Foreign Bank Involvement Research Articles

Interest margins and bank regulation in Central America and the Caribbean

Abstract This paper examines empirically the determinants of bank interest margins in Central America and the Caribbean over the period 1998–2014. A particular focus is set on the impact of differences in the regulatory environment and market structure across countries in explaining the interest margins of individual banks. Our results suggest that bank market power, operating costs, credit risk, and liquid asset holdings increase the margin between loan and deposit rates, while increased income diversification and GDP growth are associated with lower loan-deposit spreads. When considering information on banking regulation, we find strong evidence to support our main hypothesis that improvements in market quality and liberalization have a significant effect on interest margins. More specifically, reductions in entry requirements to banking, higher involvement of foreign banks, and increased financial statement transparency are associated with significant reductions in interest margins.

Foreign banks, financial crises and macroeconomic fluctuations

Understanding the implications of increased foreign bank presence is especially compelling in periods of financial crisis. In this paper, we explore this issue by examining the relationship between the involvement of foreign banks in the banking systems and the volatility of key macroeconomic variables in normal and crisis periods. Using a sample of 20 Emerging European countries from 1998 to 2013, we find that an increase in the assets of foreign banks in the banking system reduces output and consumption growth volatility in general but does not significantly affect the volatility of investments. However, these banks were found to play a significant role in increasing output, consumption and investment volatility in 2009. Our findings suggest that foreign banks’ harmful impact during the global crisis was only temporary and that they seem to help Emerging European countries stabilize macroeconomic volatility in normal times and after the global crisis.

Market Structure and Determinants of Bank Profitability Among Middle East and North African (MENA) Banks

The study investigates the determinants of performance in MENA banking in both the context of Structure Conduct Performance (SCP) and efficiency hypothesis. It is the first of its kind that examines a large sample of banks (140 banks) for an extensive period (1999-2012), includes the after 2007-crisis period so it gives the ability to draw for the first time reliable conclusions for both the 2011 Arab uprising and, more importantly, to examine a whole economic area (MENA region) after the liberalisation and related transformation of the economies of MENA region We use panel analysis, and GMM estimation. Our findings confirms that there is a positive and significant relationship between net interest margins, profitability of commercial banks and capital adequacy implying that commercial banks in the MENA economies have lower needs for external funding and hence higher profitability. In respect to spending on technological items, fixed assets and software, findings indicate that spending on technology and fixed assets contribute in making banks more profitable as it is statically significant and positively related to bank’s performance. We also found that bank tends to invest in less risk investments. Bank size as measured by average total assets recorded a negative and significant relationship to net interest margin and profitability indicating diseconomies of scale. We also found that banks with foreign ownership are more profitable and perform better than state banks. The above show that despite the liberalisation of the sector, banks in this area are inefficient, with the only positive contribution being the involvement of foreign banks in the MENA region.

Heterogeneity in the growth and finance relationship: How does the impact of bank finance vary by country and type of lending?

We explore heterogeneity in the finance-growth relationship by considering the effects of foreign and domestic lending separately. Estimating finite mixture models, we find that the effects of bank finance and foreign bank involvement on growth depend on 1) how well-developed the banking sector is, and 2) if foreign banks are involved via affiliates within the country or via cross-border loans. The experience of lenders with a local presence is important, but only once a threshold level of financial sector development is reached. In countries with underdeveloped banking sectors, the influence of foreign-owned lenders relative to locally-owned banks can hinder growth.

REGIONAL FINANCIAL INTEGRATION IN SUB‐SAHARAN AFRICA – AN EMPIRICAL EXAMINATION OF ITS EFFECTS ON FINANCIAL MARKET DEVELOPMENT

AbstractThis article examines the effects of political agreements on regional financial integration (RFI) on financial market development and access to and cost of finance inSub‐SaharanAfrica (SSA). Our results suggest thatRFIpositively affects financial development – measured very broadly as ratio of liquid liabilities to gross domestic product (GDP) – when combined with a sufficient level of institutional quality. If institutional quality is below a threshold level,RFIapparently has negative effects on financial development. However, we cannot find any significant effects of RFI on the ratio of private credit toGDPor on the efficiency of the banking sector. Regarding the effects ofRFIon access to and costs of finance of enterprises inSSA, our results are mixed. We can find no significant effect ofRFIon access to finance for all firms in the aggregate, but the results indicate thatRFIactually impedes small firms' access to finance. Furthermore, there is a significant positive influence of foreign bank involvement on the severity of the credit constraint for small enterprises, while we do not find such an influence for large enterprises. These results provide some support for the foreign bank barrier hypothesis in the context ofRFI.

Foreign Lending, Local Lending, and Economic Growth

Recent research has shown that there is significant cross-country heterogeneity in the previously well-established relationship of finance and long-run growth. We explore this heterogeneity by estimating finite mixture models and by considering the effects of foreign and domestic lending separately. We find that bank lending does not have the same effect on growth or savings in all countries. Country characteristics such as the extent of stock market development, the degree of rule of law, and even the development of the banking sector itself vary considerably across countries and affect the productivity of bank lending in encouraging growth and savings. Furthermore, the effect of bank finance on growth and the effect of foreign bank involvement depend on 1) how well developed the banking sector is, and 2) if foreign banks are involved via loans made by affiliates located within the country or via cross-border loans. The experience of lenders with a presence in the country is important, but only once a threshold level of financial sector development is reached. In countries with underdeveloped banking sectors, the influence of foreign-owned lenders relative to locally-owned banks can be detrimental to growth.

Foreign bank presence in emerging markets: help or hindrance to banking system stability?

With financial liberalization during the 1990s, there was a marked increase in the involvement of foreign banks in emerging market economies. This study uses data from 32 emerging markets for the period 1999 to 2005 to investigate whether the presence of foreign banks promotes or hurts the stability of the banking systems in these economies. We find consistently that a greater presence of foreign banks does not harm banking system stability and, under some definitions, is associated with a statistically significant fall in the probability of a banking crisis. This result is robust across different ways of distinguishing foreign from domestic banks, thus providing useful information to policy makers and banking regulators.

Foreign Banks in Turkey and Other EU Accession Countries - Does Minority Vs. Majority Ownership Make the Difference?

We compare banking sector development in the EU Accession Countries (AC) Bulgaria, Croatia, Romania and Turkey with a special emphasis on the role of foreign banks. We discuss selected features of the Accession Countries’ banking sector reform and patterns of foreign entry, combining the efficient structure hypothesis with findings from the joint venture literature. As in the early stages of economic restructuring in other AC, Turkey currently relies on minority foreign bank involvement and industry-bank conglomerates. We argue that minority foreign bank involvement did not prove conducive to economic growth in the New EU Member States and other EU Accession Countries.

The Rise of Foreign Investment in China's Banks: Taking Stock

The recent wave of foreign investment in China's banks and the prospects of further opening of the banking sector under the WTO agreement suggest that foreign banks are likely to play an increasingly important role in China. This paper takes stock of the involvement of foreign banks in the Chinese banking sector in the perspective of international experience. While in most other countries foreign bank entry took the form of direct takeover or majority shareholding, foreign investments in China's banks have been minority shareholdings with very limited management involvement. The paper concludes that China appears to be well positioned to benefit from further opening of the banking sector to foreign investors. International experience suggests that greater competition from and participation of foreign banks can in general bring important benefits if appropriate incentives and sufficient opportunities are created.

The Rise of Foreign Investment in China's Banks: Taking Stock

The recent wave of foreign investment in China's banks and the prospects of further opening of the banking sector under the WTO agreement suggest that foreign banks are likely to play an increasingly important role in China. This paper takes stock of the involvement of foreign banks in the Chinese banking sector in the perspective of international experience. While in most other countries foreign bank entry took the form of direct takeover or majority shareholding, foreign investments in China's banks have been minority shareholdings with very limited management involvement. The paper concludes that China appears to be well positioned to benefit from further opening of the banking sector to foreign investors. International experience suggests that greater competition from and participation of foreign banks can in general bring important benefits if appropriate incentives and sufficient opportunities are created.

The determinants of foreign bank involvement in US banking markets

Notes recent dramatic growth in international banking, outlines the US historical and legal background to it and reviews previous research trying to explain why banks establish offices outside their home country. Develops a mathematical model to investigate the factors determining the extent of foreign bank penetration in the US financial market and applies it to 1984‐95 data for Canada, France, Germany, Japan and the UK. Finds that expansion abroad is positively linked to the size of the home country’s banking industry and capital market; the need to respond to domestic credit market conditions; and the levels of trade and exchange rates between countries. Discusses the differences between the individual countries studied and consistency with other research; and considers the implications for US banks.

Central European banks and stock exchanges:: Capacity-building and institutional development

This paper analyses capacity building and institutional development in the banking and capital market sectors of formerly planned economies in Central and Eastern Europe. While the existing literature mostly addresses the specific situation of banks and capital markets in a particular country or for a few countries of the region only, this paper identifies common institutional and structural problems of all 10 Central European applicant countries for EU membership. Given the strong tendencies towards imprudent banking, the small size of the financial markets, asymmetric information, inadequate capitalization and insufficient supervision, privatization of the large former state owned banks may require strong equity involvement of foreign banks and international institutions like the European Bank for Reconstruction and Development (EBRD), which reduce the risk for foreign investors by providing guarantees and securing more reliable banking policies of the respective governments.

Foreign Banks and Interstate Banking in the US

The International Banking Act (IBA) of 1978 sharply restricted the ability of foreign banks to establish offices in more than one state. Yet during the late 1970s and early 1980s barriers to interstate banking with regard to US financial institutions were beginning to fall. The most important fact that contributed to foreign bank involvement in interstate commerce was the grandfather provision, which permitted multistate networks to remain in operation. New interstate banking has been curbed by restrictions on full‐service offices, but it has continued to develop through Edge‐Act Corporations, bank holding companies and the use of non‐bank banks. Interstate banking is likely to benefit the public and will probably continue to expand but at a slower rate and more in line with that of US banks.