Foreign Bank Participation Research Articles

Information environment and participation of foreign banks in U.S. syndicated loan market

This study examines how financial information quality affects the participation and lending behavior of foreign banks in the loan syndicate of U.S borrowers. We utilize the implementation of the Sarbanes-Oxley Act (SOX) in the U.S. as our research setting. We demonstrate a significant increase in foreign banks loan shares to public firms in the post-SOX period. In parallel, we find that this increase in lending by foreign banks is accompanied by more favorable price and non-price contract terms. By contrast, we find no evidence of either more loans or more favorable loan contract terms offered to U.S. privately held borrowers by foreign banks. Further analysis shows that the impact of such an exogenous change on loan contract terms are more pronounced among public listed borrowers with higher ex ante information asymmetry. Overall, our findings imply that the increase in quality and reliability of corporate financial information brought about by SOX reduces the information disadvantage of foreign lenders.

Banking integration and market competition: Evidence from the ASEAN‐6 countries

AbstractThis article investigates the effects of banking integration on banking competition in the ASEAN‐6 countries. Using a data set of 3217 bank‐year observations over the period 1996–2018, our main results indicate that: (i) banking openness positively affects banking competition; (ii) the overall degree of balanced (in/out) integration leads to greater market power; and (iii) the increase in the market monopoly following the participation of foreign banks can be reduced by good regulatory policies. These results remain intact when two alternative competition measures are employed and when a polynomial model and a threshold model are used to reveal the non‐linear and heterogeneous effects of banking integration.

The determinants of interest rate spreads in dollarized economies

ABSTRACT Twenty years after dollarizing, interest rate spreads remain considerably high in El Salvador and even higher in Ecuador, despite decreased deposit rates. Using panels covering the 2005–2019 period, we explore the determinants of interest rate spreads in these two dollarized countries. We find that bank-specific characteristics, such as market share and liquidity, play a significant role at accounting for the differences in spreads. Dollarization is also expected to promote the entry of international banks due to the elimination of depreciation risk. We find that the low degree of foreign bank participation in Ecuador also contributes to explaining spread differences. These findings point out to complementary reforms to extract the full benefits of dollarization.

Concentration, Foreign Participation and Bank Performance: An Empirical Study of Asian Emerging Markets

There is an abundance of literature on the relationship between market structure and profitability. Market share and concentration are usually analytical tools serving as indicators of market structure. There have been many empirical studies based on the structure–conduct–performance (SCP) theory. However, the correlation between market structure and bank interest spread has rarely been discussed in depth. Therefore, this paper constructs financial industry firm-level panel data of Asian emerging market countries from 2001 to 2015 to further explore the impacts of foreign bank participation, financial market concentration and the level of competition on bank spreads. Apart from the differences in samples, the most significant difference from the previous literature is that this paper considers the best indicators of competitiveness, namely the H value of the Panzar–Rosse (P-R) model to measure the banking market and competitive conditions. This study provides a more complete and detailed analysis by adopting the system GMM approach to perform the estimation and avoid the problem of endogeneity. Regarding the overall sample, the participation of foreign banks has had a positive and significant impact on bank interest spread, suggesting that the participation of foreign banks is a major factor influencing bank interest spread in the general financial markets in Asian emerging market countries, and that more foreign banks in local financial markets can help improve bank performance.

Financial inclusion, bank ownership, and economy performance: Evidence from developing countries

This study analyzes financial inclusion and bank ownership structure's macro impact, using data from 44 developing countries over 2004-2017. Although foreign bank participation enhances the banking sector's efficiency, the benefits decline with circumscribed and exclusory intermediation, resulting in reduced per capita GDP and output growth. Use of and access to financial services and products, including ATMs availability and depositor accounts, positively impact economic performance. To positively impact the economy, financial inclusion and bank ownership require a minimum level of institutional quality.

AKUISISI BANK ASING TERHADAP PERBANKAN NASIONAL DITINJAU DARI ASPEK HUKUM PERSAINGAN USAHA

A bank acquisition is carried out by taking over all or part of the shares which results in the transfer of control of the bank to the acquirer. Bank acquisitions can be carried out directly or through the stock exchange. Bank acquisitions can be carried out by Indonesian citizens and / or Indonesian legal entities, as well as by foreign citizens and / or foreign legal entities. The national banking liberalization system has resulted in the acquisition of many Indonesian national private banks by foreign banks which can cause unfair business competition in the world of Indonesian national banking. The positive impact of the acquisition of national private banks by foreign banks, foreign investors provide added value to the national banking system. Banks that acquire national private banks have a competitive advantage in the form of a strong source of funds in foreign exchange, the implementation of sophisticated technology, extensive knowledge of structured finance products, and strong risk management. Meanwhile, the negative impact is the emergence of a gap between the process of accumulating third party funds and the process of channeling them for the benefit of the local and national economy. The lack of participation of foreign banks in funding large-scale business activities in the country, such as funding infrastructure development programs, is due to the very strict risk management calculations they carry out.

Determinants of Interest Rate Spreads In Uganda’s Commercial Banking Sector: A Panel Data Analysis

Uganda’s interest rate spreads have persistently remained high despite the financial liberalisation undertaken in the 1990s. Using data for 24 banks, we assess the determinants of interest rate spreads in Uganda’s commercial banking sector for the period 2005-2015. Results show that, among the bank-specific factors, interest rate spreads increase with increase in credit risk, liquidity risk, and capital adequacy ratio. Contrary to most studies and a priori expectations, non-interest income is shown to be positively related to bank spreads. Bank size is shown to be negatively related to interest rate spreads. For industry-specific factors, foreign bank participation in loans markets is associated with higher spreads. For macroeconomic factors, high inflation rates are shown to translate into high spreads, whilst high real GDP growth rates and broad money supply are associated with lower spreads. Contrary to theory and most literature, exchange rate volatility is associated with lower bank spreads. Going forward, banks and government should devise mechanisms to encourage loan repayment, and banks should be encouraged to reduce on holding excess liquid assets. At a macro-level, the Bank of Uganda should maintain its stance on curbing inflation. Economic growth and financial development should as well be encouraged.
 JEL Classifications: C23; E43; E44; G21; L11

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.

Relationship Banking and Loan Syndicate Structure: The Role of Private Equity Sponsors

AbstractUsing a sample of syndicated loans to private equity (PE)‐backed initial public offering companies, we examine how a third‐party bank relationship influences the syndicate structure of a loan. We find that a stronger relationship between the lead bank and the borrower's PE firm enables the lead bank to retain a smaller share of the loan and form a larger and less concentrated syndicate, especially when the borrower is less transparent. A stronger PE‐bank relationship also attracts greater foreign bank participation. Our findings suggest that the lead bank's relationship with a large equity holder of the borrower facilitates information production in lending.

Banking in Transition Countries

Modern banking institutions were virtually non-existent in the planned economies of cen-tral Europe and the former Soviet Union. In the early transition period, banking sectors be-gan to develop during several years of macroeconomic decline and turbulence accompa-nied by repeated bank crises. However, governments in many transition countries learned from these tumultuous experiences and eventually dealt successfully with the accumulated bad loans and lack of strong bank regulation. In addition, rapid progress in bank privatiza-tion and consolidation took place in the late 1990s and early 2000s, usually with the par-ticipation of foreign banks. By the mid 2000s the banking sectors in many transition coun-tries were dominated by foreign owners and were able to provide a wide range of services. Credit growth resumed, sometimes too rapidly, particularly in the form of lending to households. The global financial crisis put transition banking to test. Countries that had expanded credit rapidly were vulnerable to the macroeconomic shock and there was con-siderable concern that foreign owners would reduce their funding to transition country sub-sidiaries. However, the banking sectors turned out to be resilient, a strong indication of the rapid progress in institutional development and regulatory capabilities in the transition countries. Keywords: transition banking, bank privatization, foreign banks, bank regulation, credit growth JEL codes: G21, P27, O57

Determinants of Banks’ Net Interest Margins in Honduras

This paper analyzes the determinants of banks’ net interest margins in Honduras during the years 1998 to 2013 – a period characterized by increasing banks’ net interest margins, foreign bank participation and consolidation. In line with findings in the previous literature, we find that operating costs are the most important drivers of banks’ net interest margins. We also find that competition among banks has led to higher concentration and that funding by parent banks positively impacts foreign banks’ net interest margins. Together, these results suggest that banks, particularly foreign banks, are under pressure to consolidate and reduce operating costs in order to offer competitive interest margins. We conclude that further structural reforms and consolidation may lower banks’ net interest margins.

PRE- AND POST-CRISIS TRUST IN BANKS: LESSONS FROM TRANSITIONAL COUNTRIES

Trust in banks appears to be an essential element of well-functioning of macroeconomic systems, in general, and of financial markets, in particular. We study what factors determine the level of trust in banks before and after the 2007-08 financial crisis and how this crisis reshaped banking trust in 29 transitional countries. We find that younger, rural, educated, banked and generally trusting people tend to have higher confidence towards banks both in pre-crisis as well as post-crisis periods. Among country-level covariates, growth rate of GDP and Rule of Law remain positively and significantly associated with banking trust in both periods, while foreign bank participation starts to be detrimental to the trust after the crisis. In addition to ‘objective’ variables, we find that ‘subjective’ factors such as respondent’s personal experience with the crisis appear to strongly influence their trust in banks. Finally, after controlling for the “objective” variables, we find that the financial crisis has caused a decline in trust which is statistically significant but not dramatic or completely exceptional drop. Our findings indicate that the financial crisis has temporary impact on peoples’ trust in banks since pulling back the rate of GDP growth tends to fully recover banking trust in transitional countries.

Relationship Banking and Loan Syndicate Structure: The Role of Private Equity Sponsors

Using a sample of syndicated loans to U.S. IPO companies, we examine how the relationship between the PE sponsor of a borrower’s IPO and the lead bank of the loan influences loan syndicate structure. We find that a stronger PE-bank relationship enables the lead bank to retain a smaller share of the loan and form a larger and less concentrated syndicate, especially when the borrower is less transparent. A stronger PE-bank relationship also attracts greater foreign bank participation. Our findings suggest that the lead bank’s relationship with a third-party financial sponsor of the borrower facilitates information production in lending.

Changes in Funding Patterns by Latin American Banking Systems:How Large? How Risky?

This paper investigates the shifts in Latin American banks’ funding patterns in the post-global financial crisis period. To this end, we introduce a new measure of exposure of local banking systems to international debt markets that we term: International Debt Issuances by Locally Supervised Institutions. In contrast to well-known BIS measures, our new metric includes all entities that fall under the supervisory purview of the local authority. This is especially important in Latin America, where the participation of foreign banks that are established as independent, fully capitalized entities is most substantial. Using this metric we found that all types of Latin American banking groups significantly and sharply increased their issuance of external debt securities during 2010-14. Owing to the low ratios of banks’ external debt to total liabilities in the pre-crisis period, solid solvency ratios and improved supervisory capacity, the increase in banks’ external indebtedness did not result in financial difficulties, and by mid-2015 banking systems remained strong. However, a preliminary analysis of risks based on this new trend reveals the emergence of several signs of increased vulnerability. Firstly, in some banking groups (particularly in Brazilian banks, domestic and foreign alike) the increased issuance of external debt was accompanied by a greater reliance on wholesale funding. In contrast, reliance on wholesale funding by Colombian banks remained low and stable. Secondly, rollover risks have significantly increased for Latin American banking groups. Maturing debt, which increased significantly in 2013-14, will continue at high levels in 2015-16 in the context of major uncertainties in international capital markets. This risk is especially noticeable in Brazil and Chile, whose ratios of maturing debt to total debt are high. Thirdly, in spite of a sizeable accumulation of international reserves, the large increase in banks’ external debt might have contributed to reducing the resilience of central banks to deal with severe adverse shocks.

Financial Liberalization and Foreign Bank Entry in Emerging and Developing Economies: What Does the Literature Tell Us?

An important feature of international financial liberalization in several emerging market and developing economies (EMDEs) over the last two decades has been the rising foreign bank participation in their domestic banking systems. While the term financial liberalization has been widely used in literature, it is often not carefully defined. What is the relationship between foreign bank entry and financial liberalization? This paper lays out a simple framework to understand the different components of financial liberalization, its relationship with domestic deregulation as well as foreign bank entry and also surveys the trends and implications of foreign bank entry in EMDEs.

Changes in Funding Patterns by Latin American Banking Systems: How Large? How Risky?

This paper investigates the shifts in Latin American banks’ funding patterns in the postglobal financial crisis period. To this end we introduce a new measure of exposure of local banking systems to international debt markets that we term: International Debt Issuances by Locally Supervised Institutions. In contrast to well-known BIS measures, our new metric includes all entities that fall under the supervisory purview of the local authority. This is especially important in Latin America, where the participation of foreign banks that are established as independent, fully-capitalized entities is most substantial. Using this metric we found that all types of Latin American banking groups increased significantly and sharply their issuance of external debt securities. Owing to the low ratios of banks’ external debt to total liabilities in the pre-crisis period, solid solvency ratios and improved supervisory capacity, the recent increase in banks’ external indebtedness has not resulted in financial difficulties and banking systems remain strong. However, a preliminary analysis of risks based on this new trend reveals the emergence of several signs of increased vulnerability. First, in some banking groups (particularly in Brazilian banks, domestic and foreign alike) the increased issuance of external debt has been accompanied by a greater reliance on wholesale funding. In contrast, reliance on wholesale funding by Colombian banks has remained low and stable. Second, rollover risks have significantly increased for Latin American banking groups. Maturing debt, which increased significantly in 2013-14, will continue at high levels in 2015-16 in the context of major uncertainties in international capital markets. This risk is especially noticeable in Brazil and Chile, whose ratios of maturing debt to total debt are high. Third, in spite of a sizeable accumulation of international reserves, the large increase in banks’ external debt might have contributed to reducing the resilience of central banks to deal with a severe adverse shock.

The Financial Crisis and Systemic Risks in Asia Pacific Banks: An Evaluation of Policy Responses

This paper examines the effects of the 2008 financial crisis on the Asia Pacific banking system and the policies that the local government authorities implemented in response to the crisis. We use descriptive statistics to examine capital adequacy and loan quality in the Asia Pacific banks. We show that the extent of spillover effects of the crisis on the Asia Pacific banking industry is associated with the trade-off between financial liberalization and financial stability; there is a linear relationship between foreign bank participation and cross-border loans in the Asia Pacific economies. We also conduct an event study to examine the systemic risks in the Asia Pacific banks. Particularly, we find that the CDS spread started to converge in 2009 after the implementation of stimulus packages and assertive policies in the Asia Pacific countries, implying that the policies adopted by the regional governments had at least some immediate effectiveness in helping banks decentralize the international financial shocks.

Competition in Turkish Banking: Impacts of Restructuring and the Global Financial Crisis

This paper investigates the evolution of competition in the Turkish banking industry by taking into account the transformation in the sector in the aftermath of the country's financial crisis of 2000 to 2001 and the global financial crisis. The results demonstrate that the level of competition in the system did not increase despite the restructuring that was undertaken and the increased foreign bank participation. In addition, the level of competition in the sector deteriorated during the global crisis. There is also some evidence that the market power of banks with different ownership characteristics varied and did not converge over time.

Determinants of Banks' Net Interest Margins in Honduras

This paper analyzes the determinants of banks’ net interest margins in Honduras during 1998 to 2013—a period characterized by increasing banks’ net interest margins, foreign bank participation and consolidation. In line with findings in the previous literature, we find that operating costs are the most important drivers of banks’ net interest margins. We also find that competition among banks has led to higher concentration and that funding by parent banks positively impacts foreign banks’ net interest margins. Together, these results suggest that banks, particularly foreign banks, are under pressure to consolidate and reduce operating costs in order to offer competitive interest margins. We conclude that further structural reforms and consolidation may lower banks’ net interest margins.

The Takeover of ABN AMRO and Its Effects on Latin American Banking

Throughout the 1990s and well into the first half of the new century, there was intense activity in Mergers and Acquisitions (M&As) in the commercial banking industry of Western Europe. The frequency of M&As diminished when the 2007–2009 financial crisis hit the markets. One of the last of these activities that took place before the full explosion of the 2007–2009 financial crisis was the cross‐border takeover that a consortium made up of Royal Bank of Scotland (RBS–England), Fortis (Belgium–Netherlands), and Santander (Spain) carried out of one of the largest banks in the world, ABN AMRO (Netherlands). A few months later, the write‐offs of significant amounts of subprime mortgage securities had affected the balance sheet of RBS and Fortis, with severe strategic consequences. The financial crisis forced RBS and Fortis to withdraw from Latin America but also represented a golden opportunity for Santander to further strengthen its already solid position in the region. This article offers a detailed discussion of these events and concludes with a reflection on the need to further investigate the economic consequences of the participation of foreign banks in emerging countries.