Local Banking Competition and Efficiency in the Presence of Offshore Financial Institutions: Evidence from the Caribbean

Offshore banking is a significant aspect of the financial environment in some Caribbean Islands. The objective of this paper is to identify whether domestic banks located in Caribbean offshore centers operate any differently from domestic banks located in islands that do not host offshore banking. Balance sheets and income statements between 1993 and 2004 are used to measure the level of competitiveness and efficiency of banking activity. The results show that domestic banks located in Caribbean offshore financial centers operate in a less competitive manner and are less efficient in their role in providing financial intermediation than local commercial banks located in non-offshore banking islands.