et al (1998) claim that this measure is appropriate if the number of foreign and domestic banks determines competitive conditions. We define the foreign bank share by taking into account their asset shares.

The data set is initially constructed at the bank level for each country. Then, country-level averages are calculated in each year. The regressions and other statistics are based on these panel data which consist of country-level averages.

# **4. Descriptive Analysis**

The starting point of our analyses is the construction of descriptive statistics. First of all, the question of how foreign bank entry is related to macroeconomic variables and to domestic banks’ performance indicators is examined. It is also checked how our results change when the countries are split into different groups according to the sequence of financial liberalization.

Table 1 reports the average values of the performance indicators for foreign banks and domestic banks separately at the country level. The variables change a lot among countries. In general, foreign banks’ revenue indicators (net interest margin, non-interest income, and profits) are higher, but their overhead costs are lower. Another result is that countries with a higher foreign bank share tend to have more competitive domestic banks - cost and profit indicators are lower. First of all, the performance indicators of two developing countries which differ in their foreign bank shares are compared. Brazil (the foreign bank share is 8.3 percent) and Mexico (the foreign bank share is 40.7 percent) are chosen in this group. It can be seen that domestic banks’ net interest margin, non-interest income, profits, and overhead costs are lower in Mexico. We obtain similar results for developed countries. For example, we can compare Finland (the foreign bank share of 0.4 percent) with the United Kingdom (the foreign bank share of 29.1 percent). The values of the performance indicators are lower in the United Kingdom. This last set of results is consistent with the available literature such as World Bank (2002). They show that in poor countries where foreign bank entry is higher than average, costs associated with financial intermediation is lower since net margins and non-interest income are lower. In these countries, banks’ overhead are also lower.

The statistics related to the foreign bank penetration are presented in Table 2. Countries are ranked according to their foreign bank share. Two different measures of the foreign bank share are calculated in this table. While the first measure is the share of foreign banks’ assets in total assets, the second one shows the number of foreign banks in percent of total number of banks. The major result is that the degree of openness to foreign bank entry varies a lot among countries. The asset share of foreign banks ranges from 2 percent in China to 61.3 percent in Hong Kong, China. There is a considerable gap between the highest and the lowest values of the foreign bank share among developed countries as well. While the United Kingdom has the highest foreign banks’ asset share, which is 25.5 percent, that is only 4 percent in Finland. Similar results are obtained when the foreign bank penetration is measured with the number of foreign banks. But in this case, while Japan has the lowest share, which is 1.7 percent, Ireland is the most open country with the foreign bank share of 61.7 percent.

Given such a large spectrum of the foreign bank share, the next question we would ask is whether there is a relationship between countries’ income levels and their degree of openness to foreign banks. In order to answer this question, we plot the log of GDP per capita and the asset share of foreign banks, which measures the degree of openness. The graph is presented in Figure 1. The openness of the banking sector for foreign banks is not related to countries’ income level.

9