Participants are more accurate at remembering faces of their own relative to another ethnic group (own-race bias, ORB). This phenomenon has been explained by reduced perceptual expertise, or alternatively, by the categorization of other-race faces into social out-groups and reduced effort to individuate such faces. We examined event-related potential (ERP) correlates of the ORB, testing recognition memory for Asian and Caucasian faces in Caucasian and Asian participants. Both groups demonstrated a significant ORB in recognition memory. ERPs revealed more negative N170 amplitudes for other-race faces in both groups, probably reflecting more effortful structural encoding. Importantly, the ethnicity effect in left-hemispheric N170 during learning correlated significantly with the behavioral ORB. Similarly, in the subsequent N250, both groups demonstrated more negative amplitudes for other-race faces, and during test phases, this effect correlated significantly with the ORB. We suggest that ethnicity effects in the N170 reflect an early categorization of other-race faces into a social out-group, resulting in less efficient encoding and thus decreased memory. Moreover, ethnicity effects in the N250 may represent the "tagging" of other-race faces as perceptually salient, which hampers the recognition of these faces.