Banking concentration, financial openness, and financial development

Abstract

We examine how financial development in the banking sector depends on the degree of capital account openness and the degree of bank concentration across countries. Using data on 136 countries, we find that the relationship of openness to credit market activity depends on the level of economic development. In high income countries, openness is only associated with higher credit market activity in concentrated banking systems. However, in developing countries, there is evidence that openness is associated with higher credit market activity regardless of concentration. Moreover, in contrast to previous work we examine how the impact of concentration depends on openness.