Foreign Bank Subsidiaries Research Articles

How should we bank with foreigners? An empirical assessment of lending behavior of international banks to six East Asian economies

We construct macro-and micro-panel data on international bank lending to six Asian economies—Indonesia, Korea, Malaysia, Philippines, Singapore, and Thailand—over the period 2000 to 2010 to analyze a number of objectives. The paper first examines the critical determinants not only to overall international bank lending but also to cross-border bank lending, and find that cross-border lending by international banks tend to pull out from host economies during difficult times in source economies, whereas such retrenchments are not evident on the basis of overall lending. The paper next examines the differences between subsidiaries and branches of international banks in their ability to shield themselves from the financial difficulties of their global parent banks and thus their ability to continue lending in destination markets. The results show that foreign bank subsidiaries are more capable in this regard.

Multinational Banking and Financial Contagion: Evidence from Foreign Bank Subsidiaries

Using bank-level data on 368 foreign subsidiaries of 68 multinational banks in 47 emerging economies during 1994-2008, we present consistent evidence that internal capital markets in multinational banking contribute to the transmission of financial shocks from parent banks to foreign subsidiaries. We find that internal capital markets transmit favorable and adverse shocks by affecting subsidiaries’ reliance on their own internal funds for lending. We also find that the transmission of financial shocks varies across types of shocks; is strongest among subsidiaries in Central and Eastern Europe, followed by Asia and Latin America; is global rather than regional; and became more conspicuous in recent years than before. We also explore various conditions under which the international transmission of financial shocks via internal capital markets in multinational banking is stronger, including the subsidiaries’ reliance on funds from their parent bank, the subsidiaries’ entry mode, and the capital account openness and banking market structure in host countries.

Multinational banking and the international transmission of financial shocks: Evidence from foreign bank subsidiaries

Using bank-level data on 368 foreign subsidiaries of 68 multinational banks in 47 emerging economies during 1994–2008, we present consistent evidence that internal capital markets in multinational banking contribute to the transmission of financial shocks from parent banks to foreign subsidiaries. We find that internal capital markets transmit favorable and adverse shocks by affecting subsidiaries’ reliance on their own internal funds for lending. We also find that the transmission of financial shocks varies across types of shocks; is strongest among subsidiaries in Central and Eastern Europe, followed by Asia and Latin America; is global rather than regional; and becomes more conspicuous in recent years. We also explore various conditions under which the international transmission of financial shocks via internal capital markets in multinational banking is stronger, including the subsidiaries’ reliance on funds from their parent bank, the subsidiaries’ entry mode, and the capital account openness and banking market structure in host countries.

Credit Euroization in Eastern Europe: The ‘Foreign Funds’ Channel at Work

This paper aims to analyze the process of credit euroization in Emerging Europe and to investigate the motives of borrowers and lenders to engage in foreign currency lending. We empirically test for drivers of credit euroization in 13 European post-transition countries over the pre-crisis period 1999–2007. We find evidence that underpins the concept of the foreign funds channel, which asserts that credit euroization is driven by foreign borrowings, regardless of whether the funds are channeled into the system via subsidiaries of foreign banks (foreign bank channel) or via domestic banks borrowing abroad.

Are Foreign Banks Out-Competing U.S. Banks in the U.S. Market?

The market share of foreign-owned banks (subsidiaries, branches, and agencies) in the United States grew dramatically during the 1980s and early 1990s, amid fears that foreign banks were out-competing U.S.-owned banks in their home market. However, more recent data show that growth of the market share of foreign-owned banks has slowed substantially. Furthermore, the data show that foreign-owned banks in the U.S. have persistently exhibited lower profit rates than counterpart U.S.-owned banks, subsidiaries of foreign banks have operated less efficiently than U.S.-owned banks, and in the last few years the credit quality of foreign banks plunged below that of U.S.-owned banks. These findings call into question fears about foreign banks out-competing U.S. banks in the U.S. market and suggest that, despite having captured a substantial share of U.S. banking business, further penetration of the U.S. banking market by foreign-owned banks is far from certain. Disclaimer As with all OCC Working Papers, the opinions expressed in this paper are those of the author alone, and do not necessarily reflect the views of the Office of the Comptroller of the Currency or the Department of the Treasury. Any whole or partial reproduction of material in this paper should include the following citation: Nolle, Daniel E., Are Foreign Banks Out-Competing U.S. Banks in the U.S. Market?, Office of the Comptroller of the Currency, E'&'PA Working Paper 94-5, May 1994.

How Should We Bank with Foreigners? - An Empirical Assessment of Lending Behavior of International Banks to Six East Asian Economies

The possible crucial role of international bank lending in the transmission of adverse economic disturbance from advanced economies to emerging economies in the recent global financial crisis has once again placed this type of capital flows into sharper scrutiny both in academic and policy discussions. We construct macro-and micro-panel data on international bank lending to six Asian economies, viz., Indonesia, Korea, Malaysia, Philippines, Singapore and Thailand, to analyze a number of objectives. We first examine the influence of a number of critical determinants not only to overall international bank lending but also to cross-border bank lending, and obtained one critical finding in this part of the study that cross-border lending by international banks tend to pull-out from host economies during difficult times in source economies, whereas such retrenchment are not evident on an aggregated basis. This may suggest that encouraging brick-and-mortar affiliates of international banks to ‘set up shop’ in recipient economies may be the judicious choice for these economies. We next critically examine the difference between subsidiaries and branches of international banks in terms of their ability to shield themselves from the financial difficulties of their global parent banks and thus their ability to continue lending in destination markets. According to our results, foreign bank subsidiaries are more capable in this regard. This finding carries with it the obvious attraction of favoring an organizational banking structure that is biased towards subsidiaries. However, national banking regulators should remember that apart from encouraging a host of other domestic and cross-border initiatives, encouraging the entry of brick-and mortar subsidiaries of international banks should not viewed as a panacea to the financial stability concerns not only in Asia but also across emerging markets in general.

The Impact of the Global Economic and Financial Crisis on Central, Eastern and South-Eastern Europe: A Stock-Taking Exercise

The paper first reviews the main drivers of the growth and real convergence process in central, eastern and south-eastern Europe (CESEE) since 2000 and assesses the key macro-financial strengths and vulnerabilities of the region at the beginning of the global economic and financial crisis. The main part of the paper reviews financial and real economic developments in these countries since the crisis started to impact the CESEE region. The paper finds that developments have been rather heterogeneous in the region. CESEE countries with the largest economic imbalances tended to be most affected. National and international support measures appear to have helped to stabilise financial markets, and parent banks of foreign bank subsidiaries in CESEE were committed to sustaining their exposure to the region. The degree to which CESEE governments were able to use policy instruments to counter the real effects of the crisis is rather heterogeneous, depending inter alia on the exchange rate regime in place and the initial fiscal positions.

The Role of Foreign Banks in Post-Crisis Asia: The Importance of Method of Entry

This study examines the role of foreign banks in post-crisis Asia, focusing particularly on the four countries most affected by the Asian Crisis of 1997 - Indonesia, Korea, Malaysia and Thailand. First, using data on the presence of foreign banks via branching as well as subsidiaries, the study shows that the presence of foreign banks in the four crisis-hit countries is actually much larger than has been previously reported once the presence of foreign branches is accounted for in the data. However, the percentage of assets controlled by foreign banks in Asia is still lower than that of other emerging economies, despite great increases in the post-crisis period. The author reviews regulations on foreign bank entry that may have limited the presence of foreign banks or influenced the method of entry (branching versus subsidiary). Given recent regulatory changes and the need for bank recapitalization in the region, the presence of foreign banks is expected to increase in the near future, so this study next takes up the policy implications of this trend. To date, foreign banks in most Asian countries appear to perform relatively worse than their domestic counterparts as measured by return on equity, cost to income ratios, and the ratio of problem loans to total loans. This finding contradicts previous research in other emerging economies, and may be due to the fact that foreign bank entry in Asia is still a very recent phenomenon, and has occurred mostly through the takeover of troubled banks in the region. The second policy issue examined here is the stability of lending by foreign banks relative to domestic banks. Macroeconomic data suggests that foreign bank lending may in some cases be more stable than domestic bank lending, particularly during crisis, but that the stability of foreign bank lending varies greatly by method of entry. Cross border claims of foreign banks are the most volatile, followed by foreign bank branch lending. Lending by foreign bank subsidiaries capitalized in the host country appear to be more stable than domestic lending, perhaps providing much needed capital during times of crisis. Therefore, foreign banks play an important role in Asia, not only in the traditional ways by providing new services and stimulating competition and efficiency, but also by contributing to stability of the banking sector in the face of macroeconomic fluctuations. However, the mode of foreign entry seems to have important implications for the contributions of foreign banks. Since lending by off-shore banks and foreign bank branches seems to be more volatile than locally capitalized foreign subsidiaries, policy makers in Asia should encourage foreign players to enter via fully-owned subsidiaries or joint ventures and move away from the previous pattern of branch-based entry.

Internal capital markets and lending by multinational bank subsidiaries

We use new panel data on the intra-group ownership structure and the balance sheets of 45 of the largest multinational bank holdings to analyze what determines the credit growth of their subsidiaries. We find evidence for the existence of internal capital markets through which multinational banks manage the credit growth of their subsidiaries. Multinational bank subsidiaries with financially strong parent banks are able to expand their lending faster. As a result of parental support, foreign bank subsidiaries also do not need to rein in their credit supply during a financial crisis, while domestic banks need to do so.

Bank Efficiency and Foreign Ownership in the Lebanese Banking Sector

We have compared the efficiency of banks with majority domestic ownership, banks with majority foreign ownership, and the subsidiaries of foreign banks operating in the Lebanese market between 1996 and 2005. We have implemented the DEA methodology to calculate the yearly scores for technical, allocative, and cost efficiencies for the three groups of banks. Moreover, we have extended our study to reveal the factors that shape bank efficiency, by proposing several micro and macroeconomic variables and testing their correlation with this efficiency.Firstly, our results did not prove significant differences between the efficiency of the three groups of banks. However, the evolution of the efficiency scores over the period under study shows an improvement in the performance of banks with majority foreign ownership, but some deterioration in the performance of banks with majority domestic ownership and the subsidiaries of foreign banks.Secondly, and with respect to the factors affecting bank efficiency, we found that the employed variables have different impacts according to groups, which may confirm that bank efficiency is differently determined, according to bank ownership.

MBNA Corp.

AbstractCommercial Banking (MIC: 8.1 SIC: 6021 NAIC: 522110)MBNA is a registered bank holding company, with assets of $61.71 billion as of Dec 31 2004. Co. is the parent of MBNA America Bank, N.A., which has two wholly‐owned foreign bank subsidiaries, MBNA Europe Bank and MBNA Canada Bank. MBNA.com, provides credit card, consumer loan, retail deposit, travel and shopping services. Co. is an independent credit card lender and an issuer of affinity credit cards, marketed primarily to members of associations and customers of financial institutions. Co. offers credit cards in the U.S., the U.K., Ireland, Canada and Spain. In addition to its credit card lending, Co. also makes other consumer loans and offers insurance and deposit products.

MBNA Corp.

AbstractCommercial Banking (MIC: 8.1 SIC: 6021 NAIC: 522110)MBNA is a registered bank holding company, with assets of $61.71 billion as of Dec 31 2004. Co. is the parent of MBNA America Bank, N.A., which has two wholly‐owned foreign bank subsidiaries, MBNA Europe Bank and MBNA Canada Bank. MBNA.com, provides credit card, consumer loan, retail deposit, travel and shopping services. Co. is an independent credit card lender and an issuer of affinity credit cards, marketed primarily to members of associations and customers of financial institutions. Co. offers credit cards in the U.S., the U.K., Ireland, Canada and Spain. In addition to its credit card lending, Co. also makes other consumer loans and offers insurance and deposit products.

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 and in this context innovative group of distance measures. We find that different statistical measures of diversification may indicate contradicting results on the individual bank level. Since distance measures are more appealing from a theoretical point of view, the common practice to rely on measures of concentration only in the debate about diversification and focus, may be misleading. We further find that, despite these differences on the individual bank level, 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.

MBNA Corp.

AbstractCommercial Banking (MIC: 8.1 SIC: 6021 NAIC:522110)MBNA is a registered bank holding company, with assets of $59.13 billion as of Dec 31 2003. Co. is the parent of MBNA America Bank, N.A., which has two wholly‐owned foreign bank subsidiaries, MBNA Europe Bank and MBNA Canada Bank. MBNA.com, provides credit card, consumer loan, retail deposit, travel and shopping services. Co. is an independent credit card lender and an issuer of affinity credit cards, marketed primarily to members of associations and customers of financial institutions. Co. offers credit cards in the U.S., the U.K., Ireland, Canada and Spain. In addition to its credit card lending, Co. also makes other consumer loans and offers insurance and deposit products.

Foreign Bank Penetration and Private Sector Credit in Central and Eastern Europe

In this article, we analyse foreign bank penetration in Central and Eastern Europe (CEE) and its influence on private sector credit. By combining BIS data and BankScope data into a unique database we make a clear distinction between cross-border credit and credit by foreign bank subsidiaries. We show that the relative importance of foreign bank subsidiaries has increased considerably during recent years. We do not find evidence of foreign banks deserting CEE during financial crises or economic downturns. Although cross-border credit did decrease during some periods, foreign banks expanded the credit supply of their subsidiaries simultaneously.

MBNA Corp.

AbstractCommercial Banking (MIC: 8.1 SIC: 6021 NAIC:522110)MBNA is a registered bank holding company, with assets of $59.13 billion as of Dec 31 2003. Co. is the parent of MBNA America Bank, N.A., which has two wholly‐owned foreign bank subsidiaries, MBNA Europe Bank and MBNA Canada Bank. MBNA.com, provides credit card, consumer loan, retail deposit, travel and shopping services. Co. is an independent credit card lender and an issuer of affinity credit cards, marketed primarily to members of associations and customers of financial institutions. Co. offers credit cards in the U.S., the U.K., Ireland, Canada and Spain. In addition to its credit card lending, Co. also makes other consumer loans and offers insurance and deposit products.

Who owns the major US subsidiaries of foreign banks?: A note

In 2000, ten foreign banks owned the 12 largest US subsidiaries of foreign banks, which together accounted for over 92% of the assets of all subsidiaries. The parent banks were large and tended to be from English-speaking countries. The novel result is that the parent was often the largest bank in its home country, which suggests that domestic limits to growth are a factor in the foreign direct investment decision.

FDI and Internationalization: Evidence from U.S. Subsidiaries of Foreign Banks

Nine foreign banks own the ten largest U.S. affiliates or subsidiaries of foreign banks. These account for 86% of the assets in affiliates and subsidiaries. Their histories suggest that most now represent an attempt by the parents to grow outside the confines of home markets. Original motives for their establishment have included ethnic banking and operational stability stemming from geographical dispersion. There is one major instance of acquiring capabilities, but it does not involve retail banking. The dispersal of national origins suggests that bank-specific capabilities are the primary source of the parents' competitive advantage. Being from English speaking countries also appears to help. Lastly, the growth of the affiliates and subsidiaries has not come from incremental growth but rather from a rearrangement of assets among banks.

Foreign Bank Penetration and Private Sector Credit in Central and Eastern Europe

We analyse foreign bank penetration in Central and Eastern Europe (CEE) and its influence on private sector credit. By combining BIS data and BankScope data into a unique database we make a clear distinction between cross-border credit and credit by foreign bank subsidiaries. We show that the relative importance of foreign bank subsidiaries has increased considerably during recent years. We do not find evidence of foreign banks deserting CEE during financial crises or economic downturns. Although cross-border credit did decrease during some periods, foreign banks expanded the credit supply of their subsidiaries simultaneously.

The poor performance of foreign bank subsidiaries: Were the problems acquired or created?

We examine foreign acquisitions of United States banks around the time of the ownership change to determine whether the observed poor performance of foreign subsidiaries is the result of changes in business strategy or the preexisting characteristics of the target bank. We find that many of the problems were already present at the time of acquisition. However, changes in business strategy by the foreign owners were generally not successful in raising the bank’s performance level to that of its domestic peers.