Openness, profit opportunities and foreign banking

Using new data from the World Bank and OCC surveys, we show correlations across a wide range of countries between foreign banking and domestic economic, financial and bank regulatory conditions. Foreign banking tended to be more prevalent in countries that were more open to foreign ownership of their banks, more open to banks’ engaging in a wider range of financial activities and more open to international trade. Restrictions on foreign ownership of domestic banks that were in place in the late 1970s reduced the current extent of foreign banking. Foreign banking was negatively correlated with current restrictions on banks’ securities, insurance and real estate activities. Countries that had more international trade tended to have more foreign banking. Foreign banking was more pervasive in countries where banking was more profitable and where the domestically-owned banking sector was smaller relative to GDP.     

Aggregate liquidity shortages, idiosyncratic liquidity smoothing and banking regulation

This paper develops a model of banking fragility driven by aggregate liquidity shortages. Inefficiencies arise from a failure of the interbank market to smooth the available liquidity in such a shortage. We find that a standard lender of last resort policy is ineffective in restoring efficiency as it leads to offsetting changes in the banks’ supply of liquidity. In contrast, subsidizing the purchase of assets from troubled banks increases welfare by improving the banks’ liquidity holdings. The first best, however, is achieved by redistributing existing liquidity from healthy to troubled banks in a crisis.     

The multinational bank: A financial MNC?

The theory of non-financial multinational corporations is applied to the multinational commercial bank. The incentives toward multinationality that characterize the expansion of non-financial firms have their counterparts in multinational banks. The theory of the MNC provides a useful basis for the development of a theory of the multinational bank when the subsidiary offices operate in foreign financial markets. When banks' foreign subsidiaries operate in supranational markets (such as the Eurocurrency markets), there is little or no equivalence because the multinational banks compete only among themselves: there is no competition with indigenous firms. The supranational markets give rise to a distinct type of subsidiary. These banking offices and the markets in which they operate serve to integrate national capital and money markets with some possible endangerment to the stability of the international financial system.     

Do weak supervisory systems encourage bank risk-taking?

Weak bank supervision could give banks the ability to shift risk from themselves to supervisors. We use cross-border bank mergers as a natural experiment to test changes in risk and the impact of supervision. We examine cross-border bank mergers and find that the supervisory structures of the partners’ countries influence changes in post-merger total risk. An acquirer from a country with strong supervision lowers total risk after a cross-border merger. However, total risk increases when the target bank is located in a country with relatively strong supervision. This result is consistent with strong host regulators limiting the risky activities of their local banks. Foreign-owned competitors could then engage in the risky projects, especially if the foreign banks’ supervisors are not strong. An acquirer entering a country with strong supervision appears to shift risk back to its home country. The results suggest that bank supervisors can reduce total banking risk in their countries by being strong.     

Development and efficiency of the banking sector in a transitional economy: Hungarian experience

The paper analyzes the experiences and developments of Hungarian banking sector during the transitional process from a centralized economy to a market-oriented system. The paper identifies that early reorganization initiatives, flexible approaches to privatization, and liberal policies towards foreign banks’ involvement with the domestic institutions helped to build a relatively stable and increasingly efficient banking system. Foreign banks and banks with higher foreign bank ownership involvement were associated with lower inefficiency.     

What drives foreign expansion of the top 100 multinational banks? The role of the credit reporting system

This study explores how information costs, proxied by characteristics of credit reporting systems, affect the foreign expansion of the top 100 multinational banks. We find that banks prefer to expand operations in countries where private credit bureaus exist or where the credit reporting system is of better quality. This preference is particularly strong for banks’ branch decisions. Furthermore, banks prefer subsidiary entry only in countries where private credit bureaus exist with better credit information quality. Overall, our results indicate that banks are attracted to countries where the credit reporting system helps reduce banks’ information costs.     

Bank lending opportunities and credit standards

This article empirically tests the hypothesis that credit-screening standards can be first increasing and then decreasing in the quality of the bank's pool of potential borrowers, which in turn may vary through the business cycle or across different segments of the lending markets. A key implication is that banks with lending opportunities toward the middle of the quality spectrum can have loan portfolios that perform better than do the portfolios of banks with loan-origination opportunities that are either too weak or too strong. Using banks’ volume of secondary-market loan sales as a proxy for the richness of lending opportunities, I find an inverse U-shaped relation between the performance of banks’ loan portfolios and their activity in the loan sales market. The pattern deserves scrutiny for its policy implications, as many regulators hold the view that countercyclical variation in credit standards may have a destabilizing effect on business cycles.     

Mark-to-market accounting and liquidity pricing

When liquidity plays an important role as in financial crises, asset prices may reflect the amount of liquidity available rather than the asset's future earning power. Using market prices to assess financial institutions’ solvency in such circumstances is not desirable. We show that a shock in the insurance sector can cause the current market value of banks’ assets to fall below their liabilities so they are insolvent. In contrast, if values based on historic cost are used, banks can continue and meet all their future liabilities. We discuss the implications for the debate on mark-to-market versus historic cost accounting.     

The marketability of bank assets, managerial rents and banking stability

Financial innovation and greater information availability have increased the tradability of bank assets and have reduced banks’ dependence on individual bank managers. We show that this can have two opposing consequences for banking stability. First, the hold-up problem between bank managers and shareholders becomes less severe. Consequently, banks’ capital structure needs to be less concerned with disciplining the management. Deposits – the most effective disciplining device – can be reduced, increasing banks’ resilience to adverse return shocks. However, limiting the hold-up problem also diminishes bank managers’ rents, reducing their incentives to properly monitor and screen borrowers, with adverse implications for asset quality. Thus, the default risk of banks does not necessarily decline. We argue that this delivers a novel explanation for the origin of the recent subprime crisis.     

How loan portfolio diversification affects risk, efficiency and capitalization: A managerial behavior model for Austrian banks

The aim of this paper is to analyze how diversification of banks across size and industry affects risk, cost and profit efficiency, and bank capitalization for large Austrian commercial banks over the years 1997–2003. Employing a unique dataset, provided by the Austrian Central Bank, we test for several different types of managerial hypotheses, formalized according to a modified version of the Berger and DeYoung model [Berger, A.N., DeYoung, R., 1997. Problem loans and cost efficiency in commercial banks. Journal of Banking and Finance 21, 849–870]. We find that, although diversification negatively affects cost efficiency, it increases profit efficiency and reduces banks’ realized risk. Finally, diversification seems to have a positive impact on banks’ capitalization.     

On the importance of retail banking relationships

We use proprietary data to analyze the importance of retail banking relationships to commercial banks and their depositors when banks underwrite securities. We find lead underwriters’ retail customers benefit as they demand and end up with significantly more of the highly underpriced issues. We find it is actual underpricing beyond that predicted by grey markets that drive the differential demand from the lead bank retail clientele, suggesting that banks pass on information about underpriced initial public offerings to their retail depositors. We analyze banks’ incentives for such behavior and find evidence of banks benefiting through retail cross-selling—both brokerage accounts and consumer loans increase significantly.     

Foreign bank subsidiaries’ risk-taking behavior: Impact of home and host country national culture

This paper examines whether the risk-taking behavior of foreign affiliates of multinational banks is more influenced by the national culture of their parent banks’ home country or the national culture of foreign affiliates’ host country. The study uses a dataset of 292 foreign affiliates (i.e., subsidiaries or branch operations) operating in 66 countries having parent banks in 26 countries for empirical analysis. National culture of both home and host countries is measured with four dimensions—uncertainty avoidance, individualism, masculinity and power distance—of Hofstede's framework of national culture. Findings suggest that the national culture of parent banks’ home country has higher impact on the risk-taking behavior of foreign affiliates of multinational banks than the national culture of their host country. Specifically, foreign affiliates’ risk-taking is higher if parent banks’ home country has low uncertainty avoidance, high individualism and low power distance cultural values. This study extends our understanding that how informal institutions, such as the national culture, influence the financial decisions in multinational banks.     

Joint size and ownership specialization in bank lending

During the period 1996–2003 consolidation reduces the size diversity of Spanish banks but diversity in ownership forms increases as savings banks and cooperatives gain market share. This paper examines the implications of these structural changes in Spanish credit markets in terms of banks’ specialization (large or small borrowers, relational or transactional lending) and consequent credit availability for small and opaque firms. We find that size-of-the-borrower/size-of-the-bank specialization follows a different pattern in savings banks than in commercial banks, suggesting lower organizational diseconomies of size in the former than in the latter, which helps to explain the increase in ownership diversity over time. We also find that savings banks and cooperatives specialize relatively more in relational lending than commercial banks so ownership diversity assures funding for small firms even if bank consolidation continues.     

Liquidity risk and syndicate structure

We decompose syndicated loan risk into credit, market, and liquidity risk and test how these shape syndicate structure. Commercial banks dominate relative to non-banks in loan syndicates that expose lenders to liquidity risk. This dominance is most pronounced when borrowers have high levels of credit or market risk. We then tie commercial banks’ advantage in liquidity risk to access to transactions deposits by comparing investments across banks. The results suggest that risk-management considerations matter most for participants relative to lead arrangers. Links from transactions deposits to liquidity exposure, for instance, are more than 50% larger at participants than at lead arrangers.     

The cost of being late? The case of credit card penalty fees

This paper is the first in the literature to examine the determinants of US credit card penalty fees. Many critics of credit card fees – including a number of US Senators – have argued that credit card penalty fees reflect banks’ market share. Using a unique data set we find that fees are increasing in customer risk which supports the position of defenders of penalty fees, such as banks. However, our finding that fees are increasing in a bank's market share is consistent with the concerns expressed by politicians and regulators. We also find card penalty fees are direct substitutes for card interest rates.     

Organizational mode choices of multinational banks abroad

We investigate the determinants of organizational modes adopted by multinational banks abroad using a unique database of 98 parent banks and their organizational modes in 169 countries from 2005 to 2015. Our findings reveal that multinational banks operate in various organizational modes abroad, including multiple modes in a single host country; however, subsidiaries are the dominant mode of operation, followed by branches and simultaneously operating branches and subsidiaries in the host country. Furthermore, the characteristics of multinational banks play a significant role in determining their organizational decisions in a host country. Our results indicate that less profitable banks are less likely to open representative offices and are more likely to have branches. In contrast, multinational banks with high asset growth are more likely to operate a representative office abroad and less likely to open a subsidiary. These findings suggest that parent bank profitability and asset growth are important considerations when determining the optimal organizational mode of foreign expansion. Furthermore, country characteristics (particularly openness to economic and capital flows, institutional framework, and geographical and cultural distance) between host and home countries also influence foreign bank operations in a given host country.     

Marketing of banking services in Nigeria

This paper (which was originally presented at the 2001 World Services Congress in Hong Kong, 19–21 September) traces the origins of marketing in Nigerian banking and shows how different economic, social and political environments have influenced the marketing of financial services in Nigeria. It argues that the future of the banking market in Nigeria will, in the main, depend on the ongoing integration of the country into the global market. With the return of the international banks, multinational and foreign companies and missions are likely to favour such banks for their banking transactions. The implication of this is that banks with little or no foreign ownership structures will gradually be forced to concentrate on the indigenous market. Unless the government can put its house in order quickly and ensure a stable macroeconomic environment for economic development, it is likely that market forces will cause several of these indigenous banks to merge their activities or be absorbed by the big international banks.     

The relation between commercial bank profit rates and banking concentration in Canada,Western Europe,and Japan

This paper examines the relation between the profit rates of 60 banks and concentration in the ‘home’ banking market of each. Other explanatory variables found to be significant are whether the bank is government owned, a proxy for profit rates throughout each country, and the rate of growth of individual banks' assets. The evidence supports the view that greater concentration leads to higher profit rates. However the relatively small coefficients of the concentration variable indicate that relatively large changes in concentration are necessary to reduce profit rates by one percentage point.     

On the independence of assets and liabilities: Evidence from U.S. commercial banks, 1990–2005

Traditional asset–liability management techniques limit banks’ abilities to structure their balance sheets—but more recently, financial innovations have allowed banks the chance to manage interest rate risk without constraining their asset–liability choices. Using canonical correlation analysis, we examine how the relationships between asset and liability accounts at U.S. commercial banks changed between 1990 and 2005. Importantly, we show that asset–liability linkages are weaker for banks that are intensive users of risk-mitigation strategies such as interest rate swaps and adjustable loans. Perhaps surprisingly, we find that asset–liability linkages are stronger at large banks than at small banks, although these size-based differences have diminished over time, both because of increased asset–liability linkages at small banks and decreased linkages at large banks.     

The entry and the activity level of foreign banks in Italy: An analysis of the determinants

Although the theory of multinational banking has pointed out the importance of local profit opportunities, the empirical evidence is still poor and deserves further investigation. To this end, we analyse entry decisions and activity levels of foreign banks operating in Italy between 1983 and 1998. We consider 22 OECD countries, 10 of which had at least one bank (branch or subsidiary) in Italy. Entries and activity levels were related to the degree of economic integration as well as to the financial market features of the home country relative to Italy.Unlike other studies, besides economic integration, the relative profitability of the banking activity proves to be a significant variable in that it highlights the importance of local market conditions. In the past decade, increased competition in the Italian banking sector has reduced these profit opportunities, driving foreign banks towards more innovative sectors of financial intermediation.