BOFIT Discussion Papers, Institute for Economies in Transition, Bank of Finland
No 5/2006:
Profitability of foreign banks in Central and Eastern Europe: Does the entry mode matter?
Olena Havrylchyk and Emilia Jurzyk ()
Abstract: Using data for 265 banks in Central and Eastern European
Countries for the period of 1995-2003, this paper analyses the differences
in profitability between domestic and for-eign banks. We show that foreign
banks, especially greenfield institutions, earn higher profits than
domestic banks. However, this effect is acquired rather than inherited,
since there is evidence that foreign banks tend to take over less
profitable institutions. Profits of foreign banks in CEECs also exceed
profits of their parent banks, explaining the reasons for their entry.
Further, we study benefits and costs of foreign ownership by analyzing
de-terminants of profitability for domestic, takeover, and greenfield
banks. Profits of foreign banks are less affected by macroeconomic
conditions in their host countries. However, greenfield banks are sensitive
to the situation of their parent banks. Only domestic banks enjoy higher
profits in more concentrated banking markets, whereas takeover banks suffer
from diseconomies of scale due to the fact that they acquired large
institutions.
Keywords: foreign banks; bank profits; multinational banking; transition economies; (follow links to similar papers)
JEL-Codes: F36; G15; G21; (follow links to similar papers)
42 pages, April 25, 2006
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