Evaluating the Impact of Foreign Bank Penetration on Domestic Banking Risk

The penetration of foreign banks into domestic markets has been a topic of interest for researchers and policymakers alike. A recent study sought to examine the impact of foreign bank penetration on domestic banking risk, but certain limitations and potential issues with its methodology raise concerns.

Methodological Limitations and Potential Issues

Reverse Causality

• The study acknowledges reverse causality as a potential issue, where foreign banks may enter markets with fragile domestic banks.
• However, the study does not provide evidence to support this claim, leaving it unclear whether reverse causality is indeed a concern.

Omitted Variable Bias

• The study acknowledges omitted variable bias but fails to address how it could be mitigated.
• This omission undermines the validity of the study’s findings and highlights the need for more robust methodology.

Dynamic Nature of Bank Stability

• Banking systems can exhibit persistence in cost structure and profitability, which may affect the analysis.
• The study notes this issue but does not provide a clear solution, leaving it unclear how to address the dynamic nature of bank stability.

Robustness Check using GMM

• While the study uses GMM as a robustness check, it is essential to ensure that the choice of GMM is appropriate for the specific research question and data.
• A more thorough examination of the GMM’s suitability is necessary to guarantee its effectiveness in addressing potential biases.

Conclusion

The study on the impact of foreign bank penetration on domestic banking risk raises several concerns regarding its methodology. Addressing these limitations and potential issues is crucial to ensuring the validity of the findings. By acknowledging and mitigating these concerns, researchers can provide a more comprehensive understanding of the relationship between foreign bank penetration and domestic banking risk.

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