The popular notion that transition countries are overbanked is challengend here. We study the decision for market entry and the optimal number of banks in a Salop-model. We show that the amount of collateral depends on the distance between bank and firm as well as the quality of the institutional environment. We analyse how the number of banks decreases as the institutional environment improves. Moreover we find that market entry is insufficient because new entrants do not consider the positive effects on their entry decision and social wellfare sufficiently, i.e. the reduction of collateral requirement and the increase of in the average in the avarage liquidation value.

D43, G21, G34, L13, P31, P34