This paper examines how banking competition affects the transmission of monetary policy through the bank lending channel. We apply a two-step estimation procedure using bank-level panel data for commercial banks in 10 Asian and 10 Latin American countries during the period from 1996 to 2006. In the first step we measure the degree of banking competition by applying the methodology proposed by Panzar and Rosse (1987). In the second step we estimate a loan growth equation where the explanatory variables include the Panzar–Rosse measure of banking competition. The estimation results provide consistent evidence that increased competition in the banking sector weakens the transmission of monetary policy through the bank lending channel. This is especially true for banks in Latin American countries and banks of small size, low liquidity, and low capitalization. We also discuss the policy implications of the main findings of this paper.

In this paper we examine the impact of foreign bank penetration on the competitive structure of domestic banking sectors in host emerging economies. We focus our analysis on Asia and Latin America during the period 1997–2008. Using bank-level panel data to identify foreign banks and to estimate measures of banking competition, we are able to provide robust empirical evidence that an increase in foreign bank penetration enhances competition in these host countries’ banking sectors. We find that this positive foreign bank penetration and banking competition link is associated with a spillover effect from foreign banks to their domestic counterparts. This spillover effect becomes stronger when more efficient and less risky foreign banks enter into less concentrated host country markets. We also find that the spillover effect is greater when foreign banks enter in the form of ‘de novo penetration’ than through mergers or acquisitions of domestic banks (‘M&A penetration’).