Foreign Bank Presence Research Articles

Disentangling the impact of foreign bank presence on domestic banks performance: Does the degree of foreign ownership in domestic banks matter?

While extant studies typically measure foreign bank presence only considering the percentage share of foreign-owned banks among the banking industry of one country, there comes one interesting question: whether the impact of the micro-level foreign presence, i.e. foreign investment in domestic banks, may be similar? Drawing on theoretical arguments from FDI spillover and corporate governance, this paper hypothesizes that macro-level foreign bank presence mainly threatens domestic banks’ performance due to increased competition, whereas micro-level foreign presence enhances banks’ efficiency. Empirical analyses based on a cross-country bank-level dataset from 2002 to 2020 support these hypotheses. The mechanism analysis shows that macro-level foreign presence hampers domestic banks’ outputs, while micro-level foreign presence helps reduce banks’ input prices. Furthermore, the impact of macro-level foreign presence is more pronounced in less developed economies, while the positive impact of micro-level foreign presence is significant in more developed economies or those with low banking concentration. Our findings enrich the literature on foreign bank presence by considering micro-level foreign investment in domestic banks, and expand the FDI and corporate governance literature by incorporating the banking context.

Cross-border banking and bank stability: evidence from Sub-Saharan Africa

AbstractBased on bank-level data from 29 Sub-Saharan African countries between 2005 and 2019, we apply panel fixed effects (FE) and two-step system GMM estimators to investigate whether increased cross-border banking affects domestic banking sector stability. We find significant evidence that the stability of banks in host countries declines with an increased presence of foreign banks—and the impact is more pronounced on banks that are small and less efficient. The stability impact of foreign banks is also found to depend on the quality of governance institutional factors in the host country. The findings shed some important insights on the downside of financial liberalisation policy in developing countries and the need for increased cross-border collaboration between home and host supervisory authorities in the SSA region—especially in jurisdictions where the foreign bank affiliates are systemically important. The domestic supervisory authorities thus need to effectively manage the inherent trade-off between reaping the benefits from international financial integration while effectively safeguarding domestic banking systems against cross-border contagion and fragility.

Foreign bank presence and income inequality in Africa: What role does economic freedom play?

This study contributes to income equality (IE) literature by examining four important issues. First, the study examines the effects of foreign bank presence (FBP) on IE. Second, the paper identifies the minimum threshold level of FBP which can lead to IE. Third, the effect of economic freedom on IE was investigated. Fourth, the paper determines whether economic freedom interacts with FBP to minimise IE. The findings are based on macro data for 33 African countries from 1995 to 2020. The findings from the two-stage system generalised method of moment indicate that unconditionally, FBP reduces income inequality. Also, results from the threshold effect reveal that whilst FBP reduces income inequality, if it exceeds 52%, it may contribute to it. Additionally, the study reveals that economic freedom dampens IIE. Furthermore, economic freedom conditions FBP to reduce IE. Based on these findings, policymakers are advised to exercise caution in attracting foreign banks and to promote local financial institutions. Policymakers are also advised to implement policies to promote economic freedom.

SMEs and financial dependence: how important are foreign banks?

PurposeThe importance of financial dependence of small and medium enterprises (SMEs) on their performance is a relatively unaddressed area of research. Relatedly, whether and to what extent foreign bank penetration exerts an impact in the presence of financial dependence also remains an open question. The purpose of the paper in this regard is to exploit unit-level data on Indian SMEs and assess the independent and interactive effects of financial dependence on SME behaviour, in the presence of foreign banks.Design/methodology/approachThis study uses fixed effects specification to address the issue. In subsequent analysis, this study also uses an instrumental variable approach for robustness.FindingsThe results indicate that financial dependence improves investment and employment, although there is a decline in productivity. These findings differ across size classes of SMEs. Similar is the evidence in the presence of foreign banks. In particular, foreign bank penetration leads to a decline in investment for micro and medium SMEs, although for small SMEs, the impact is found to be the opposite.Originality/valueTo the best of the author’s knowledge, this is one of the early within-country studies to examine the interface between SMEs and financial dependence and the role played by foreign banks in this regard.

Foreign bank presence and inclusive growth in Africa: the moderating role of financial development

PurposeThe purpose of this study is to assess the extent to which the nexus between foreign bank presence (FBP) and inclusive growth is being impacted by the financial development.Design/methodology/approachThe study used a two-stage system generalized method of moment (GMM), using 28 African countries from the period 2000 to 2018.FindingsThe study found a positive effect of FBP on inclusive growth. While financial development magnifies the positive effect of FBP, inclusive growth nexus, it has a direct effect on inclusive growth.Practical implicationsFor Africa to ascertain the positive effect of FBP on inclusive growth, financial system must be developed to reduce the cream-skim behavior of foreign banks.Originality/valueThis paper assess the extent to which developing economy's developed financial system form synergies with FBP to further enhance the inclusiveness of growth.

Drivers of cross‐border bank claims: The role of foreign‐owned banks in emerging countries

AbstractStudies of the determinants of cross‐border bank claims are based on the economic situations of the lending and borrowing countries—the traditional push/pull factors—but fail to take into account the situation of the international lending banks and the presence of their subsidiaries in emerging countries. They also fail to explain the huge decrease in cross‐border bank flows after the 2008 global financial crisis. In this paper, we analyse the determinants of cross‐border bank claims on a panel of 28 emerging countries and explicitly integrate banking determinants. Thus, we account for the financial situation of international lender banks and the existence of foreign locations in emerging countries as a potential pull stabilising factor. We show that the presence of foreign banks in emerging countries is clearly a factor of attraction for cross‐border bank claims. It remains when we explicitly take into account the 2008 crisis but to a lower extent and in favour of interbank loans. This may be proof of support from the international parent banks to their affiliates. Last, the financial situation of international banks, notably their liquidity and ability to respect prudential rules, also plays a role in their financing strategies in emerging countries.

The effects of foreign bank presence on financial development in Africa: The role of institutional quality

AbstractDespite the momentous rise in concentration and market share of foreign banks in overall bank assets in Africa, rigorous empirical work(s) examining their effect on financial sector development in Africa is hard to find. In view of this, the study seeks to investigate the moderating role of institutions/governance on the foreign bank presence‐financial development nexus. Employing the two‐step system generalized method of moment for a panel dataset of 28 economies in Africa over the period, 2000–2018, the results show that foreign bank presence has a positive effect on financial development. Also, the study finds evidence that foreign banks in host countries increase financial development in the presence of quality institutions. The study recommends improvement in institutional quality, which will help foreign banks to promote financial development.

What drives bank income smoothing? Evidence from Africa

We investigate whether banks use loan loss provisions to smooth income and whether this behaviour is influenced by foreign bank presence, ownership and institutional quality differences across African countries. We examine 370 banks from 21 African countries from 2002 to 2021. We find evidence that African banks use LLPs to smooth their income when they are more profitable during economic boom or recession. Income smoothing is persistent (i) among banks with a widely dispersed ownership, (ii) among banks with strong government ownership and (iii) among banks with weak government ownership. Income smoothing is also persistent in African countries that have greater corruption control, better regulatory quality and political stability. In contrast, moderate concentrated ownership reduces bank income smoothing. Bank income smoothing is also reduced in African countries that have strong rule of law, high government effectiveness, strong foreign bank presence and strong voice and accountability institutions. The implication is that effective corporate governance and institutional quality can constrain the extent of income smoothing by African banks.

The effects of different modes of foreign bank entry in the Turkish banking sector during the 2007–2009 Global financial crisis

<abstract> <p>This paper provides insights on how foreign bank entry modes (acquisition vs. greenfield investment) in an emerging market (Turkey) influenced bank strategies during the 2007–2009 global financial crisis. Using a comprehensive dataset comprising twenty-nine accounting variables from Turkish banks' financial statements during 2005–2010, we find important differences between foreign-acquired banks and foreign bank branches in lending and sourcing funds. We find that foreign bank branches continued to support international trade by issuing import loans during 2007–2009 global financial crisis, whereas foreign-acquired banks focused on issuing consumer and credit card loans. In terms of bank sourcing funds, we find that foreign-acquired banks were able to continue to use foreign currency deposits of Turkish residents and local interbank funding including participation (Islamic) banks. Foreign bank branches, on the other hand, relied on sourcing funds from international interbank funding and foreign currency deposits of residents abroad, which led to the necessity for them to change their strategies because of funding shortage in international markets. Our results show that the presence of foreign banks in Turkish banking sector enabled the continuity of bank lending activities in host market during the turmoil of 2007–2009 global financial crisis. Our findings on foreign bank entry mode provide new evidence and have important implications for both policy makers and practitioners in emerging markets.</p> </abstract>

Impact of foreign ownership and foreign bank presence on liquidity risk: Evidence from Viet Nam

Impact of foreign ownership and foreign bank presence on liquidity risk: Evidence from Viet Nam

Особенности развития банков в Османской империи в середине XIX – начале ХХ вв.

Introduction. The development of banks in the Ottoman Empire is a complex topic in domestic and foreign historiography. Eastern societies, especially Muslim ones, have long had a negative attitude towards banking activities, considering it an offspring of an alien Western culture, using the services of traditional structures. In this article, the author endeavours to show the development of banks in the country from the 1820s – 1830s to the First World War. The article highlights the important role of the Galata banking houses owned by Greeks, Armenians and Jews in establishing the credit and financial system in the Ottoman Empire. They served the interests of the Porte and financed foreign economic transactions. Materials and Methods. The work has an interdisciplinary character, since it is carried out at the intersection of history, history of economics, economics, and statistics. Classical methods of historical science were used. Analysis. In the middle of the 19th century, the banking houses of Galata found themselves in a difficult situation, especially in the context of galloping inflation. The Ottoman Empire needed modern banks with considerable resources. This article stresses that only foreign banks could successfully carry out this task and highlights a number of stages in the development of the process. The British capital had dominated the country during the 1860-70s while the French and German banking capital started to gain access to the empire in the 1880s. By World War I, more than half of the country’s banking assets belonged to French banks. The author raises a complex problem of the development of national banks in the Ottoman Empire. Most of them could not compete with foreign banks, except for the «Agricultural Bank», which was a successful example of modern bank development in a traditional society that enjoyed great confidence from the local population, who formed a new financial culture. Therefore, it willingly invested its savings in deposits. Results. The author concludes that despite the achievements in establishing modern banks, there was a severe shortage of bank branches and representative offices, especially in the remote parts of the empire. Consequently, a large part of the population had to turn to traditional banking houses and moneylenders, which, contrary to the law, inflated the interest rates. The Ottoman Empire needed further expansion of the presence of foreign banks and, most importantly, the establishment of large national banks capable of becoming the flagships of the modern economy in the country.

Fintech, foreign bank presence and inclusive finance in Africa: Using a quantile regression approach

Fintech, foreign bank presence and inclusive finance in Africa: Using a quantile regression approach

Impact of capital adequacy, liquidity management and credit risk management on economic performance: Evidence from Pakistan.

The main purpose of this study is to evaluate the relationship between capital adequacy, liquidity management, credit risk management, and financial performance with moderating role of bank ownership. This study used secondary data approach and collect 10 years panel data from 2012-2021 from the financial statements of the 15 Pakistani commercial banks. State software is used to analyze the data. Results show that there is a positive relationship between capital adequacy, liquidity management, credit risk management, and financial performance. But, on the other hand, there is not a strong moderating effect of bank ownership. The outcomes have been nearly the equal in all samples indicating that foreign ownership is not an important component of profitability in the quarter and as such a public coverage to encourage the presence of foreign banks might also, therefore, no longer yield any advantage in terms of financial institution profitability. This result is robust to the use of regulate- local measures whilst endogeneity concerns are controlled for. Furthermore, the findings imply that the stock liquidity issue of profits management is undoubtedly associated with future stock returns in Chinese corporations. Our outcomes reveal that the inventory liquidity thing of quick- termism in managerial choices performs a crucial role in figuring out destiny inventory returns.

The Impact of Financial Development and Macroeconomic Fundamentals on Nonperforming Loans among Emerging Countries: An Assessment Using the NARDL Approach

The relationship between financial development indicators and non-performing loans (NPLs) has garnered significant attention, especially in emerging countries. The puzzle of whether financial sector development increases or decreases Non-performing Loans (NPL)s has not been resolved to the satisfaction of the curious mind. This research attempts to answer the above question by studying the asymmetric and symmetric association between financial sector development and NPLs, by utilizing the novel non-linear autoregressive distribution lag (NARDL) and the linear autoregressive distribution lag (ARDL) approach. Moreover, to make the study inclusive, we have added a series of proxies to measure financial sector development and macroeconomic vulnerabilities. Our main findings confirm that financial sector development and NPLs move together in the long run, and there is significant evidence of the asymmetric relationship. We infer that NPLs react differently to the negative and positive shocks of financial development and macroeconomic variables both in the short and long run. In the long-run positive shocks in financial intermediation, banking efficiency, banking depth, banking stability index, and banking non-interest income significantly impact the NPLs in emerging countries. The positive shocks of financial sector development (financial intermediation and size of banks) increase NPLs in emerging countries and vice-versa. Furthermore, regarding the macroeconomic variables, the positive shock of inflation, unemployment, and interest rate positively affect NPLs. The empirical analysis also concludes that in the long-run foreign bank presence is an insignificant factor affecting NPLs in the selected countries. This study emphasizes that, unlike the linear model, the non-linear model provides a more realistic and robust result by highlighting hidden asymmetries, which will help policymakers make appropriate strategic decisions.

Themes in Southeast European Banking: A Review of Literature

In this paper we review the literature around three main research questions: the impact of foreign bank entry on net interest margins, financial system stability and credit supply. We also motivate the focus on Southeast European (SEE) countries. SEE economies although under the umbrella of European transition economies exhibit different macroeconomic and financial sector features from these countries and as such could benefit from a more focused empirical investigation. This could tailor and improve the recommendations given to policymakers in these countries which will help promote financial and economic development. Other countries in the world that share similar macroeconomic and financial sector features could benefit from the results as well. In addition, it is argued that SEE countries offer a unique laboratory for the proposed research questions because of the dramatic increase of foreign bank presence in these countries and their low level of financial and economic development. Keywords: foreign bank entry, Southeast Europe, net interest margins, financial system stability, credit supply DOI: 10.7176/EJBM/14-18-07 Publication date: September 30 th 2022

Liquidity risk, macroprudential regulation and bank performance: empirical evidence from Vietnamese commercial banks

This paper attempts to cover the gap in the literature on the effects of liquidity risks and macroprudential policies on the performance of domestic banks in Vietnam. The two-way fixed effects and fixed effects generalized least squares methods are employed to analyze panel data from 31 Vietnamese commercial banks from 2006 to 2020. The results show that the liquid assets to total assets ratio has a positive effect on bank performance, which is measured by net interest margin. Stricter macroprudential regulations, which are represented by the short-term funding for mid-to-long-term loans ratio, improve domestic banks’ performance when taking the increase of foreign bank presence into account.

Analysis of Foreign Bank Presence Factor on the Factor of Economic growth Indonesia using Confirmatory Factor Analysis (CFA)

Indonesia is an emerging country which will be develop to industrial country. This paper examines the main implications about foreign bank presence on the Indonesia’s economy. We find that the Foreign Bank Presence has negative effect on Indonesia’s Economy. The determinant factor of foreign bank presence is Foreign Number and Capital Adequacy Ratio (CAR) can be used to confirm determinant factors of Foreign Bank Presence but Foreign Shares cannot be used to confirm determinant factors of Foreign Bank Presence. While, Gross Domestic Product (GDP) and Inflation Rate can be used to confirm determinant factors of Indonesia’s Economy. But direct effect of foreign number on Gross Domestic Product (GDP) is positive effect, and direct effect of capital adequacy ratio on inflation rate is negative effect.

Determinants of bank income smoothing using loan loss provisions in the United Kingdom

PurposeThis paper examines the determinants of bank income smoothing using loan loss provisions in the United Kingdom or Great Britain from 1999 to 2017.Design/methodology/approachThe study used ordinary least square (OLS) regression and applying the HAC robust standard error correction test.FindingsThe findings showed that UK banks use loan loss provision for income smoothing purposes. Income smoothing is greater in times of high economic policy uncertainty. The extent of bank income smoothing is reduced by foreign bank presence, UK GAAP adoption, IFRS9 adoption, and high levels of voice and accountability. Also, there is reduced income smoothing using loan loss provisions during a financial crisis and in periods of economic prosperity.Research limitations/implicationsThe implication is that economic conditions, institutional governance and accounting disclosure rules can influence the extent of bank income smoothing in the United Kingdom. The findings of the study contribute to several studies that explore the determinants of bank income smoothing.Originality/valueNo study has extensively examined the determinants of bank income smoothing in Great Britain or the United Kingdom. The present study fills this gap in the literature.

Integration of financial systems of western Balkan countries into the european financial system

The impact of international financial reporting of SMEs on economic performance continues to be one of the most debated issues among international economists. Theoretical models have identified a number of channels through which international financial reporting of SMEs can promote economic growth and economic development in developing countries and countries in transition. However, in spite of its benefits, financial reporting of SMEs can also be dangerous, as it has been witnessed in many recent financial crises. In fact, there are some evidences that financial globalisation leads to better macroeconomic outcomes only when certain “threshold conditions” are met. Therefore, this paper discusses the potential benefits and potential costs of financial reporting, which could face transition countries from Western Balkans while integrating their financial systems into the European financial system. Since the financial sector of Western Balkan countries is characterised by an increasing presence of foreign bank, this paper points out the potential advantages and a possible “danger” of the excessive presence of foreign banks in the host-country. This paper concludes with the idea that it is important to determine the optimal level of foreign banks participation in local banking sector and that financial reporting of SMEs should be approached cautiously, with good institutions and macroeconomic frameworks viewed as important preconditions.

The impact of foreign bank presence on domestic banks' profit: evidence from Vietnam

This paper examines the impact of foreign bank presence on Vietnamese domestic banks' profit by employing data of 30 domestic banks and 30 foreign banks operating in Vietnam from 2012 to 2017. Pooled OLS, REM, FIX and GLS are used to estimate but GLS regressed results are employed to explain the impact. We propose two new measurements of foreign bank presence to expand the existing literature. Our findings show that the increased presence of foreign banks enhances domestic banks' profit. However, domestic banks have to share interest bearing income with foreign banks.