Foreign Banks in Central Eastern Europe: Impact of Foreign Governance on Bank Performance

Abstract

This research belongs to a vast body of literature analysing the impact of foreign capital on the bank performance of Eastern European countries. This topic has attracted considerable attention in the past, with most studies in the literature stressing the positive consequences of foreign capital for bank efficiency and overall market competitiveness. Our aim, however, is to look beyond short-term impact on profitability and instead carry out research into a broader question, namely: has foreign capital brought more fundamental, long-term changes to Eastern European banking markets through its use of different strategies, business models and corporate governance principles, imported from the home countries of foreign owners? A related question is whether the type of entry matters, as foreign banks differ in the way they entered the so-called emerging markets, opting either for a model of limited presence in many countries (wholly controlled subsidiary model) or for a strong retail presence in selected countries (majority shareholder model). The former’s advantage over competitors is its decisiveness and technological superiority: ability to act quickly and build strategy around transfer of technology and managerial skills across borders. The latter’s strong points are local flexibility, better customer relationship and longer time frame for strategic decisions.