Foreign Bank Entry, Bank Efficiency and Market Power in Central and Eastern European Countries

This paper analyzes the implications of the recently observed sharp expansion of foreign banks to the Central and Easter European Countries (CEECs). Using a simple intermediation model, we show that the mode of foreign entry has a pivotal impact on the post-entry performance of banks in CEECs. Foreign greenfield banks are characterized by a superior cost efficiency, compared to domestic and foreign acquired banks. The efficiency of foreign acquired banks deteriorates in the initial year of acquisition, but improves thereafter. Banks acquired by foreigners have less market power relative to the rest of the banking system, while the impact of foreign greenfield entry on market power is insignificant. Overall, CEECs banking sectors have benefited from the increased foreign bank participation, both in terms of higher efficiency and more competition.