We use accounting data for Philippine commercial banks over the period covering 1990 through 1998 to investigate how the relaxation of foreign entry regulations affects domestic banks. As part of this analysis, we control for features of ownership structure that are common in many developing economies, namely group affiliation and ownership concentration. We find evidence that foreign bank entry is associated with a reduction in interest rate spreads and bank profits, but only for those domestic banks that are affiliated to a family business group. Foreign entry corresponds more generally with improvements in operating efficiencies, but a deterioration of loan portfolios. Meanwhile, increases in the percentage of foreign ownership of domestic banks reduce these improvements in operating efficiencies and result in less emphasis given to earning income from nontraditional banking sources. Overall, we conclude that foreign competition compels domestic banks to be more efficient, to focus operations due to increased risk, and to become less dependent on relationship-based banking practices. We propose further policy reforms aimed at fully realizing the benefits and reducing the social costs associated with the increased foreign bank presence in the Philippine domestic commercial banking sector.
