Foreign Bank Subsidiaries Research Articles

Cultural values of parent bank board members and lending by foreign subsidiaries: The moderating role of personal traits

In this study, we investigate whether the cultural values of a parent bank’s board members affect lending by the bank’s foreign subsidiaries and how this influence is moderated by the board members’ personal traits. Using a new dataset on foreign-owned banks and their parent companies, we find that average individualism, uncertainty avoidance, and indulgence within parent bank boards significantly impact lending by foreign subsidiaries. We establish that different sensitivities of female and male directors modify the relevance of individual cultural dimensions in lending by foreign bank subsidiaries. Moreover, we show that parent bank directors’ cultural values have a stronger impact on lending by the bank’s foreign subsidiaries when those directors have enough time to fulfill their duties and possess higher ownership stakes in the parent companies.

Foreign bank lending: The role of home country culture during prosperous and crisis periods

We investigate whether a home country’s culture determines lending behavior of foreign bank subsidiaries in host countries during both prosperous and difficult economic periods. We employ a dataset of foreign-owned banks originating from 46 home countries and operating in 47 host countries during 1996–2018. The results show that, in general, only certain cultural dimensions of the home country influence the foreign bank subsidiaries’ lending. However, this impact strengthens significantly during crises.

Monetary policy spillovers under COVID-19: Evidence from lending by U.S. foreign bank subsidiaries

This paper uses Call Report data to examine the impact of home country monetary policy on foreign bank subsidiary lending in the United States during the COVID-19 pandemic. Examining a large sample of foreign bank subsidiaries and domestic U.S. banks, we find that foreign bank lending growth was positively associated with both lower home country policy rates and negative home country rates. Point estimates indicate that a one standard deviation decrease in home country policy rates was associated with a 3.5 percentage point increase in lending growth, while negative home country policy rates added an additional 3.0 percentage points on average. Disparities in sensitivity to home country rates also exist by bank size, as large banks exhibited more responsiveness to home country policy rate levels, but were less responsive to negative policy rates. Easier home country policy rates are also found to impact negatively on growth in capital ratios and bank income, in keeping with expanded foreign subsidiary activity. However, income responses to negative home country rates are mixed, in a manner suggesting balance sheet adjustment to changes in relative home and host country conditions. Overall, our findings confirm that the bank lending channel for global monetary policy spillovers was active during the pandemic crisis.

Monetary Policy Spillovers Under Covid-19: Evidence from U.S. Foreign Bank Subsidiaries

This paper uses Call Report data to examine the impact of home country monetary policy on foreign bank subsidiary lending in the United States during the COVID-19 pandemic. Examining a large sample of foreign bank subsidiaries and domestic U.S. banks, we find that foreign bank lending growth was positively associated with both lower home country policy rates and negative home country rates. Our point estimates indicate that a one standard deviation decrease in home country policy rates was associated with a 3.5 percentage point increase in lending growth while negative home country policy rates added an additional 3.0 percentage points on average. Disparities in sensitivity to home country rates also exist by bank size, as large banks exhibited more responsiveness to home country policy rate levels, but were less responsive to negative policy rates. Easier home country policy rates are also found to impact negatively in growth in capital ratios and bank income, in keeping with expanded foreign subsidiary activity. However, income responses to negative home country rates are mixed, in a manner suggestive of sophisticated adjustment of global bank balance sheets to changes in relative home and host country monetary policy stances. Overall, our findings confirm that the bank lending channel for global monetary policy spillovers was active during the pandemic crisis.

Do investors value frequent issuers in securitization?

We assess the value of frequent issuers to investors in securitization markets by examining the initial yield spread of 6132 European mortgage-backed securities (MBS), covering a 20-year period between 1999 and 2018. We find that frequent issuers have certification value, and it increases as the credit cycle approaches its peak, as lending standards loosen, and information asymmetries in securitization markets increase. Investors value frequent issuers more favourably on riskier, difficult to evaluate MBS. We find that after the great financial crisis (GFC), investors began to attribute more value to frequent issuers, regardless of MBS credit quality. We also find that in the pre-crisis period, investors required higher yields to compensate for perceived rating shopping, which is not observed after the GFC. Finally, we show that investors expect higher yields on deals closed by subsidiaries of foreign banks.

Foreign Bank Lending: The Role of Home Country Culture During Prosperous and Crisis Periods

We investigated whether home country culture determines the lending behavior of foreign subsidiaries in host countries during both tranquil and difficult economic times. We employed a dataset of foreign-owned banks originating from 49 home countries and operating in 47 host countries during the period 1996–2018. We found that, in general, only certain dimensions of the home country culture of multinational banks influence lending activities of the foreign bank subsidiaries. However, the impact of home country culture strengthens significantly during crises. Interestingly, we established that the cultural values of the home country are more important than the cultural distances between home and host countries in explaining foreign bank lending attitudes.

Проблемы повышения доходности российских коммерческих банков

The article deals with the ways of obtaining income by banks. In modern conditions, taking into account the lessons and consequences of the global financial crisis, the regulator sets increasingly high requirements for the management and capital management system in credit institutions in the financial and banking services markets. In this regard, the number of banks that seek to improve the risk management system in order to bring it in line with the best foreign practices is constantly increasing. However, only a few Russian credit institutions have the necessary sources for calculating economic capital and its adequacy ratios. And only a few (mostly subsidiaries of large foreign banks) are able to make payments in accordance with international best practices. The ability to calculate economic capital, that is, the largest possible loss for a given time horizon, calculated with a set confidence interval, characterizes the high level of quality of the risk management system. The problems of increasing the profitability of commercial banks in the Russian Federation are also disclosed.

ARE FOREIGN BANK SUBSIDIARIES MORE PROFIT EFFICIENT THAN DOMESTIC ONES? - AN ANALYSIS ON EARNING APPROACH OF PRIVATE SECTOR BANKS, BANGLADESH

Profitability indicates the efficiency with which the operations of the business are carried on. The measurement of profitability in banking is necessary to improve the financial soundness of banks. The banking in private sector of Bangladesh comprises both domestic and foreign bank subsidiaries. The main purpose of this study is to determine and compare the profitability of foreign banks with domestic conventional and Islamic banks operating in Bangladesh. Among various variables here two most important profitability ratios: Return on Asset and Return on Equity are used to analyze the performance of private sector banks. A sample of nine private sector banks has been selected randomly to measure and compare their performance for the period of 2010 to 2018. Each year the average ratios were considered. In this work, t-test analysis is used to determine the significance of this study. The study has shown that there is no significant difference between the profit efficiency of foreign bank subsidiaries and domestic banks (Islamic and Conventional). KEYWORDS: Profitability, Islamic Banks, Conventional Banks, Foreign Banks, Private Sector.

Effect of interbank activities on bank risk: Why is China different?

Shadow banking commonly occurs outside the banking system to avoid regulation. However, in China, shadow banking could occur inside the banking system through interbank activities. This unique Chinese style of shadow banking provides a natural environment to examine how this form of banking, proxied by interbank activities, affects credit ratings. To prove this, we conduct two comparisons. First, we compare the local Chinese commercial banks with foreign bank subsidiaries in China where the two types of banks are subject to the same macroeconomic environments, policies, and regulations. However, unlike the local banks, foreign bank subsidiaries do not engage in the Chinese style of shadow banking. Next, we compare the interbank activities of five developed countries (Germany, France, Japan, the United Kingdom, and the United States) where the unique shadow banking system is absent. Our results show that credit ratings are downgraded for Chinese banks when they conduct interbank activities. The results do not hold for foreign bank subsidiaries in China as their ratings are either upgraded or show no effect from interbank activities. Furthermore, after we control for country heteroscedasticity, we find that agencies either upgrade ratings or keep them the same for the banks from the five developed countries that conduct interbank activities.

Credit risk of subsidiaries of foreign banks in CEE countries: Impacts of the parent bank and home country economic environment

In this study, using dynamic panel data, we investigated the influences of the home country economic environment and parent bank condition on the credit risk of foreign banks in Central and Eastern European (CEE) countries. We concentrated on the international transmission of credit risk through the internal capital market of multinational banks. Our theoretical assumptions follow studies that document how the parent bank condition and home country macroeconomic environment affect lending in subsidiaries in CEE countries. However, our results go one step further. We provide evidence that these relationships are reflected in subsidiaries’ credit risk in CEE countries. Our results suggest that the size and profitability of the parent bank have negative influences, while the liquidity and credit risk of the parent bank have positive influences on the subsidiaries’ credit risk. Moreover, the GDP growth in the parent bank’s country has a negative effect on the credit risk of the subsidiary, while the lending rate and liquidity in the parent bank country cause growth in the credit risk. These results indicate a new channel of international risk transfer from parent bank countries to host countries through foreign-owned banks.

Re-examine Performance of Foreign Banks in Indonesia

We reexamine the performance of multiple definitions of foreign banks in Indonesia over the period of September 2005-December 2013 in a monthly dataset. We use a number of definitions of foreign banks which are branches and subsidiaries of foreign banks (BSFB), joint venture banks (JVB) and domestic banks acquired by foreign investors (DBAFI). Unbalanced panel data estimation, more particular random effect, is employed to examine our hypothesis. We find that BSFB have a higher performance than other banks. However, little evidence is revealed for the joint venture and acquired banks. Encouraging banks, more particular domestic banks, to be more efficient should be bolstered by the regulators to lead them to be more profitable and competitive.

International Banking and Cross-Border Effects of Regulation: Lessons from the United States

Domestic prudential regulation can have unintended effects across borders and may be less effective in an environment where banks operate globally. Using U.S. micro-banking data for the first quarter of 2000 through the third quarter of 2013, this study shows that some regulatory changes indeed spill over. First, a foreign country's tightening of limits on loan-to-value ratios and local currency reserve requirements increase lending growth in the United States through the U.S. branches and subsidiaries of foreign banks. Second, foreign tightening of capital requirements shifts lending by U.S. global banks away from the country where the tightening occurs to the United States and to other countries. Third, tighter U.S. capital regulation reduces lending by large U.S. global banks to foreign residents.

Do Banks Diversify Loan Portfolios? A Tentative Answer Based on Individual Bank Loan Portfolios

Theory of financial intermediation gives contradicting answers to the question whether banks should diversify or focus their loan portfolios. Our aim is to find out which of the two strategies is predominant in the German banking market. To this end we measure diversification for all German banks in the period from 1993 to 2002. As measures we use a broad set of heuristic approaches which capture the deviation of a bank's portfolio from a specified benchmark. Conceivable benchmarks are naive diversification across all industries or, alternatively, the economy's industry structure. With this framework our analysis comprises the widespread measures of concentration, like the Hirschman-Herfindahl index, but also the less known group of distance measures. We find that different statistical measures of diversification may indicate contradicting results. Since distance measures are more appealing from a theoretical point of view, the common practice to rely on measures of concentration only, may be misleading. We further find that, despite these differences, both approaches reveal that the majority of banks significantly increased loan portfolio diversification over the last decade. This tendency is especially driven by the large number of credit cooperatives and savings banks. However, some banks (especially regional banks and subsidiaries of foreign banks) reveal a strategy that seems to be more focused on certain industries.

Foreign Bank Subsidiaries' Default Risk During the Global Crisis: What Factors Help Insulate Affiliates from Their Parents?

This paper examines the association between the default risk of foreign bank subsidiaries and their parents during the global financial crisis, with the purpose of understanding what factors can help insulate affiliates from their parents. The paper finds evidence of a significant positive correlation between parent banks'and foreign subsidiaries'default risk. This correlation is lower for subsidiaries that have higher capital, retail deposit funding, and profitability ratios and that are more independently managed from their parents. Host country regulations also influence the extent to which shocks to the parents affect the subsidiaries'default risk. In particular, the correlation between the default risk of the subsidiary and the parent is lower for subsidiaries operating in countries that impose higher capital, reserve, provisioning, and disclosure requirements and tougher restrictions on bank activities.

Foreign Bank Subsidiaries' Default Risk during the Global Crisis: What Factors Help Insulate Affiliates from their Parents?

This paper examines the association between the default risk of foreign bank subsidiaries in developing countries and their parents during the global financial crisis, with the purpose of determining the size and sign of this correlation and, more importantly, understanding what factors can help insulate affiliates from their parents. We find evidence of a significant and robust positive correlation between parent banks’ and foreign subsidiaries’ default risk. This correlation is lower for subsidiaries that have a higher share of retail deposit funding and that are more independently managed from their parents. Host country bank regulations also influence the extent to which shocks to the parents affect the subsidiaries’ default risk. In particular, the correlation between the default risk of subsidiaries and their parents is lower for subsidiaries operating in countries that impose higher capital, reserve, provisioning, and disclosure requirements, and tougher restrictions on bank activities.

Credit growth in Central, Eastern, and South-Eastern Europe: The case of foreign bank subsidiaries

In this paper, we investigate the credit growth of foreign-owned banks in Central, Eastern, and South-Eastern Europe from 2000 to 2014. We intend to show whether foreign capital in the banking sector should be treated as a monolith, as it currently is in the literature. To this end, we analyse credit growth based on the status of the parent company (global systemically important banks, or G-SIBs, vs. non-GSIBs) and European Union membership of the countries of the subsidiaries. The analyses are carried out on a panel of banks with the use of the panel corrected standard error methodology. Additionally, we differentiate between the pre-crisis and crisis/post-crisis periods to identify whether the policy of parents changed after the outbreak of the crisis. We find important differences in the determinants of the credit growth of subsidiaries, indicating that foreign capital in the banking sector should not be treated as a monolith.

Capital Management and Leverage of Foreign Bank Subsidiaries in a Host Country: A Case in Hong Kong

The large presence of global banks in Hong Kong offers a well suited empirical setting to study the capital management of foreign bank subsidiaries from a host country perspective. Specifically, this paper uses the trade-off theory of leverage to investigate whether the leverage dynamics of foreign bank subsidiaries in the host country would behave differently to domestic banks. Similar to the behavior uncovered empirically of non-financial firms, we find that the standard determinants of leverage are applicable to banks in Hong Kong. In particular, there is a mean-reverting force which acts as a self-correcting mechanism for their leverage, with over-leveraged banks having a tendency to decrease their leverage, and vice versa. However, the self-correcting mechanism of banks’ leverage may in times be unduly disturbed by abundant global liquidity, with the effect on foreign bank subsidiaries tangibly higher than that on domestic banks. The externality generated by current abundant global liquidity affecting foreign bank subsidiaries may require the implementation of macro-prudential policies in the host country to contain the risks stemming from the high leverage of banks and external liquidity shocks.

Foreign bank subsidiaries' default risk during the global crisis: What factors help insulate affiliates from their parents?

This paper examines the association between the default risk of foreign bank subsidiaries and their parents during the global financial crisis, with the purpose of understanding what factors can help insulate affiliates from their parents. The paper finds evidence of a significant positive correlation between parent banks' and foreign subsidiaries' default risk. This correlation is lower for subsidiaries that have higher capital, retail deposit funding, and profitability ratios and that are more independently managed from their parents. Host country regulations also influence the extent to which shocks to the parents affect the subsidiaries' default risk. In particular, the correlation between the default risk of the subsidiary and the parent is lower for subsidiaries operating in countries that impose higher capital, reserve, provisioning, and disclosure requirements and tougher restrictions on bank activities.

Market Discipline and Deposit Guarantee: Evidence from Australian Banks

AbstractThis study examines depositor market discipline of Australian banks and its interaction with the 2008 deposit and wholesale funding guarantee. Prior to 2008 market discipline is found for Australian‐incorporated banks. Depositors did not distinguish between major and small banks, but some differences in the degree of market discipline were found for foreign bank subsidiaries. Following the introduction of the 2008 guarantees, market discipline was reduced except for nonhousehold depositors at banks that did not access the wholesale guarantee. Market discipline is also evidenced at foreign bank branches, but weaker for those accessing the wholesale guarantee.

Determinants of loans and deposits strategies of foreign bank subsidiaries in emerging countries

Abstract. This paper focuses on the transmission of bank liquidity shocks in Loan and deposit in emerging markets. First, we attempt to identify factors affecting the credit strategy of foreign banks in emerging countries. Second, we test whether depositors exert market discipline on foreign subsidiaries. By combining financial variables of subsidiaries and their parent banks and macroeconomic variables of host and home countries, we investigate the factors that may affect the behavior of depositors. Our empirical approach is based on a Partial Least Squares-Path model that allows us to indentify the causal relationships between the various groups of variables. Our results show that foreign bank lending is determined by the specific financial variables of the parent bank and macroeconomic variables of the country of origin. This support that the strategy's credit of foreign subsidiary is centrally managed at the parent bank and credit supply of subsidiaries depends primary on the financial situation of its parent bank. Finally we find evidence of market discipline exercised over foreign subsidiaries in emerging countries. We show that market discipline is strongly affected by the specific characteristics of the subsidiary.