_/_ . Next, we consider whether there is a systematic link between· foreign bank penetration and national income. In Table 2 we present average foreign penetration shares by national income group.<sup>6</sup> Interestingly, the foreign asset share in the low-income countries is comparable to that of the high-income countries, with somewhat higher · penetrat\on shares for middle-income countries. This finding suggests that differences in natim;ial foreign penetration shares in Table 1 are primarily due to national differences unrelated to national income. Table 2 also provides a breakdown of the average foreign penetration share by geographical region.<sup>7</sup> Interestingly; the foreign penetration share ·is highyst in the group of transitional economies at 0.54. This figure reflects the recent foreign takeovers and de novo entries. · Next, Table 3 presents the net interest margins and other accounting variables for domestic and foreign banks in the 80 countries in the 1988-1995 period. An ownership index of zero refers to the group of domestic banks, while a value of one refers to the foreign banks. As already evident from Table 1, not all countries harbor both domestic and foreign banks.

In some developing countries (such as Costa Rica, Jamaica, and. Venezuela), foreign banks are able to realize net interest incomes of over 10 percent of assets. In these couritries and in many other developing countries, foreign banks in fact achieve higher net ~nterest margins than domestic banks. Instead, in most developed c0tmtries. ·(for inst.μice, in France, Germany, Japan, the United Kingdom, and the United States), foreign: banks Qbtain lower net interest margins than domestic banks; 1 These differences may reflect varying. reasons for ·banks to go: abroad as welL as the·. diverse regulatory conditions they find abroad after entering._ Some banks expand abroad to be able to serve and retain important domestic customers. with foreign operations, even if this does not translate into sizable interest margins. Perhaps · this reason for foreign entry is particularly. important for the developed countries. ·The relatively low interest margins foreign banks obtain in the developed countries may also reflect that foreign banks in these countries engage in wholesale rather. than retail transactions. These low margins may also be ·· due . to the fact that· ,any technical advantages foreign banks may have in developed countries are not significant enough to overcome the informational disadvantages they face relative: to· domestic. banks.

In developing countries, foreign banks may be able to realize high interest ma11gins,, because they are frequently exempt from credit allocation regulations and other sucfi restrictions. EspeCially in countries where domestic banking markets are dominated by state banks, institutions frequently use non-commercial criteria to allocate their credit. Furthermore, pervasive market inefficiencies and outmoded banking practices that exist ·

> 6 For country groupings by income, see the World Development Report (l 996).· ·

> 7 Countrie.s in transition are China, the Czech Republic, Estonia, Hungary, Lithuania, Poland, Romania, Russia, and Slovenia. Neither this group of countries nor the industrial economies are in regions in the strict sense.

6