City Research Online

Abstract

This paper investigates the impact of foreign bank entry on financial intermediation costs in host countries, using panel data from nine Southeast European economies during a period of rapid global financial integration (1995–2011). Using a panel framework that exploits within-bank and cross-country variation, supported by an instrumental variables (IV) strategy, we find that foreign banks initially operate with lower net interest margins (NIMs) than domestic banks, suggesting enhanced competition and lower intermediation costs. Over time, however, this effect diminishes, with foreign banks eventually charging higher margins as market integration deepens and risk strategies evolve. We also show that regulatory stringency in banks’ home countries influences their behaviour abroad: banks from more tightly regulated jurisdictions tend to operate with higher NIMs, suggesting a potential for regulatory arbitrage. Our findings offer key lessons for regulators navigating cross-border banking risks amid financial fragmentation and geopolitical uncertainty.

Publication Type:	Article
Additional Information:	This version of the article has been accepted for publication, after peer review (when applicable) and is subject to Springer Nature’s AM terms of use, but is not the Version of Record and does not reflect post-acceptance improvements, or any corrections. The Version of Record will be available online at: www.palgrave.com/gb/journal/41261
Publisher Keywords:	Economic transition, International Financial Integration, MNEs and Economic Development, Foreign Bank Entry, Bank Regulation
Subjects:	H Social Sciences > HG Finance
Departments:	Bayes Business School
SWORD Depositor:	Symplectic Administrator

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