Banking Market Liberalization and Bank Performance:the Role of Entry Modes

This paper analyzes the evolution in bank performance following the removal of legalrestrictions on the entry of foreign banks in three transition economies: the Czech Republic,Hungary, and Poland. Two modes of foreign bank entry are considered: entry by Greenfieldinvestments, and by foreign mergers and acquisitions of domestic banks. For this purpose, weconstruct a panel data of banks from the three countries over the period 1994-2004. Wedetermine the dates on which liberalization occurred in each country. Bank performance isreflected by accounting measures of profitability, net interest margin, and operating costs.The results show a very limited effect of the entry of Greenfield banks on domestic bankingmarket in the early transition period. In contrast, the foreign entry by mergers andacquisitions of domestic banks exerts significant impacts on bank performance. Indeed, weobserve significant declines in banks' profits and net interest margins, and a significantincrease in operating costs. Our results have important policy implications for those emergingand transition economies still hesitant to liberalize their banking markets....