GLOBAL FINANCIAL DEVELOPMENT REPORT Brick …pubdocs.worldbank.org/en/687461509974147905/GFDR-2018-Chapter2… · Brick and Mortar Operations of International Banks Robert Cull ...

Brick and Mortar Operations of International Banks

Robert CullResearch Manager, Research Department

Claudia Ruiz-OrtegaEconomist, Research Department

http://www.worldbank.org/financialdevelopment

GLOBAL FINANCIAL DEVELOPMENT REPORT 2017

SettingtheStage:BrickandMortarOperationsofForeignBanks

•OlderLiterature(1980suptoGFC)showedgenerallybeneficialeffectsforhostcountrybankingsectorson:• Competitionandefficiency• Stability

•Butmoremixedresultsonaccesstofinancialservices(credit)inhostcountries

Introduction Determinants&Trends Impact Regulation&Supervision Conclusions

But,resultsoncompetition/efficiencydependentoncontext

•Nonrandomselection•Mostoftheforeignbankswerewell-establishedandheadquarteredindevelopedcountries

•Heterogeneityineffects• Greaterinlessdevelopedhostcountries• Foreignbankswereoftenatacompetitivedisadvantageinmoredevelopedbankingsectors(Bergeretal.,2000;DeYoungandNolle,1996;Peek,Rosengren,andKasirye,1999)


Stabilityandcreditaccessdependentonhome/hostcountrycontext

Stability• Foreignbankshelpstabilizecreditflowsduringhostcountrybankingcrises• But,canalsotransmitfinancialshocksfromtheirhomecountriestohostcountrybankingsectors

Access•Movingbeyondcherrypickingandservinghomecountryclientsabroadrequires:• Betterinformationenvironment(accountingstandards,creditregistries,collateralregistries)• Strongframeworkforcontractenforcement


Inshort,effectsofforeignbankshavealwaysbeenheavilydependentonhome/hostcontext

Mostrecentstudiesfocusedonbanking/real sectoroutcomesalsounderscore thatconclusion

• Post-liberalizationgainsinaggregatecredit,growthanddeclinesingrowthvolatilityaregreaterifdomesticbankingsectorwasalreadycompetitive(Behn,Haselmann,Seru,andVig,2014)

• Foreignbanksfromdevelopedeconomiesespeciallydependentonstronglegalframeworkstofosterbusinessformation(Alfaro,Beck,andCalomiris,2015)


Post-GFCTrendslikelytoaffecthostcountrybankingsectors

•Changesintherosterofforeignbanks• Retrenchmentbydevelopedcountrybanks(lessthanX-border,butnotable)• GreaterSouth-Southentry;Regionalization

Alternativedeliverymechanisms(fintech)


Outlineofpresentation

• Determinantsofforeignbankentry

• Recenttrends

• Effectsofforeignbankpresenceon:• Competition/efficiency• Bankingstability• AccesstobankingservicesThroughthelensofPost-GFCdevelopmentsandtrends

• Emergingapproachestoregulateandsuperviseinternationalbanks

• Policyrecommendations


Determinantsofforeignbankentry

• Foreignbanksoperateabroadinorderto:• Followhome-countrycustomers(GoldbergandJohnson,1990;FocarelliandPozzolo,2000)• Pursueprofitableopportunitiesabroad(Sethetal.,1998;Yamori,1998)• Seekinternationalportfoliodiversification(Haydenetal.,2006;Garcia-HerreroandVazquez,2013)

•Whendoingso,thecostsofinformationinthehosteconomyarecrucial• Foreignbankstendtolocateinplaceswithlowerinformationcostsforthem(i.e.,institutional/cultural/geographicalproximity)(Buch,2003;VanHoren,2007;ClaessensandVanHoren,2014)


Additionalfactors

• Foreignbankentrydecisionsmaybedistortedby:

• Regulatoryarbitrage- foreignbanksmaytakegreaterriskinless-regulatedhosteconomies(Acharya,2003;KarolyiandTaboada,2015;Dong,SongandTao,2011;Ongena,PopovandUdell,2013)

• Restrictionsthatlimitcross-bordercapitalflowswithinamultinationalbankgroup(i.e.,macroprudentialpolicies,countercyclicalbuffers,ringfencing)

• Financialsafetynetsinthehosteconomy


RecenttrendsinforeignbankentryI

PANELA.NUMBEROFSUBSIDIARIESOFFOREIGNBANKS

PANELB.FOREIGNBANKCLOSURES

0

5

10

15

20

25

Highincome Developing

0

100

200

300

400

500

600

700

800

2001 2003 2005 2007 2009 2011 2013



RecenttrendsinforeignbankentryII

PANELC.FOREIGNACQUISITIONSOFDOMESTICBANKS

PANELD.OWNERSHIPTRANSFERALSOFFOREIGNBANKS

0

10

20

30

40

HighIncome Developing

0

5

10

15

HighincometoDeveloping

DevelopingtoHighincome


Impactofforeignbanksinahosteconomy

Efficiency&CompetitionFinancialStabilityAccesstoCredit


EfficiencyandCompetition

• Indevelopingcountries,foreignbankstendtobemoreefficientthanlocalones• Boninetal.,2005;Demirguc-KuntandHuizinga,1999;Claessensetal.,2001• Foreignbanksbringsuperior technologies, riskmanagementsystems,lowerfundingcosts

• Evidencesuggeststhatforeignbankstendtoraisetheefficiencyoflocalbanks• Byforcinglocalbankstolowerspreadsandrationalizetheircosts(Clarkeetal.,2003;UniteandSullivan,2001;Claessensetal.,2000)

• Positivespillovers:localbankslearnfromforeignones(Lehner andSchnitzer,2008;Zhu,2012;Jeonetal.,2011)


• Indevelopingcountries,foreignbankparticipationispositivelyassociatedwithmorecompetitivebankingsectors(Clarkeetal.,2003;Claessensetal.,2001)

• Competitionismoreintensewhen:• Moreefficientandlessriskyforeignbanksentermarketswithlessconcentratedbankingsectors(Jeonetal.,2011)• Entryoccursthroughgreenfieldinvestment(Claeys andHainz,2014)


EfficiencyandCompetition

FinancialStability

Risk-sharingthroughglobalbankinghastwosides

1. Theycanhelpsmoothlocalshocks• Lowerincidenceofcrises(Barthetal.,2004;Demirguc-Kuntetal.,1998)• Morestablecreditgrowthduringlocalcrises(Dages etal.,2000)• Morediversifiedpoolofliquidity,parentsupport

2. Theymaytransfershocksfromabroad• CollapseofJapanesestockprices(PeekandRosengren,1997,2000)• 1998RussianCrisis(Chava andPurnanandam,2011;Schnabl,2012)• Transmissionofforeignmonetarypolicy(Moraisetal.,2015)


FinancialStability- LendingcontractionduringtheGFC

DuringtheGFC,foreignbankscontractedlendingearlierandfasterthandomesticbanks

• Contractiondifferedacrossbankcharacteristics• Lessseverewhenforeignbanksarelargelocallyandrelymoreonlocaldeposit-takingandlessonwholesalefunding(DeHaasandVanLelyveld,2014)

• Regulationinhostcountrymattered• Morestabilitywhenbankingsector regulationinhostcountriesismorestrict(Anginer etal.,2016)


FinancialStabilityandnewgenerationofforeignbanks

RegionalizationofforeignbanksandSouth-Southbankingwillbringbothopportunities&risksforthefinancialstabilityofhosteconomies

• Opportunities:• Easiercoordinationbetweenhomeandhostcountries

• Risks&Challenges:• Shocksofhomeandhostcountriesmorecorrelated• Regulationinhomecountriesofnewforeignbanksismorelax


AccesstoCredit- largeheterogeneityacrosscountries

• Impactofforeignbanksoncreditaccessgreatlydependentonhostcountryfactors• Economicdevelopment, localbankingsectordevelopment, informationalandlegalenvironment

• Amongtheleast-developedcountries,therecanbeanegativeassociationbetweencreditaccessandforeignbankentry• Foreignbanks“cherry-pick”thelargestfirms,worsening thepoolofborrowersoflocalbanks(Detragiache etal.,2008)

• Associationfound ifforeignbankpresenceissmall,ifenforcingcontractsiscostly,andcreditinformation islimited(ClaessensandVanHoren,2014)


AccesstoCreditandInvestmentOpportunities

Foreignbankscanexpandcreditaccessandinvestmentopportunities:

• Byforcinglocalbankstogo“down-market”• Localbanks- advantagewithinformationallyopaqueclients(BeckandMartinezPeria,2010;BeckandBrown,2013;Mian,2003-2005)

• Bylendingtounderservedsegments• Improvementoflendingtechnologiesbasedonhardinformation(BergerandUdell,2006;DelaTorreetal.,2010)

• BypromotingtradeandFDI(Claessensetal.,2014;Ongena etal.,2014)


AccesstoCredit- RegionalizationandSouth-Southbanking

• Developingcountries’foreignbanksmorefamiliarizedwithhostcountry’senvironment• Performbetterinweakerlegalenvironments• Abletoovercomechallengesoflendingtosmallerclients(Mian,2006;ClaessensandvanHoren,2014)

• Businessformationrates• Morestronglycorrelatedwithdevelopingcountries’foreignbanks• However,developingcountries’banksmorelikelytofinanceindustrieswithstandardizedinputs(Alfaroetal.,2015)


Performanceofforeignbanksbytheircountryofheadquarters I

PANELA.CREDITGROWTH(%) PANELB.LOCALDEPOSITSTOTOTALLIABILITIES(%)

0

10

20

30

40

50

60

70

2001 2003 2005 2007 2009 2011 2013


40

50

60

70

80

90

100

2001 2003 2005 2007 2009 2011 2013



Performanceofforeignbanksbytheircountryofheadquarters II

PANELC.INTERESTINCOME(%) PANELD.NON-PERFORMINGLOANS(%)

50

55

60

65

70

75

80

2001 2003 2005 2007 2009 2011 2013Highincome Developing

0

2

4

6

8

10

12

2001 2003 2005 2007 2009 2011 2013



ApproachesforRegulation,SupervisionandResolution

• Havinglocalauthoritiessupervisinginternationalbanksissuboptimal

• InternationalSupervisoryCoordination• Hasbeenthepreferredwaytodealwiththismismatch• Exchangeinformation, harmonize regulationsandsupervision standards• BaselCommittee(global standard-setter)

• Problems:• Coordinationacrosscountries ischallengingandcomplex• Incentivesofhomeandhostauthoritiesmaynotbealigned

• Whenaforeignbankissystemicinthehostcountrybutnot largeinthehomecountry,homecountrymayhavelittleinterestinintervening

• Regardingresolution, G-SIBsareextremelyhardtoresolve



• TheGFChighlightedtheseproblems• Coordinationarrangementsfailed(non-binding)• Lastminuteandadhocinterventionsinvolvingpublicsupport• “Banksareglobalinlifeandnationalindeath”(MervynKing,formerGovernoroftheBankofEngland)

• SincetheGFC…• Morerestrictiveregulationandmonitoringofinternationalbanks• Preventivemeasuresincaseofdistress(i.e.,TLAC)• Regulatorybarriers:macroprudentialmeasures,countercyclicalbuffers,ring-fencing



• GFCrevealedtheneedforaconsistentframeworkforsupervisingandresolvinggloballyactivebanks

• Thefinancialtrilemma(Schoenmaker,2013)• Financialstability,financialintegrationandnationalfinancialpoliciesareincompatible

• Policymakersneedtodecidewhether tobemorefinanciallyintegrated(i.e.,theuniversalapproach)ormorefinanciallysovereign (i.e.,territorialapproach)

• Implementationofanyoftheseapproachesiscomplex


Territorialapproach• Non-cooperativeapproach• Hindersbenefits offoreignbanks

Universalapproach• i.e.,BankingUnion• Legallybinding frameworks• Centraldecisionmaking

MorefinancialintegrationLessnationalsovereignty

Intermediateapproach• Elementsofuniversal

approach• i.e.,resolution procedures

Conclusions

• Foreignbankscanimprovelocalbankingsectors,butbenefitsaremorelikelyiftheproperregulatoryandsupervisoryframeworksareinplace

• Toreapbenefitsofforeignbanks:• Financialliberalizationaccompaniedbyinstitutionalreformsthatimproveinformationenvironmentandcontractenforcement

• Diversifiedrosterofhomecountries’foreignbanks(forstabilityandaccess)

• Regardingnewgenerationofforeignbanks:• Homecountrieswithmorelaxregulationstandards• Potentiallyhurtrisk-smoothing(morecorrelatedshocks)• Mayfacilitatecoordinationamongauthorities• Maybebettertoovercomechallengesoflending“down-market”

• Fintechisrapidlychangingthesector,bringingnewchallengesforregulationandsupervision


Conclusions

• Intermsofregulation/supervision/resolution:• Regulation,supervisionandresolutionofforeignbanksisextremelycomplex

• IncentivesacrossauthoritiestodealwithG-SIBsareimperfect

• Whiletheuniversalapproachmaybetooextremeformostcountries,someofitselementscouldbeworthadopting• i.e.,harmonizing procedures forresolution• i.e.,havinganex-anteplanonhowtoshareburdens incaseofdistress,ratherthantoimproviseex-post


GLOBAL FINANCIAL DEVELOPMENT REPORT Brick …pubdocs.worldbank.org/en/687461509974147905/GFDR-2018-Chapter2… · Brick and Mortar Operations of International Banks Robert Cull ...

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