| This dissertation develops a model that incorporates foreign competition within the banking system of a developing country. The main justification for which foreign banks decide to enter a local market is that they may exploit competitive advantages. From the host country's point of view, the advantages of foreign bank participation are: (1) it brings more variety of services that customers have access to; (2) the higher level of competition reduces the interest spread in the country; (3) it reduces the lack-of-liquidity problem as banks may have access to foreign funding. This dissertation uses an oligopolistic approach to analyze the banking sector. The markets where banks compete may be affected by changes in the interbank market as well as other exogenous parameters (i.e., administrative costs, credit risk, exchange rate, etc.). In particular, it is found that when the local banking system is inefficient (relative to international standards) or faces a high level of credit risk, the developing country is better off with an open-door policy. It is also showed that foreign participation softens negative shocks in the economy. In addition, it is seen that as the foreign subsidiary overcomes initial difficulties, it becomes more independent of its parent bank. Moreover, we observe the interdependence of the economies of the host country and the parent nation, in terms of monetary policy, associated with foreign-bank participation. |
