Foreign bank entry on banking sector in transition economies: The case of Albania

The high share of foreign banks in Eastern European countries has become a key feature of financial development. At present foreign banks own more than 50 percent of banking assets in almost all of the CEE and SEE and in some countries the share of foreign-owned bank assets is as high as 80-90% , making this region? banking systems among the most open in the world.Despite mixed evidence in the literature as to the effects of foreign bank entry, the benefits foreign banks can offer are now much more widely recognised. Most transition economies now increasingly look to foreign banks to provide the capital, technology and know-how needed in banking. Nevertheless recent rapid credit growth leaded by foreign banks in transition countries has been the subject of much criticism because of the potential risks it poses to the financial sector and macroeconomic stability.Albania joined the group of countries experiencing a credit boom in 2004-2005, after the privatization of the state-owned Savings Bank, with credit growth rates as high as 75% per year. In 2007 foreign banks? assets in Albania accounted for more than 94 percent of total assets in the banking system.The aim of this work is to give a thorough presentation of the foreign bank entry and its effects in the Albanian banking sector, together with the potential risks and challenges to the financial stability. Even why for some objective reasons it is almost impossible to compare the performance of foreign banks vis-a-vis domestic banks, the impact of foreign bank entry on the sector as a whole is analyzed in detail, with important results and inferences for the future.