WTO Commitments vs. Reported Practices on Foreign Bank Entry and Regulation: A Cross-Country Analysis

Abstract

The General Agreement on Trade in Services (GATS) is an important new element in the international framework that affects the regulation of the financial sector of every World Trade Organization (WTO) Member and all potential new Members. However, except for a limited number of country-specific case studies, no attempt has been made to compare WTO commitments on opening the domestic banking sector to foreign banks with actual regulatory practice in a systematic manner on a cross-country basis. Nor has much attention been devoted to assessing the degree to which WTO Members may impose greater restrictions on foreign banking operations relative to domestic banks once foreign entry has occurred. This paper addresses both of these important empirical questions, by drawing on a new and comprehensive dataset of the WTO commitments made by 123 Member countries, paired with systematic World Bank data on the regulations imposed on foreign banks by those countries. The main objective is to assess the overall extent to which countries open their borders to foreign banks less (or more) than they are legally obliged to do based upon their WTO commitments. Our results show substantial divergences between commitments and reported practices across a range of foreign bank entry requirements and permissible banking activities. We deepen and broaden this analysis by constructing a comprehensive index of market openness taking into account additional entry and operations requirements and restrictions. We compare the variant of the index constructed using the WTO commitments data with the variant constructed with parallel components in the World Bank 'reported practices' data. Using this methodology, we find a substantial proportion of countries whose reported banking practices are more restrictive than their WTO commitments indicate they should be. However, we also find a significantly large group of countries whose banking markets in practice are more open than their WTO commitments oblige them to be. Our comprehensive index is also used to determine the degree to which banking regulation disadvantages foreign banks relative to domestic banks in each country; and, again, both the WTO commitments data and the World Bank reported practices data yield separate variants. Overall we find: 1) developed countries are more open to foreign entry than are developing countries; but 2) developed countries as a group are somewhat less open than their WTO commitments suggest they should be, whereas developing countries are in practice significantly more open than their WTO commitments oblige them to be; and 3) for foreign and domestic banks operating within each set of countries, foreign banks are, on average, at somewhat less of a regulations-related disadvantage relative to domestic banks than is the case for developed countries on average.