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Publisher : Elsevier - Science Direct (الزویر - ساینس دایرکت)
Journal : Journal of Development Economics, , Volume 63, Issue 1, October 2000, Pages 157-196
This study analyzes financial liberalization measures undertaken in 1990, of which an opening to foreign investment was a major component. After a brief description of the major changes in legislation on foreign investment, we compare performance of foreign-owned vs. domestic banks, first using a descriptive approach, then in a more systematic manner using econometric analysis. Panel data estimations reveal that financial liberalization in general had a beneficial impact on bank behavior in Colombia, by increasing competition, lowering intermediation costs and improving loan quality. Although the positive contribution of foreign entry may be overstated in recent studies by not controlling for other liberalization factors, foreign (and domestic) entry beginning in 1990 did improve bank behavior by enhancing operative efficiency and competition. However, the greater competition may have resulted in increased risk and a subsequent deterioration in loan quality, particularly among domestic banks.
After several decades of varying degrees of financial repression and restriction on direct foreign investment in the financial system (DFIFS), in the early 1990s Colombian policymakers decided to undertake a widespread financial reform program which allowed virtually free entry of DFIFS. This decision was taken as a part of a larger process of external sector liberalization, and was aimed at enhancing competition, improving resource allocation, and obtaining greater administrative efficiency in financial institutions. There is evidence that financial sector opening and the entry of foreign-owned financial institutions may provide significant benefits to a country's financial system. Analysis of cross-country information has shown how foreign entry tends to lower intermediation spreads and overhead expenses over time, with subsequent benefits for consumers of financial services (Claessens et al., 1998). Case studies of some individual countries confirm these positive results Honohan, 1997, Pastor et al., 1997 and Denizer, 1999. There is also evidence that the Colombian liberalization brought about certain beneficial impacts on bank performance, as reflected in the behavior of intermediation spreads. A recent study (Barajas et al., 1999) used aggregate banking system data and compared estimates of spreads for two distinct sample periods, one pre and one post-liberalization. It found that for the post-liberalization estimates, the behavior of intermediation spreads over marginal costs approached that consistent with perfect competition, while the pre-liberalization estimation yielded significant “market power”, thus providing indirect evidence that competition had increased as a result of the liberalization. Although the average level of spreads did not change significantly from one period to the next, the estimates showed that their corresponding “market power” component had. However, since the above study did not use an uninterrupted data set spanning the two periods, it was unable to provide a direct structural change test for the effects of reform. Nor did it separate different effects of the reform program, such as increased entry of new foreign and domestic participants, nor whether significant changes in other aspects of bank behavior and performance (namely, administrative efficiency and loan quality) had occurred. In the present study we use a newly constructed panel data set encompassing both pre and post-liberalization periods and set out to separate these different effects of liberalization, testing their significance in explaining changes in different performance indicators as well as in the degree of competition in the banking market. In particular, we analyze the behavior of DFIFS in Colombia and examine several hypotheses regarding the difference in behavior of foreign-owned banks as well as the impact of foreign entry on different types of banks. By controlling for other key elements of the reform program, this paper also aims at improving upon the Claessens, et al. type of analysis, which concentrates on foreign entry and therefore may be overstating its impact. This is particularly relevant in the Colombian case, since we know that other key changes occurred at the time that the system was opened to foreign entry. The organization of the paper is the following. First, in Section 2 we describe the institutional background, pointing out different phases in the treatment of DFIFS, from relative openness before 1967, to increased restriction culminating in a “Colombianization” of the financial system in 1975, and finally to renewed openness in the 1990s. Second, in Section 3 we examine several performance indicators during the 1991–1998, focusing on differences between domestic and foreign-owned banks on the one hand, and between domestic banks acquired by foreign investors and all other foreign banks, on the other. In addition to common performance indicators, we also look at differences in the types of activities undertaken by foreign banks, namely their geographical distribution as well as the importance of non-intermediation operations. Third, in Section 4 we use panel data on individual banks during the 1985–1998 period to test whether significant differences in pricing behavior, administrative costs, loan quality, and competitive conditions arise between domestic and foreign owned banks, whether foreign entry has affected the performance of domestic banks, and whether the mode of foreign entry matters (i.e., purchase of existing banks vs. the establishment of new foreign-owned banks). Finally, in Section 4 we provide a summary of the major conclusions and findings.
نتیجه گیری انگلیسی
In our descriptive analysis, we showed how the policy stance towards DFIFS in Colombia had changed over time, becoming increasingly restrictive up until new foreign investment was banned outright in 1975. As a result, foreign investment flows effectively stalled throughout the late 1970s and 1980s, and individual banks were forced to transform themselves into joint-ownership banks with at least 51% domestic ownership. We also showed how first joint-ownership and then foreign banks tended to behave differently from domestic banks. They operated with higher capitalization levels and better overall loan quality, and tended to be more profitable over time, weathering better the widespread banking crisis of the early 1980s. Further, although there were some differences in the sectoral allocation of loans — with foreign banks concentrating more heavily on commercial loans — these differences cannot account for their higher loan quality, as foreign banks exhibited better loan quality across all sectors. For their sources of funds, foreign banks tended to rely more heavily on time deposits which, although more costly in financial terms, required a less extensive branch network throughout the country. Therefore, they paid more on average per deposits but had lower administrative costs partly as a result of concentrating their activities in Bogotá and having fewer branches. Finally, they benefited from having slightly greater non-intermediation activities, thus giving them a relative advantage in isolating their income from cyclical variations in economic activity. The financial liberalization measures implemented in the early 1990s included a relaxation of entry restrictions which contributed to a flurry of new activity in the sector. In particular, the renewed opening of the market to foreign investment resulted in joint ownership banks almost immediately being acquired fully by foreign investors, new foreign banks being established, and some domestic banks also being acquired over time by foreign investors. In addition, several new domestic banks were also created, quickly capturing market share. The econometric results provided more definitive evidence that foreign banks (both joint-ownership banks in the pre-liberalization period and fully foreign-owned banks in the post-liberalization) have behaved differently from domestic banks. Even given equal real wages and lending rates, foreign banks still tended to have lower administrative costs and higher loan quality, which resulted in their ability to operate with slightly lower intermediation spreads. Furthermore, for the two relevant domestic banks, foreign acquisition appears to have been beneficial, as significant improvements came about in administrative costs. Finally, foreign banks did not appear to possess as much market power as their domestic counterparts; although their estimated H-statistic was consistent with monopolistic competition, it was substantially closer to unity (perfect competition) than that for domestic banks. In fact, foreign banks exhibited a degree of competition similar to that observed in several industrialized countries in recent years. Perhaps for this same reason, competitiveness did not increase for foreign banks either as a result of financial liberalization or of entry by new banks. The econometric analysis also shows evidence of benefits from increased entry of both domestic and foreign banks. The preliminary regressions on several bank performance indicators — similar to those specified in studies of other countries by Claessens et al. and others — tended to overstate the importance of foreign entry by not controlling for other crucial elements of the liberalization process: increased domestic entry, capital inflows, and other aspects such as the strengthening of banking regulations and supervision. However, once these elements were incorporated foreign entry continued to play an important role, particularly in the behavior of domestic banks, where it tended to reduce the excess of intermediation spreads over marginal costs. Domestic entry appeared to have an even greater impact, lowering non-financial costs in addition to intermediation spreads charged by both domestic and foreign banks. Foreign and domestic entry also proved to have a significant impact in enhancing competitiveness in the domestic bank market, although this impact was difficult to separate from that of the liberalization measures enacted in 1990. In addition to increased entry, other elements of liberalization also had significant effects on bank behavior. First, the test for competitive conditions showed that a significant increase in competition took place after 1990, particularly among domestic banks. Although it was generally difficult to separate this effect from those resulting from entry of new banks, one estimation did suggest that the liberalization dummy dominated over the entry variables. Second, the opening of the capital account and the resulting ability of domestic agents to borrow abroad led foreign banks in particular to respond by reducing their intermediation spreads. Third, the effects of the liberalization dummy variable indicate that after 1990 competition was enhanced, possibly as a result of the announcement of the opening of the market to new entrants. Fourth, the liberalization dummy variable also suggested that there were significant effects from improved banking regulation and supervision; these tended to improve loan quality but may have induced a significant increase in non-financial costs of intermediation. Furthermore, foreign banks were shown to benefit the most from entry; while their spreads and administrative costs were driven down, entry tended to improve their loan quality. Since their market power had been considerably lower and was not eroded to a visible degree by liberalization and/or entry, these institutions were in a stronger position to compete in the new environment. One area in which entry appeared to have negative effects was loan quality, particularly of domestic banks. This result could be interpreted as a by-product of increased competition (i.e., loss of bank franchise value), and it could also reflect a flight of higher quality borrowers to the foreign banks either newly created or newly acquired. In either case, this result stands in contrast with those of the “uncontrolled” regressions (Table 7) in which foreign entry was found to be unambiguously beneficial for loan quality as well as for competition and operative efficiency. As for differences within groups of banks, newly created banks appeared to be at a market disadvantage with respect to their established counterparts (both domestic and foreign), and thus were forced to charge lower spreads in order to gain market share. Furthermore, loan quality tended to be worse for newly created domestic banks and their administrative costs higher than for their established counterparts. Finally, as foreign investors acquired domestic banks, they tended to lower their administrative costs. Three additional findings regarding the effects of the liberalization measures are worth mentioning. First, confirming the results of Barajas et al. (1999), liberalization appeared to have a positive impact on competition as suggested in the intermediation spread equations and shown in the H-tests. Second, also consistent with the above study, spreads became more sensitive to changes in loan quality, possibly an indication of greater prudence on the part of domestic banks, and consistent with our interpretation that improved regulation/supervision increased the costs of intermediation. Third, bank size was seen to have a mixed impact on performance. Although there was evidence of economies of scale, loan quality was also seen to deteriorate as individual market share increased, and as the overall concentration of the market increased.