Foreign bank entry and performance with a focus on Central and Eastern Europe

Abstract

Since the Fall of the Wall in 1989, large international banks have been opening branches in former Eastern Bloc countries with high expectations. Ilko Naaborg investigated how these banks function in eleven different countries. In 1995, on average, foreign banks made up about 25 percent of the total number of banks. In 2002 that figure had increased to 61 percent. ‘Home advantage’ In the meantime, foreign banks have become the most important providers of financial products in these countries. They dominate the national banks, both in the number of banks and in the assets they manage: from 4% in 1995 to 84% in 2002. Naaborg investigated the financial performance of these banks and compared this with that of the local national banks. Against all expectations, the local national banks turned out to generate more profits – despite their higher overheads. With this conclusion, Naaborg has provided the first evidence of the so-called ‘home advantage’ of national banks. Corruption By 2001, the profitability of foreign banks in Central and Eastern Europe had decreased significantly when compared with the early transition period of the 1990s. In the second part of his thesis, Naaborg highlights the factors that may have influenced this, including political stability, quality of legislation and degree of corruption. Naaborg points out the importance of government policy directed towards improving the institutional environment, including better availability of data concerning local businesses, better legislation to protect both creditors and debtors and a reduction in the susceptibility of the judiciary to corruption.