The effects of foreign entry in banking sectors of transitional economies : The case of Slovakia

Abstract

This research project undertook a combined quantitative and qualitative analysis of the foreign entry effects on domestic banking in Slovakia during the first eight years of the country's existence. The research results suggest that straightforward assessing of foreign entry effects is difficult as it largely depends on the specific conditions of the country's financial sector development. Moreover, the organisation of financial markets, bank supervision and regulation as well as legal infrastructure, state influence and past experience plays a significant role in shaping domestic banks' behaviour. The research results have not supported the view that the opening of financial sectors of transitional economies or developing countries could lead to destabilisation or introduces crisis into the systems. The results of the analysis show that the foreign banks increased their share in all bank activities after the initial testing period. Foreign banks were clearly more profitable and more efficient at operating with less risky loan portfolios and following cautious strategies for involvement in the Slovak economy but increasing the levels of trust within the economy. The results of qualitative analysis tend to corroborate the results of quantitative part however, revealing interesting issues affecting the results and reporting of domestic banks. Domestic banks were more hampered by the organisation of the market, regulation and especially the state influence rather than by foreign entry. Foreign banks were important for exerting competitive pressures, introducing higher quality of services and new products as well as market-based credit and risk management and a different corporate culture and human resources, which was detected as a major spillover effect. The foreign banks seemed to explore the market upon arrival to decide on future strategies. Once established, however, the banks began to converge in terms of their activities, if not their attitudes. Limited offers of creditworthy customers were quickly substituted with large involvement of their activities on inter-bank and government debt market