ABSTRACT

The market structure of the banking industry in many developing countries has recently undergone significant changes. In particular, the ongoing and, often, extensive entry of foreign banks has been the source of a far-reaching transformation. Between 1994 and 1999, the share of assets held by foreign banks (i.e., those banks that are at least 50 percent foreign) increased from 7.8 percent to 52.3 percent among countries in Eastern Europe (IMF 2000). For countries in Latin America, the increase in foreign bank participation over the same period was from 13.1 percent to 44.8 percent. At the same time, the rise in foreign bank participation often occurred in the context of already high and, in some countries, rising levels of bank concentration. Among a sample of 33 developing countries, the level of bank assets held by the three largest banks averaged 64 percent during 1995-99.1

Growing foreign bank presence and high levels of bank concentration in developing countries have been the consequence of a number of factors, some of them interrelated. A facet of the larger process of financial liberalization and international integration, foreign entry was encouraged by local banking authorities following financial crises as they sought to minimize the costs of recapitalizing domestic financial systems. The high levels of concentration have also, in part been the consequence of crises, as banks closed, merged or were acquired. In some cases, foreign bank entry contributed to bank concentration where foreign banks mainly acquired existing domestic banks. Foreign competition, moreover, induced domestic bank consolidation and concentration.