Olena Havrylchyk

Profitability of Foreign Banks in Central and Eastern Europe: Does the Entry Mode Matter?

Using data for 265 banks in Central and Eastern European Countries for the period of 1995-2003, this paper analyses the differences in profitability between domestic and for-eign banks. We show that foreign banks, especially greenfield institutions, earn higher profits than domestic banks. However, this effect is acquired rather than inherited, since there is evidence that foreign banks tend to take over less profitable institutions. Profits of foreign banks in CEECs also exceed profits of their parent banks, explaining the reasons for their entry. Further, we study benefits and costs of foreign ownership by analyzing de-terminants of profitability for domestic, takeover, and greenfield banks. Profits of foreign banks are less affected by macroeconomic conditions in their host countries. However, greenfield banks are sensitive to the situation of their parent banks. Only domestic banks enjoy higher profits in more concentrated banking markets, whereas takeover banks suffer from diseconomies of scale due to the fact that they acquired large institutions.

Foreign Bank Entry and Credit Allocation in Emerging Markets

We employ a unique data set containing bank-specific information to explore how foreign bank entry determines credit allocation in emerging markets. We investigate the impact of the mode of foreign entry (greenfield or takeover) on banks’ portfolio allocation to borrowers with different degrees of informational transparency, as well as by maturities and currencies. The impact of foreign entry on credit allocation may stem from the superior performance of foreign entrants (“performance hypothesis�?), or reflect borrower informational capture (“portfolio composition hypothesis�?). Our results are broadly in line with the portfolio composition hypothesis, showing that borrower informational capture determines bank credit allocation.

Profitability of foreign banks in Central and Eastern Europe

This article uses data for 418 banks operating in Central and Eastern Europe between 1993 and 2004 to analyse the impact of the mode of foreign bank entry and of the parent institutions’ characteristics on bank profitability. The results show that foreign banks are affected both less and differently by domestic economic conditions, but do react to the health of the parent banks and the economic situations in their home countries. Their mode of entry is important: profits of banks entering via greenfield investment exhibit a complementary relationship with their parent banks, whereas profits of banks acquiring domestic institutions are negatively related to the opportunity costs in their home markets.

The effect of foreign bank presence on firm entry and exit in transition economies

This study investigates the impact of foreign bank penetration on firm entry in Central and Eastern Europe. Acquisition of domestic banks by foreign investors has lowered rates of firm creation, decreased the average size of entrants, and increased firm exit in industries with greater informational opacity, while entry of greenfield foreign banks appears to have spurred firm creation and exit. We modify the view in earlier studies that informational opacity equates with firm size, defining opacity in terms of technological characteristics for a given industry. We find the economic significance of foreign bank entry is larger for opaque industries than industries with large shares of small firms. The study provides evidence of increased credit constraints for start-ups in Central and Eastern Europe, which is consistent with the theoretical proposition that the presence of foreign banks exacerbates informational asymmetries.

What Drives the Expansion of the Peer-to-Peer Lending?

Peer-to-peer lending platforms are online intermediaries that match lenders with borrowers. We use data from the two leading online lenders, Prosper and Lending Club, to explore main drivers of their expansion in the United States. We exploit the heterogeneity in local lending markets at the county level to analyze three hypotheses for the penetration of online lenders: 1) crisis-related; 2) competition-related; and 3) Internet-related. Our findings support the competition-related hypothesis as online lenders have expanded more in areas with lower density of branch network and lower bank concentration that we interpret as weaker brand loyalty. We also document that spatial, socio-economic and demographic characteristics determine the expansion of online lenders.

The Financial Intermediation Role of the P2P Lending Platforms

The objective of our paper is to explore the role of P2P lending platforms through the prism of the theory of financial intermediation. P2P lending platforms perform the brokerage function of financial intermediaries by matching lenders’ supply and borrowers’ demand of funding, according to the risk and the maturity of their needs. Unlike banks, P2P lending platforms do not create money and do not perform risk and maturity transformation. However, they can organize secondary markets to trade loan contracts before maturity and some P2P lending platforms aim at providing a fixed income to lenders. To ensure efficient and sustainable financial intermediation, P2P lending platforms need to ensure that they are not subject to principal-agent problems and that their incentives coincide with those of lenders. The possibility of orderly resolution of P2P lending platforms failures might decrease moral hazard problems that are inherent in the modern financial intermediation.

The burden of bank taxation: corporate income tax vs. bank levy

Taxing Banks Fairly offers an ethical perspective on bank taxation and financial stability to complement the traditional political economy approach. It also considers how a bank levy or financial activities tax, could be used to ensure that big banks make a ‘true and fair’ contribution to their insurance by taxpayers. Covering a range of topics on bank and financial sector taxation, this book will prove a valuable resource for academics, policy makers and financial regulators.

Inherited or Earned? Performance of Foreign Banks in Central and Eastern Europe1

Using a combination of propensity score matching and difference-in-difference techniques we investigate the impact of foreign bank ownership on the performance and market power of acquired banks operating in Central and Eastern Europe. This approach allows us to control for selection bias as larger but less profitable banks were more likely to be acquired by foreign investors. We show that during three years after the takeover, banks have become more profitable due to cost minimization and better risk management. They have additionally gained market share, because they passed their lower cost of funds to borrowers in terms of lower lending rates. Previous studies failed to pick up the improvements in performance of takeover banks, because they did not account for the performance of financial institutions before acquisitions.