helpful comments and suggestions. The findings, interpretations, and conclusions expressed in this paper are entirely those of the authors and do not necessarily represent the view of the World Bank, its Executive Directors or the In this paper, we analyze how foreign entry affected domestic banks in Argentina during an especially intense period of entry in the mid-1990s. The results are consistent with the hypothesis that foreign banks enter specific areas where they have a comparative advantage, putting pressure on the domestic banks already focussing on those types of lending. We find that domestic banks with loan portfolios concentrated in manufacturing, an area where foreign banks have traditionally devoted a large part of their lending, tended to have lower net margins and lower before tax profits than other domestic banks. Conversely, domestic banks with greater consumer lending, an area where foreign banks have not been heavily involved, have higher net margins and higher before tax profits. Finally, domestic banks focussed on mortgage lending, an area entered aggressively by foreign banks during the mid-1990s, experienced falling net margins and increasing overheads. 1 I.

The main motivation for prudential regulation is to increase the solvency of the banking sector. However, it is usually understood that tighter regulation also leads to more concentration and higher spreads. Thus, these prudential measures are seen as implying a trade-off between solvency and competition. In this paper we argue that this trade-off does not necessarily exist. We present a model in which tighter capital requirements lead banks to choose a lower degree of product differentiation, potentially inducing more intense competition and lower spreads. The model is motivated by the recent evolution of the Argentine banking sector. q 2000 Elsevier Science B.V. All rights reserved.

Reserve Bank of Dallas. Robert R. Moore is senior economist in the Financial Industry Studies of In the literature on systemic banking crises, two common themes are: (1) lack of market discipline encourages risky lending and (2) financial liberalization or privatization lead to risky lending. However, there is evidence to suggest that neither financial liberalization nor weak market discipline always precedes risky lending. We test for depositor discipline and, separately for post-liberalization or post-privatization risky lending in Argentina, Canada, and Mexico. In the countries without market discipline, lending risk increases significantly in the wake of liberalization. Where depositors discipline banks, banks neither behave riskily nor does their risk increase in the wake of privatization.

helpful comments and suggestions. All remaining errors are ours alone. The findings, interpretations, and conclusions expressed in this paper are entirely those of the authors and do not necessarily represent the view of the World Bank, Despite increased globalization in the provision of financial services, economists have difficulty presenting a compelling empirical assessment to policy makers of the effects of opening their banking sectors to foreign entrants. Lack of empirical evidence stems largely from a lack of comparable cross-country data. In addition, until recently,