How does foreign entry affect the domestic banking market?

Using bank level data for 80 countries in the 1988-1995 period, this paper examines the extent of foreign ownership in national banking markets. The net interest margins, overhead, taxes paid, and profitability of foreign and domestic banks are compared. The functioning of foreign relative to domestic banks is very different in developing and developed countries, with foreign banks achieving higher (lower) profits than domestic banks in developing (developed) countries. Estimation results further suggest that an increase in the share of foreign banks leads to a lower profitability of domestic banks.