Trade in financial services and the determinants of banks' foreign assets

Abstract

The purpose of this study is to analyse and model the determinants of banks' foreign assets, one of the major sources of trade in financial services for the US, the UK and Germany. As banks' foreign assets are part of the foreign financial assets of the private sector recorded in the capital account balance, the model of this paper is based on the portfolio balance model. The empirical results suggest that FDI abroad for the three countries studied is a substitute for banks' foreign assets. Of further interest with regard to the US, the UK and Germany is the observation that over the last decade increases in these countries banks' foreign assets have come with increases in foreign financial liabilities and decreases in banks' domestic assets. Given that banks' foreign assets are the principal source of interest income, this paper has proposed the hypothesis that shrinking margins and financial product innovation have resulted in a decrease in interest income with an increase in non-interest income. Indeed, tacit support for the increased importance of banks' commissions and fees is given in the case of the US and the UK whose banks are major derivative market participants and financial product innovators.