This paper empirically examines whether the effect of financial openness on private credit depends on the market structure of the banking sector prior liberalization. We find that financial openness has a positive effect on private credit in countries characterized by a highly competitive banking sector. However, this effect vanishes and even becomes negative in countries where the market structure is one of imperfect competition. These findings are consistent with the predictions of recent theoretical models.

JEL classification: F34; G15; G21; G38.

Ronald Fischer

Patricio Valenzuela

Keywords: Competition; Financial Openness; Financial Development