Foreign Competition and Banking Industry Dynamics: An Application to Mexico

We apply 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 the high concentration in the Mexican banking industry, domestic and foreign banks act strategically in our framework. After calibrating the model to Mexican data, we examine the welfare consequences of government policies that promote global competition. We find relatively high economywide welfare gains from allowing foreign bank entry.