The determination of foreign banking location

Abstract

In this paper we examine the determinants of foreign bank location. We initially present some time series data on the postwar expansion of international banking. We show that foreign branching increased very rapidly from about 1960 to the mid-1980s and slowed significantly after 1985. One interpretation of this growth in foreign branching is that it largely paralleled the increase in trade and foreign direct investment, although it may also have been encouraged by the improvements in communications and the rapid financial innovation of the 1960s and 1970s. To assess the role of trade and foreign direct investment on bank expansion, we employ a cross-sectional analysis of the pattern of foreign bank offices. Whereas previous studies have focused on a single parent or host country, our study extends the existing literature by analyzing the location of nearly 2000 overseas offices across 37 patent and 82 host countries. Our results suggest a significant relationship between the pattern of bank location, trade and foreign direct investment. We define a banking centre as one in which there are more foreign banks than can be explained in terms of real business activity and we show that the USA, UK, Switzerland, Singapore and Indonesia most clearly qualify as banking centres. We also provide some evidence for a sample of host countries that the abnormal number of bank offices is related to capital market activities.