The correlation coefficient between these two variables is only 0.00025. Thus, the figure supports the results obtained in Table 2.

One of our objectives is to investigate the possible effects of the order of financial liberalization on domestic banks’ efficiency gain as a result of the increased foreign bank participation. Table 3 reports the list of countries which followed different financial liberalization paths<sup>10</sup> . While almost all developed countries liberalized their stock markets first, developing countries started to their financial liberalization process either with their domestic financial markets or with their capital accounts.

Table 4 reports statistical information on domestic banks’ performance indicators when countries are grouped according to the sequence of financial liberalization. Each group of countries is separated into two sub-groups depending on their geographical location. While Asian and Latin American countries (emerging market economies) are included in the first set, European and G7 countries (developed countries) take place in the second set. The values of the asset share of foreign banks are on average close to each other in each group. While the share is 13.3 percent in the countries liberalized their capital accounts first, it is 16.8 percent in the countries liberalized their stock markets first, and 15.8 percent in the countries liberalized their domestic financial markets first. If we investigate emerging market economies and developed economies separately, differences in their foreign bank share are more obvious. The banking sectors of the Asian and Latin American countries which liberalized either their stock market first or their capital accounts first are more open to foreign banks. While the asset share of foreign banks is 38.4 percent in the first group, it is 19.2 percent in the second group. The European and G7 countries, which liberalized their domestic financial sector first, also have a relatively large foreign bank penetration rate (i.e. 23.2 percent). The least open markets in terms of foreign bank entry (only 1.5 percent) belong to the European and G7 countries which liberalized their capital accounts first. As Figure 1 confirms, there is no obvious trend between the level of economic development and foreign bank entry.

We can use Table 4 to compare the performance indicators of different group of countries. On the one hand, domestic banks’ net interest margin, non-interest income, overhead costs, and loan loss reserves get the lowest values in the countries which liberalized their stock markets first. This means that the competition is tougher in these countries’ banking sector. As noted above, these countries are also more open to foreign banks on average. On the other hand, the highest values of non-interest income, overhead costs, and loan loss reserves belong to the Asian and Latin American countries which liberalized their domestic financial markets first. Even though the competition is limited in these countries, the asset share of foreign banks (14.1 percent) is close to the overall average value which is 15.2 percent. Thus, the presence of foreign banks is not sufficient to increase the competition in the banking sector.

If we summarize our findings, the descriptive statistics indicate that the countries which liberalized their stock market first tend to have a higher foreign bank entry rate and to have a more competitive banking sector. But we cannot conclude whether the order of liberalization plays an important role in determining the performance of domestic banks since other important factors such as macroeconomic indicators are also effective in this process. Because of this, we need to control for these additional determinants. In order to accomplish this purpose, we apply econometric analyses to investigate the relationship between foreign bank entry and the performance indicators of domestic banks, and the possible role of the sequence of financial liberalization in this process. These results are presented in the next section.

> 10 While ranking countries according to their order of financial liberalization, we use the information presented by Kaminsky and Schmukler (2003). Detailed information on the liberalization dates is given in Table A1 in the appendix section.

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