Non-native players in the domestic league: Foreign penetration and domestic banking sector in an emerging market

This paper investigates the influence of foreign bank presence on the Vietnamese banking sector. Using a comprehensive dataset spanning from 2005 to 2020, this study establishes a link between the presence of foreign banks and increased competitiveness in the Vietnamese market. As more foreign banks enter the local market, domestic banks tend to experience diminished profits and take on higher levels of risk. Local banks respond by increasing the riskiness of their loan portfolios, particularly through greater corporate credit issuance. The study further reveals that these impacts vary according to domestic banks' size, ownership structure, governance quality, and income diversification. Furthermore, the modes of foreign bank penetration also exhibit differential effects. The findings maintain validity through rigorous robustness checks employing various econometric methods and alternative variables. This research carries significant implications for policymakers, commercial banks, and stakeholders in the globalising banking system.