Foreign Bank Entry Research Articles

Foreign bank ownership and income inequality: empirical evidence

ABSTRACTUsing country-level panel data over 1995–2013 on within-country income inequality and foreign bank presence, this paper establishes a positive relation between the two, running from higher foreign bank presence to income inequality. Given that foreign bank participation increased by 62% over the period 1995 to 2013, our baseline results imply a 5.8% increase in the Gini coefficient on average over this period, ceteris paribus. These results are robust to the inclusion of country and year fixed effects and to the use of restrictions on foreign bank entry in the host countries as an instrumental variable. We show that this positive effect is channelled through the lack of greenfield entry and the associated lower levels of competition.

Bank Competition, Foreign Bank Entry, and Risk-Taking Behavior: Cross Country Evidence

This unique study examines the interactive role of bank competition and foreign bank entry in explaining the risk-taking of banks over the globe. We used cross-country data for the banking sector from 2000 to 2016. Using the pooled regression model and Two-stage Least Squares model (2SLS with Generalized Method of Moments GMM), we document that foreign bank entry decreases the risk-taking behavior of the banks to a certain level and exhibits an inverted U-shaped relation with financial stability. Furthermore, the joint effect of bank competition and foreign bank entry brings financial fragility because host banks tend to make risky investments due to undue competition induced by foreign bank entry. We support the competition–fragility hypothesis when foreign bank entry goes beyond a certain threshold. Our results also suggest that restrictions on bank activities and capital regulation stringency reduce the level of the risk factor. We also applied various robustness tests, which further confirm our mainstream results. Our findings have policy implications for foreign investors and regulatory authorities.

Does bank competition promote economic growth? Empirical evidence from selected South Asian countries

PurposeBank competition and financial stability are often cited as important drivers of economic growth. Bank competition plays a very significant role in enhancing the efficiency and determining the stability of a financial system. However, a question of interest is whether bank competition enhances or hindrances the economic growth of a country. The purpose of this paper is to investigate the role of bank competition and financial stability on economic growth for selected South Asian economies over the period 1997–2016.Design/methodology/approachTo investigate whether bank competition enhances or hinders economic growth, the author applies a two-step estimation technique. First, the author estimates bank competition using the Lerner index and adjusted Lerner index and, second, examines the joint effect of bank competition and financial stability on economic growth applying both panel regression model and system GMM techniques.FindingsEmpirical findings reveal that the banking sector in South Asian economies is competitive as indicated by the estimated values of Lerner and adjusted Lerner index. Moreover, the joint effect defined by the interaction between banking competition and banking stability also reveals a positive and significant impact on economic growth. This finding implies that both banking competition and banking stability are significant long-term determinants of economic growth in South Asian economies.Practical implicationsThis paper suggests flexible banking regulation policies such as low net interest rate margins, lesser activity restrictions and entry of foreign banks along with few contestability measures to increase bank competition in South Asian countries. This is because as higher the competition, greater is the chance for efficient allocation of resources and hence economic growth.Originality/valueThis paper is the first of its kind that considers the joint role of bank competition and financial stability on economic growth. The application of a semi-parametric approach in the estimation of marginal cost is also a unique contribution to empirical literature.

Financial Development, Foreign Banks and Economic Growth in Africa

AbstractThis study aims to examine and analyze the impact of financial development and foreign bank penetration on African economies. An empirical study for the period 1995–2015 is conducted using the system GMM estimator. Our empirical results indicate that foreign bank entry has a positive and significant impact on economic growth in the countries of North and Southern Africa, while in the other two regions considered in this study (West and Central Africa, East Africa) the impact is negative and rarely significant. In addition, our results show that the development of financial markets has a positive and significant effect on economic growth only in the Southern African region. The paper concludes that policymakers should focus on long‐term policies to strengthen the financial sector to truly meet the needs of African people.

Foreign banks and sovereign credit ratings: Reputational capital in sovereign debt markets

Sovereign credit ratings importantly influence the borrowing costs of governments in international capital markets. Yet, there is limited understanding of how credit-rating agencies determine sovereign bond ratings. I provide theoretical justification and empirical evidence to support the proposition that a substantial presence of established global banks, acting as foreign direct investors, enhances the perceived creditworthiness of the host countries that have weak domestic institutions. Foreign banks can render the host countries’ commitments to make good on their debt obligations more credible by encouraging the transparency in the financial system, disciplining their fiscal policies, and mitigating the incentives for and impact of bank bailouts. Statistical evidence from countries in emerging Europe shows that countries with high levels of foreign bank ownership tend to be assigned better sovereign credit ratings and find it easier to obtain credit at lower interest rates in sovereign bond markets. My findings are robust to various estimation techniques, to extensive controls for alternative determinants of credit ratings, for the endogeneity of foreign bank entry, and for sample-selection bias. Interviews with bankers and senior analysts at credit-rating agencies were used to complement quantitative analyses. This article is the first attempt in the literature on sovereign borrowing and debt to examine whether private market agents, such as global banks, can enhance the government’s international creditworthiness.

One Market to Rule Them All - How Financial Integration Influenced Inequality in the European Union

Financial integration is seen as a major driver of economic growth and wealth. Its effects on income inequality have been analyzed for the bank branch deregulation in the U.S. and foreign bank entry in India. Another prominent example of financial integration and liberalization, so far, has been ignored: the introduction and progression of the European Single Market. By using a difference-in-difference design, we investigate the effects of the Single Banking License introduced in 1993 on economic growth and several inequality measures. This directive abolished any cross-country restrictions on banks in EU member states and allowed them to freely branch into other member states. This constitutes a fundamental change in the competitive environment of financial markets. We show that the European Single Financial Market positively influenced economic growth across a variety of subsamples of EU member states. The effects on income inequality indicate that inequality across states was reduced. Additional regressions with the unemployment rate and top and bottom 20% income shares support this finding and show a reduction of unemployment in previously less developed countries accompanied by an increase in the bottom income shares across all member states.

Bank globalization and financial stability: International evidence

With a comprehensive dataset covering 129 countries over 1995–2013, this study investigates the impact of bank globalization on financial stability. I find strong evidence that foreign bank entry increases both loan risk and the overall risk of bank failure, and threatens the financial stability of the host country. However, this link is dependent on the regulatory and institutional framework of the host country. The adverse impact from foreign banks can be mitigated when the host country has more restrictions on fee-generating activities, less stringent capital requirement, more asset diversification guidelines, a single supervisor, less government-owned banks, lower market entry barrier, and/or less effective credit information sharing. Instead, foreign bank entry could even lower bank risk when host country regulations on bank activities are highly restrictive, capital requirement is less stringent, and/or market entry barrier is low. The need to improve financial stability and that to reduce the adverse impact of foreign bank entry impose conflicting demand on some bank regulations, thus policymakers need to balance both needs and carefully condition the prudential regulations to ensure financial stability and at the same time minimize the adverse impact from foreign bank entry.

Has European monetary union influenced the European Union bank lending flows to the EU countries from Central and Eastern Europe?

PurposeThe purpose of this study is to modify the gravity model to identify the main determinants of the European Union (EU) bank lending to the Central and Eastern Europe (CEE) countries during 1994-2012.Design/methodology/approachThis study uses both two-stage least squares and dynamic generalized method of moments to estimate the modified gravity model.FindingsThis study finds that the CEE countries with more developed stock markets have received the higher EU bank lending inflows. The EU banks have greater access to additional financing in the stock markets. Second, the higher stock market difference between the CEE and EU countries has boosted the EU bank lending. Compared to the developed EU stock markets, the less developed CEE stock markets have become more favorable to the EU banks seeking to earn higher profits.Research limitations/implicationsThe CEE countries can further boost the EU bank lending inflows through deepening capital liberalization. They should facilitate easy foreign bank entry by reducing excessive bank legislations and regulations. Moreover, they can promote the EU bank lending through substantial EU bank integration. This can accelerate the major bank reform which would facilitate better bank supervision and regulations.Originality/valueMost previous studies have primarily used the macroeconomic and institutional factors to explain the EU bank lending. In contrast, this study explores the growing importance of the CEE financial development and bilateral trade in explaining the EU bank lending.

Financial Repression to Financial Liberalisation: Reforms and Impacts

The finance sector is the lifeblood of any economy and the backbone of trade and commerce. The year 1991 marks a landmark year for the Indian economy, owing to the momentous liberalisation, privatisation and globalisation policies. Financial liberalisation was undertaken to overcome financial fragility, and was characterised by the drastic reduction of government intervention and regulation from the financial sector. Convergence of prudential norms with international policies was important as the concept of a global economy gained dominance. Policies such as interest rate control, easier availability of credit and deregulation which allowed entry of private, domestic and foreign banks were implemented. Financial institutions grew and the banking sector expanded, affecting the macroeconomic volatility. This paper will analyse the effectiveness of these policies and their impact on the landscape on the Indian banking sector in the decades that followed.

Foreign penetration, competition, and financial freedom: Evidence from the banking industries in emerging markets

Traditional theories suggest that foreign entry intensifies competition and improves efficiency in a banking sector. However, the positive impacts may be offset by several factors, such as foreign banks’ “cherry-picking” lending practice, mergers & acquisitions, and the “crowd-out” effect. Based on a sample of commercial and savings banks collected from Bankscope, this paper investigates the effects of foreign penetration on bank competition in the host countries. Using the two-step Arellano-Bond system GMM method, we show that the entry of foreign banks enhances competition in the banking systems among the sampled developing countries between 2000 and 2014. The positive relationship between foreign penetration and banking competition is more conspicuous after the 2008–2009 global recession. Latin American countries appear to benefit more from foreign bank penetration during the sample period than emerging markets in Asia. Also, the level of a host country’s financial freedom has a moderation effect on the “foreign penetration—competition” nexus.

Banking efficiency in emerging economies: Does foreign banks entry matter in the Ghanaian context?

AbstractThis study empirically examines the effect of foreign banks entry on banking efficiency scores, using the truncated regression data envelopment analysis model for 25s banks in Ghana, over a 6‐year period (2010–2015). We decompose the efficiency scores into three (technical, cost, and allocative efficiency), and the results indicate that banks in Ghana are marginally inefficient in operating closer to their optimal capacity. The findings show that the input‐oriented model slacks are needed to push an inefficient bank closer to where an efficient bank is positioned. From the results, an immediate and a short‐term entry of foreign banks have a consistent negative relationship with both technical‐ and cost‐efficiency scores whereas long‐term entry of foreign banks shows an inconsistent relationship with the three banking efficiency scores. Thus, the drive towards a positive impact of foreign banks entry on the three efficiency scores is dependent on the form of banking efficiency considered and the interaction term between competitive banking environment (competition) and foreign banks' entry. The study suggests that policymakers and managers in emerging markets should improve on their bank efficiencies in both a competitive banking environment and during periods of foreign bank entry. Moreover, managers of banks should make adjustment to their input resources in order to cope with new banking technologies from foreign bank entry—thereby improving banking efficiencies.

Profitability of Vietnamese Banks Under Competitive Pressure

ABSTRACTThe recent banking reforms in Vietnam have had a considerable impact on the earnings of banks. The paper aims to investigate the impact of competition on profitability of Vietnamese banks over the period 2006–2016. The research selects both Lerner index and Adjusted Lerner index to measure competition and rates of return to measure bank profitability. Through the two-step GMM system estimator, the findings show that there is a practical non-linear relationship between competition and banks profit in Vietnam. In addition, the findings show bank profitability is impacted by other determinants and especially by the entry of foreign banks.

Cyclicality of lending in Africa: The influence of bank ownership

Ownership structure of banks has dramatically changed over the past two decades in African countries with privatization and foreign bank entry, including the expansion of Pan-African banks. The objective of this paper is to investigate how bank ownership influences cyclicality of lending in Africa. We are then able to assess how changes in bank ownership influence the economy. To this end, we measure the sensitivity of bank loan growth to GDP per capita growth of the host country with dynamic GMM estimations. We use panel data from 190 commercial banks covering 20 African countries spanning the period from 2002 to 2015. We find that lending of African banks is procyclical for all types of banks. However, we observe that Pan-African banks are the least procyclical banks, while no significant difference in procyclicality is observed between state-owned banks, domestic private banks, and other foreign banks. In addition, we find evidence that foreign banks are influenced by GDP per capita growth of their home country. Therefore, our findings support the view that the expansion of Pan-African banks contributes to reduce cyclicality of lending. However, foreign bank entry can enhance the transmission of external shocks.

Short Term Liquidity of Foreign Banks in India

Foreign banks have been associated with India for almost two centuries now. Yet, there presence has been prominently felt after the recommendations of the Narasimham Committee on financial sector reforms ushered a competitive era that triggered the entry of new private and foreign banks into the country. Foreign banks have always adapted well to the changing financial landscape in India. They have been offering products and services that suit the Indian way of living and enterprise, providing cross-border borrowings, capital and access to global markets. Foreign banks have made considerable contribution to the banking sector over time by bringing capital, technology, efficiency and best global practices to India. The present study examines the foreign banks in India for their liquidity management capacity and liquidity performance over the post financial crisis period. The liquidity of selected Indian foreign banks has been evaluated on the basis of their short-term liquidity ratios. The foreign banks fail to meet the preferred requirements of short-term liquidity parameter for the banking sector. Nonetheless, in relative terms, Citibank shows much better liquidity management in the short-term as compared to HSBC and Standard Chartered banks.

Historical Trends and Transitions in Credit Risk Management of Chinese Commercial Banks

The paper outlines different trends and transitions in the history of credit risk management of Chinese commercial banks. By critically reviewing different stages of credit management and its historical evolution, it helps in understanding the nature of subjective challenges faced by Chinese commercial banks to manage credit risks. It reviews post reform policies in particularly after 1978 to locate the policy transitions and trajectories of credit risk management of commercial banks in China. It helps to understand the problems and prospects of effective credit management of risks by Chinese commercial banks. It argues that Chinese commercial banks are facing greater challenges in managing risk after the entry of foreign banks to China. Therefore, it is important for the commercial banks in China to develop its own credit management mechanisms within the context of Chinese banking environment.

How has the global financial crisis affected syndicated loan terms in emerging markets? Evidence from China

AbstractThis paper examines the impact of the recent global financial crisis on the cost of debt capital (syndicated loans) in a leading emerging market, namely China, using the difference‐in‐differences approach. Before the crisis, China adopted banking reforms allowing the entry of foreign banks and more domestic participation in the syndicated loan market. As a result, during the crisis, the volume of syndicated loans grew steadily, in contrast to other countries. In addition, the amount of foreign syndicated loans decreased and average maturity increased compared with the pre‐crisis period. Our findings provide useful information to policy makers for devising effective responses to financial crises.

Does foreign bank entry contribute to financial development? Examining the role of income thresholds

AbstractThis article examines the relationship between foreign bank entry and financial development in a panel framework covering 57 emerging market and developing economies (EMDEs) between 1995 and 2009. Using various measures of financial sector deepening, the article also explores the degree to which the relationship between foreign bank entry and financial sector depth varies by different income thresholds of the EMDEs. The empirical findings suggest that while foreign banks have a direct positive impact in furthering financial depth, the marginal effects of foreign bank entry diminish over time with greater levels of economic development. In other words, the impact of foreign bank entry tends to diminish as the per capita income of the country rises.

Convergence of bank competition in Central and Eastern European countries: do foreign and domestic banks go hand in hand?

Following the massive entry of foreign banks into the Central and Eastern European (CEE) banking markets, one may wonder whether their competitive behaviour differs from that of their domestic counterparts, possibly leading to the segmentation of these markets at the regional and national levels. We find that the competitive behaviour of foreign and domestic banks differs, with foreign banks having less market power until the recent financial crisis and more market power after this financial turmoil. Despite this difference, banks tend to behave similarly, and their market power converges to a similar level. The tendency towards similar competitive behaviour is observed at the regional and national levels and for both foreign and domestic banks, although foreign institutions that enter these markets through the acquisition of domestic banks have slightly more market power. Our findings suggest the regional integration of CEE banking markets and no segmentation between foreign and domestic institutions.

Impact of Foreign Bank Entry on SME Credit in the Indonesian Banking Sector

Impact of Foreign Bank Entry on SME Credit in the Indonesian Banking Sector

Does Foreign Bank Entry Affect Domestic Enterprise Innovation?

ABSTRACTHow does financial opening-up impact the real economy? The answer is important to China, the largest economy in transition experiencing a critical period of further reform of the financial system. We capture the influence of financial reform through foreign bank entry in this paper. Starting with a description of the process of foreign bank entry in China, we sum up two paths through which foreign bank entry affects China’s domestic enterprise innovation: the direct effect and the spillover effect. Then, using the data of public listed companies in China from 2001 to 2014, we investigate the effects of foreign bank entry on domestic enterprise innovation by exploiting the staggered multiple exogenous shocks and using a difference-in-difference approach. The results show that foreign bank entry contributes significantly to domestic enterprise innovation, and they are robust when considering the potential concerns of omitted variables and reverse causality. Further study illustrates that the nurturing role derives not only from the direct effect (although it is very limited), but also from the spillover effect of foreign bank entry by enhancing competition among domestic banks. The findings suggest that it is necessary to mitigate the barriers to foreign banks and expand the banking sector in China.