The impact of foreign entry, penetration, and market concentration on bank spreads: a case study of indonesian banking industry for the year 2007 - 2012
This study aims to figure out the impact of foreign entry, penetration, and market concentration on bank spreads. It examines whether foreign participation lowers spreads and whether there is a spillover effect as a result of foreign participation. Using 43 banks as sample data of commercial banks in Indonesia, including foreign, domestic, and joint venture banks, this study explores in more detail the determinant factors of bank spreads during the period of 2007-2012. This study uses panel data method to identify the impact of bank market concentration and its spread controlling for bank specific factors and macroeconomic variables. Empirical analysis finds that foreign participation does not imply a reduction in bank spreads whilst market concentration statistically has a negative and significant impact on banks spreads. As market concentration surges, a deterioration of bank spreads occurs. Other interesting result also suggests that foreign participation encourages the appearance of spillover effect. Lower charges for spreads by foreign bank put significant pressure on domestic banks to lower their spreads. However, the different types of foreign bank entries do not imply a change in bank spreads. Further, this study indicates that macroeconomic factors can affect bank spreads, as proved from the estimation result.
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