Obstacles to a global banking system: “Old Europe” versus “New Europe”

“Old Europe” – the developed nations of continental Europe – averages only about 15% foreign bank ownership, whereas “New Europe” – the transition nations of Eastern Europe – averages about 70%. Similar findings hold elsewhere in the world – developed nations tend to have much lower foreign bank ownership shares than developing nations. We examine the causes of the differences within Europe with an eye toward more general conclusions. Our findings suggest that the low foreign bank shares in “Old Europe” – and perhaps developed nations more generally – may primarily result from net comparative disadvantages for foreign banks and relatively high implicit government entry barriers. The high foreign penetration in “New Europe” – and perhaps developing nations more generally – may be due to net comparative advantages for foreign banks and low government entry barriers, particularly in nations that reduced their state bank ownership.     

Further Evidence on the Link between Finance and Growth: An International Analysis of Community Banking and Economic Performance

We try to contribute to both the finance-growth literature and the community banking literature by testing the effects of the relative health of community banks on economic growth, and investigating potential transmission mechanisms for these effects using data from 1993 to 2000 on 49 nations. Data from both developed and developing nations suggest that greater market shares and efficiency ranks of small, private, domestically owned banks are associated with better economic performance, and that the marginal benefits of higher shares are greater when these banks are more efficient. Only mixed support is found for hypothesized transmission mechanisms through improved financing for small and medium enterprises or greater overall bank credit flows. Data from developing nations are also consistent with favorable economic effects of foreign-owned banks, but unfavorable effects from state-owned banks.     

The International Transmission of Bank Liquidity Shocks: Evidence from an Emerging Market

I exploit the 1998 Russian default as a negative liquidity shock to international banks and analyze its transmission to Peru. I find that after the shock international banks reduce bank‐to‐bank lending to Peruvian banks and Peruvian banks reduce lending to Peruvian firms. The effect is strongest for domestically owned banks that borrow internationally, intermediate for foreign‐owned banks, and weakest for locally funded banks. I control for credit demand by examining firms that borrow from several banks. These results suggest that international banks transmit liquidity shocks across countries and that negative liquidity shocks reduce bank lending in affected countries.     

Efficiency Barriers to the Consolidation of the European Financial Services Industry

Cross-border consolidation of financial institutions within Europe has been relatively limited, possibly reflecting efficiency barriers to operating across borders, including distance; differences in language, culture, currency, and regulatory/supervisory structures; and explicit or implicit rules against foreign competitors. EU policies such as the Single Market Programme and European Monetary Union attenuate some but not all of these barriers. The evidence is consistent with the hypothesis that these barriers offset most of any potential efficiency gains from cross-border consolidation. Banks headquartered in other EU nations have slightly lower average measured efficiency than domestic banks and non-EU-based foreign banks.     

The economics of bank privatization

This paper surveys the empirical literature examining bank privatization. We begin by documenting the extent of, theoretical rationale for, and measured performance of state-owned banks around the world, and then assess why many governments have chosen to privatize their often very large state-owned banking sectors. The empirical evidence clearly shows that state-owned banks are less efficient than privately owned banks, and that state domination of banking imposes increasingly severe penalties on those countries with the largest state banking sectors. On the other hand, there is little in the empirical record to suggest that privatization alone transforms the efficiency of divested banks, especially when these are only partially privatized. Privatization generally improves performance, but by far less than is typically observed in studies of non-financial industries. An increasingly common outcome of large-scale bank privatization programs is foreign ownership of many nations’ banking sector, which evidence suggests is usually positive in an economic sense, but problematic politically.     

Does Macro‐Prudential Regulation Leak? Evidence from a UK Policy Experiment

The regulation of bank capital as a means of smoothing the credit cycle is a central element of forthcoming macro‐prudential regimes internationally. For such regulation to be effective in controlling the aggregate supply of credit it must be the case that: (i) changes in capital requirements affect loan supply by regulated banks, and (ii) unregulated substitute sources of credit are unable to offset changes in credit supply by affected banks. This paper examines micro evidence—lacking to date—on both questions, using a unique data set. In the UK, regulators have imposed time‐varying, bank‐specific minimum capital requirements since Basel I. It is found that regulated banks (UK‐owned banks and resident foreign subsidiaries) reduce lending in response to tighter capital requirements. But unregulated banks (resident foreign branches) increase lending in response to tighter capital requirements on a relevant reference group of regulated banks. This “leakage” is substantial, amounting to about one‐third of the initial impulse from the regulatory change.     

What determines differences in foreign bank efficiency? Australian evidence

This study examines the factors that determine differences in efficiency of foreign banks in the host market (Australia). The impact of home market, host market and parent bank characteristics are considered within the frameworks offered by comparative advantage and new trade theories. Parametric distance functions are used to estimate the efficiency of foreign banks in Australia, and the robustness of model specification is tested using both general-to-specific modelling and extreme bounds analysis. It is found that following clients reduces the efficiency of profit creation. Incumbent bank's market share acts as a barrier to entry, while parent bank profits do not improve host nation efficiency. The limited global advantage hypothesis was found to be relevant for banks from the United Kingdom, while banks from the United States were generally less efficient.     

Banking efficiency and stock market performance: an analysis of listed Indonesian banks

The main purpose of this paper is to examine the monthly profit-based technical efficiency and productivity of listed Indonesian banks and their market performance. We examined the banks through the prism of two modelling techniques, efficiency and super-efficiency, over the period January 2003 to end-July 2007. Within this research strategy we employed Tone??s (2001) non-parametric, Slacks-Based Model (SBM) and Tone??s (2002) super-efficiency SBM to estimate the bank efficiencies. They were then combined with recent bootstrapping techniques, namely the non-parametric truncated regression analysis suggested by Simar and Wilson (2007), to identify the determinants of the efficiency scores. With respect to the latter, in the case of the SBM efficiency scores, the Simar and Wilson methodology was adapted to two truncations, whereas in the super-efficiency framework the original technique was utilised. The first part of the analysis reveals that listed banks?? average efficiencies varied widely over the sample period, from a low of 34% to a high of 97%, with only one bank having a score in excess of unity under the super-efficiency framework. The two most efficient banks were domestically owned. With respect to the truncated regression analysis, we found that the banks?? efficiency scores were positively correlated with share prices and return on equity in all models, and with the log of total assets in the super-efficiency analysis. Moreover, it was found that the JCI index of the Indonesian Stock Exchange is positively related to bank efficiency in all models. Another interesting finding is that the coefficient for the share of foreign ownership is negative and statistically significant in the super-efficiency modelling. This suggests that Indonesian banks with foreign ownership tend to be less efficient than their domestic counterparts. Finally, Malmquist productivity results suggest that, over the study??s horizon, the sample banks displayed volatile productivity patterns in their profit-generating operations.     

Domestic and multinational determinants of foreign bank profits: The case of Greek banks operating abroad

This paper examines the determinants of profits of Greek banks operating abroad by developing an integrated model that includes a set of determinants informed by the literature on the profitability of both multinational and domestic banks. The basis for our econometric analysis is provided by an unbalanced panel dataset for 19 Greek bank subsidiaries operating in 11 nations, covering the period from 1995 to 2001. The results show that the profitability of the parent bank and the operating experience of its host nation subsidiaries have a robust and positive impact on the profits of Greek banks abroad, whereas subsidiary bank size has a negative effect. Domestic financial factors reflecting stock market developments, bank-specific factors such as liquidity, loan loss provisions or cost efficiency, and market specific factors like concentration or market share in the host nations, are all insignificant in explaining Greek subsidiary banks’ profits.     

The random parameters stochastic frontier cost function and the effectiveness of public policy: Evidence from bank restructuring in Mexico

We apply specifications of the random parameters stochastic frontier cost function model to estimate bank efficiency. This class of model appears to resolve the long standing problem of confounding inefficiency and heterogeneity. Mean cost efficiencies from random models are higher by as much as eleven percentage points compared to pooled OLS estimates. Whilst tests show efficiencies are not drawn from the same population, rank order efficiencies are strongly associated. In a second step, we employ the estimated efficiencies to determine the effect of foreign acquisitions on bank cost efficiency following legislative reforms made as part of Mexico's bank restructuring programme in 1995. Foreign bank acquisition does not significantly affect efficiency whereas consolidation of local banks yields significant long-term improvements in efficiency. We recommend random parameters stochastic frontier models since they better accommodate heterogeneity and produce more precise estimated efficiencies.     

Dissecting Foreign Bank Lending Behavior During the 2008–2009 Crisis

This paper analyzes the lending behavior of foreign‐owned banks during the recent global crisis. Using bank‐level panel data for 51 countries, the paper explores the role of affiliate and parent financial characteristics, host location, as well as the impact of parent geographic origin and reach on foreign banks’ credit growth. Overall, the analysis finds robust evidence that foreign banks curtailed the growth of credit relative to other banks, independent of the host region in which they operate. Banks from the United States reduced loan growth less than other parent banks. Neither the global nor regional reach of parent banks influenced the lending growth of foreign affiliates. Parent capitalization and not parent funding explained the behavior of foreign bank credit growth during the global crisis. However, funding did affect the lending behavior of domestic and foreign banks in host countries, with those relying more heavily on deposits suffering a smaller decline in bank lending. Although not the focus of the paper, we also find that government‐owned banks played a countercyclical role in all regions.     

Characteristics determining the efficiency of foreign banks in Australia

The factors determining foreign bank efficiency are investigated using a three stage research method. It is found that host market incumbency reduces efficiency of foreign banks in Australia, resulting in over use of inputs. Factors underlying the limited global advantage hypothesis of Berger et al. [Berger, Allen N., DeYoung, Robert, Genay, Hesna, Udell, Gregory F., 2000. Globalisation of financial institutions: Evidence from cross-border banking performance. Brookings-Wharton Papers on Financial Service 3, 23–120] are identified, in that nationality specific factors represented by dummy variables are not significant once other relevant effects are controlled for. Parent profitability is not found to result in increased host nation efficiency, while parent credit rating effects are mixed. Some evidence is presented that banks from more financially sophisticated nations are more efficient. The implications of these results are explored from the perspectives of bank management and bank regulators.     

CHOOSING THE RIGHT FINANCIAL SYSTEM FOR GROWTH

Well‐functioning financial systems promote economic growth by channeling funds from those who save to those who invest in the productive capacity of economies. What are the main features of a well functioning system? Are well developed capital markets essential to the process? Or are commercial banks and other “private” sources of capital capable of bringing about the same levels of growth and prosperity? In this article, the authors use information about the financial systems of a large number of both developed and developing countries to examine various relationships between a country's financial structure and its overall economic performance. Perhaps most important, the authors report a significantly positive correlation, using data for 34 countries, between the size of a country's financial system—measured by the total of commercial bank assets, equity market capitalization, and bonds outstanding—and economic development (as measured by GDP per capita). At the same time, the authors also provide evidence that banks (or loans) and capital markets (or securities) are complements, not substitutes, in promoting economic development, and that the presence of foreign‐owned banks (though not state‐owned banks) has a positive association with growth. In other words, both private banks and capital markets are likely to play important, though different roles in channeling funds from savers to investors.     

Association Between Borrower and Lender State Ownership and Accounting Conservatism

We examine the association between borrower (firm) and lender (bank) state ownership and accounting conservatism for a sample of Chinese firms. We hypothesize that state‐owned enterprises (SOEs) adopt less conservative accounting than non‐state‐owned enterprises (NSOEs) because lenders are less concerned with downside risk for SOEs than for NSOEs. We also hypothesize a negative relation between conservatism and the fraction of total loans a firm borrows from state‐owned banks (SBs) because SBs have weaker demand for assurance of sufficient net assets to cover loan repayments than non‐state‐owned banks (NSBs). We find support for both hypotheses. Further analyses reveal that: (1) firms that borrow from commercial SBs exhibit more conservative accounting than firms that borrow from policy SBs and (2) firms adopt more conservative accounting as they get more loans from banks with foreign ownership or exclusively foreign banks. However, the results of these additional analyses are to some extent sensitive to alternative measures of accounting conservatism.     

Efficiency in the Vietnamese banking system: A DEA double bootstrap approach

This study analyses bank efficiency in Vietnam from 1999 to 2009. We use a unique data sample that allows us to capture the development of the Vietnamese banking sector over the last decade. We apply an advanced methodological approach introduced by Simar and Wilson (2007) to examine bank efficiency in Vietnam. An integral part of the analysis is to explore the determinants of bank efficiency. The results indicate that large and very large banks are more efficient than small and medium sized banks with small banks having the lowest efficiency scores in the system. Non-state owned commercial banks are more efficient than state owned commercial banks assuming overall efficiency. We also argue that banks with large branch networks and those that have been in existence for a long time are less efficient than other banks.     

The dollars and sense of bank consolidation

For nearly two decades banks in the US have consolidated in record numbers – in terms of both frequency and the size of the merging institutions. Rhoades (1996) (S.A. Rhoades, 1996. Bank Mergers and Industrywide Structure, 1980–1994. Board of Governors of the Federal Reserve System, Staff Study 169) hypothesizes that the main motivations were increased potential for geographic expansion created by changes in state laws regulating branching and a more favorable antitrust climate. To look for evidence of economic incentives to exploit these improved opportunities for consolidation, we examine how consolidation affects expected profit, the riskiness of profit, profit efficiency, market value, market-value efficiencies, and the risk of insolvency. Our estimates of expected profit, profit risk, and profit efficiency are based on a structural model of leveraged portfolio production that was estimated for a sample of highest-level US bank holding companies by Hughes et al. (1996) (Hughes et al., 1996. Efficient banking under interstate branching, Journal of Money, Credit, and Banking 28, 1045–1071.) Here, we also estimate two additional measures that gauge efficiency in terms of the market values of assets and of equity. Our findings suggest that the economic benefits of consolidation are strongest for those banks engaged in interstate expansion and, in particular, interstate expansion that diversifies banks’ macroeconomic risk. Not only do these banks experience clear gains in their financial performance, but society also benefits from the enhanced bank safety that follows from this type of consolidation.     

Effect of Foreign Shareholdings and Originating Countries on Banking Sector Efficiency

We analyze how foreign shareholdings affect the ASEAN-5’s banking sector efficiency using stochastic frontier analysis. Unlike most extant studies, which compare the performance of local and foreign banks, we assess how foreign shareholdings affect bank efficiencies. We also apply resource-based theory to analyze whether the foreign shareholdings’ countries of origin matter. We find that foreign shareholders from more developed countries enhance the bank’s resource base. Those from Asia have the greatest effect, perhaps because of their proximity and familiarity. Moreover, excessive regulation stifles the host countries’ profit efficiency potential. Finally, foreign shareholding concentration potentially enhances efficiencies by reducing agency costs.     

Location Decisions of Foreign Banks and Competitor Remoteness

This paper examines the role of “competitor remoteness”—the weighted average distance of all competing banks to a host country—on the location decision of a foreign bank. It uses unique, bilateral data on 1,199 foreign banks from 75 home countries present in 110 host countries. It finds that, besides bilateral distance, competitor remoteness importantly drives foreign banks’ location decisions. The impact of distance and competitor remoteness is stronger for non‐OECD home and host countries, when the scale of foreign bank inward and outward investment is limited, and for host countries where foreign banks dominate.     

The effect of foreign entry and ownership structure on the Philippine domestic banking market

We examine the response of domestic Philippine banks to the relaxation of foreign entry regulations that occurred in the Philippines. We find evidence that foreign bank entry is associated with a reduction in interest rate spreads and bank profits, but only for those domestic banks that are affiliated to a family business group. Foreign entry corresponds more generally with improvements in operating efficiencies, but a deterioration of loan portfolios. Overall, we conclude that foreign competition compels domestic banks to be more efficient, to focus operations due to increased risk, and to become less dependent on relationship-based banking practices.