The impact of foreign entry on the Thai domestic Banking sector

Abstract

Thailand further liberalized foreign equity participation in locally incorporated banks in 1997. This study provides an analysis of how foreign bank entry since then has affected the Thai domestic banking sector. Using bank-level data for twenty consecutive calendar quarters from the second quarter 1997 onwards, the empirical results give supportive evidence that (i) foreign-owned banks incorporated in Thailand are more efficient than their domestic-owned counterparts in terms of profitability, and (ii) that foreign bank entry reduces the net interest margin and profitability in the domestic banking system and thus leads to greater efficiency in the sector. Another main finding is that the asset share of foreign-owned banks rather than their number share determines competitive conditions. Discussing the qualitative effects of foreign bank entry revealed that the impact was most felt in areas such as product innovation, marketing, technology, operational processes, and human resources. Although the qualitative benefits cannot all be attributed to foreign bank entry, its strong impact is undeniable.