Foreign Bank Entry and Its Impact on Domestic Banking Systems

Foreign bank entry encompasses a range of modalities through which international institutions establish a presence in host-country markets, most notably via greenfield investment or acquisition. Such entry transforms local banking landscapes by introducing new sources of capital, advanced risk-management frameworks and broader product offerings. Increased competition can drive efficiency gains and improved customer service, but may also precipitate the “cherry-picking” of prime borrowers, leaving domestic lenders to serve higher-risk segments. Cross-border ownership networks enable internal capital markets that can either buffer host economies against local shocks or transmit foreign disturbances, depending on parent-subsidiary linkages. In the wake of crises, foreign banks have demonstrated differing resilience: some have stabilised credit provision, while others have retrenched, heightening volatility. The overall impact hinges on regulatory frameworks, entry modes and the capacity of host authorities to oversee complex ownership structures. Empirical evidence points to gains in financial development and inclusion in many emerging markets, but also underscores potential drawbacks for financial stability and income distribution if entry is not carefully managed. Policymakers must thus calibrate openness to foreign institutions alongside robust supervision to harness benefits and mitigate systemic risks.

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Foreign Bank Entry and Its Impact on Domestic Banking Systems publication trend

The graph below shows the total number of articles in foreign bank entry and its impact on domestic banking systems across all publications each year (not limited to Nature Index journals).

Technical terms

Greenfield investment: Establishment of a new banking operation from the ground up in a host market, often entailing substantial initial capital and local infrastructure development.

Acquisition: Purchase of an existing domestic bank by a foreign institution, enabling instant market presence and customer access but requiring integration of legacy systems and culture.

Cherry-picking phenomenon: Selective lending by foreign banks to low-risk or high-profit segments, potentially leaving underserved or higher-risk borrowers to domestic counterparts.

Internal capital market: Allocation of funds within a multinational banking group, allowing cross-border subsidies or capital withdrawals that can stabilise or destabilise host banking systems.

Lending channel: Mechanism through which changes in monetary policy or funding conditions affect bank lending volumes, influenced by ownership structure and deposit sensitivity.

References

1. Transmission of liquidity shocks: Evidence on cross-border bank ownership linkages. Journal of International Financial Markets Institutions and Money (2018).
2. The Lending Channel in Emerging Economies: Are Foreign Banks Different?. IMF Working Papers (2007).
3. Foreign bank entry and financial development: New evidence on the cherry picking and foreign bank’s informational disadvantage phenomena in the MENA countries. Cogent Economics & Finance (2018).
4. The effects of different modes of foreign bank entry in the Turkish banking sector during the 2007–2009 Global financial crisis. Quantitative Finance and Economics (2023).
5. State-owned banks and international shock transmission. Journal of International Financial Markets Institutions and Money (2024).
6. Bank ownership around the world. Journal of Banking & Finance (2024).
7. Foreign bank presence and income inequality in Africa: What role does economic freedom play?. Future Business Journal (2024).