Acquisition versus greenfield: the impact of the mode of foreign bank entry on information and bank lending rates

Policy makers often decide to liberalize foreign bank entry but at the same time restrict the mode of entry. We study how different entry modes affect the interest rate for loans in a model in which domestic banks possess private information about their incumbent clients but foreign banks have better screening skills. Our model predicts that competition is stronger if market entry occurs through a greenfield investment and therefore domestic banks' interest rates are lower. We find empirical support for our results for a sample of banks from 10 transition countries of Eastern Europe for the period 1995-2003.