Foreign activities of U.S. banks since 1997: The roles of regulations and market conditions in crises and normal times

Abstract

Using a unique newly constructed dataset on U.S. banks' foreign activities since 1997, this paper examines how bank, market and regulatory conditions in the U.S. and host countries affect U.S. banks' choices of which foreign markets to enter and how much claims and liabilities to take on there. Using a two-stage structural estimation framework, the determinants of foreign market entry/exit, cross-border claims, and foreign affiliate claims and liabilities choices are examined in 107 host countries around the world. It is shown that (1) the health of the balance sheet is the primary driver of foreign market entry/exit choices (especially so during the Subprime crisis), while host market and regulatory conditions play important roles in the choice of claims/liabilities volumes; (2) banks choose their foreign activities during banking and market crises differently than they do in ‘normal’ times; and (3) in addition to bank size, previous experience with managing a global lending network significantly increases the intensity of banks' foreign involvement. Structural estimates of the costs of foreign market entry/exit and host market regulatory stringency are also derived.