Foreign Competition and Banking Industry Dynamics: An Application - - PowerPoint PPT Presentation

Foreign Competition and Banking Industry Dynamics: An Application to Mexico

Dean Corbae

University of Wisconsin at Madison and NBER

Pablo D’Erasmo

Federal Reserve Bank of Philadelphia

Discussion by: Ata Can Bertay Tilburg University and EBC

Overview

• Summary
• The case of Mexico: Background
• Discussion of results:

– Global vs. Local crisis – Higher Competition vs. Foreign Competition – Local vs. Global shocks

• Policy discussion
• Conclusion

Summary

• A general equilibrium framework
• The effects of foreign competition on banking

industry dynamics and welfare in Mexican case

• Welfare gains both for households and

entrepreneurs

• The effect of competition per se is large
• Domestic economy may import a global crisis
• Both national and foreign banks behave

strategically

The Case of Mexico

• Two experiments:

– Privatization (1991-1995) – Foreign bank ownership (from 1995 onward)

• Government=>Private=>Foreign
• Funding government=> Credit expansion and

bailout (crisis)=>prudent behavior

Global vs. Local crisis

• Is it just exogenous productivity shocks or something

else driving the dynamics so that the output difference between benchmark and no foreign competition case gets larger in global crisis (and double crisis) and smaller in local crisis?

• Don’t we expect the opposite? (internal capital market

literature)

– In local crisis foreign banks may keep the credit flowing (thanks to the access to parent funding) – In global crisis they may retrench (for example, to provide funds to the parent banks)

Foreign monopoly Domestic monopoly

Foreign monopoly Domestic monopoly

How large are the differences quantitatively?

• Higher Competition vs. Foreign Competition

How large are the differences quantitatively?

• Local shocks vs. “imported” global shocks

Local shock Global shock

Other issues

• Policy discussion: Missing dimensions

– Institutions and Regulation

• The role of heterogeneity (Beck et al., 2013)
• Privatization without institutional and regulatory reform=> Related

lending/tunneling (Haber 2005)

• Foreign banking without contract enforcement=>less credit to

firms and households (Haber 2005)

– Government as an agent (owner and borrower) – Type of foreign entry: De novo vs. M&A – Welfare implications of foreign banks in Mexico

• Lower outreach (Beck and Martinez Peria, 2010)
• No increase in credit availability (Haber and Musacchio, 2010)
• Minor issues

– Typos – A few suggestions regarding the presentation

Conclusion

• Very useful tool to analyze the effects of competition

and foreign entry in an emerging market environment

• Both competition and foreign presence are important
• Curious about how this analysis would differ in

alternative contexts

• Someone should be cautious especially regarding

welfare analysis as some crucial elements regarding emerging market environment missing

• Better background for Mexico will help a lot for

intuition and interpretation

Extra: No bailout assumption

• No foreign competition=>No exit=>No tax for

deposit insurance

• Mid-90’s no foreign banks but reckless

banking by domestic banks=>large bailouts at the expense of taxpayers