IMF Working Papers

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

Author/Editor:

Emilia M Jurzyk ; Olena Havrylchyk

Publication Date:

January 1, 2010

Electronic Access:

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Summary:

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.

Series:

Working Paper No. 2010/004

Subject:

Balance of payments Banking Commercial banks Financial institutions Financial regulation and supervision Foreign banks Foreign direct investment Loan loss provisions National accounts Personal income