Foreign Banks in Eastern Europe: Mode of Entry and Effects on Bank Interest Rates

Credit markets in many Eastern European countries are now dominated
by foreign-owned banks. We analyze the development for foreign
ownership and its impact on lending rate in ten Eastern European
countries between 1995 and 2003. Currently, the majority of loans
from foreign banks is granted by acquired banks. The presence of
foreign acquired banks as measured by their relative number among
the banks in our dataset increased somewhat slower than that of
foreign de novo banks. However, since market entry through
acquisition allows acquiring a credit portfolio and a customer
base, acquired banks were able to expand their market share much
faster than the foreign de novo banks. Our results also show that
the interest rate decreased after foreign bank entry. Moreover,
while the reduction in interest rates of domestic banks is more
pronounced in the case of foreign entry through a de novo
investment, foreign de novo banks charge higher interest rates than
foreign acquired banks.