Foreign Competition and Banking Industry Dynamics: An Application to Mexico

Our paper develops a simple general equilibrium framework to study the effects of global competition on banking industry dynamics and welfare. It applies the framework to the Mexican banking industry, which underwent a major structural change in the 1990s as a consequence of both government policy and external shocks. Given high concentration in the Mexican banking industry, domestic and foreign banks act strategically in the framework. After calibrating the model to Mexican data, the paper examines the welfare consequences of government policies which promote global competition. It finds relatively high economy-wide welfare gains from allowing foreign bank entry.