The present evidence from both mix-country and country situation studies around the determinants of foreign bank entry as well as on the outcome of foreign banks on host economies suggests the brick-and-mortar operations of worldwide banks have important implications for competition and efficiency from the local financial sectors as well as for financial stability and use of credit within the host country (World Bank, 2018). The Worldwide Financial Development Report 2017/2018: Bankers without Borders plays a role in the insurance policy dialogue on worldwide banks by summarizing what’s been learned to date about: i) the potential risks and possibilities resulting from foreign banks when entering developing countries and ii) under what conditions host economies can reap most advantages of the entry of worldwide banks.
One key message in the report is the fact that foreign banks, through their physical operations, can enhance the performance of local banks, increase competition within the banking sector and lift overall credit access within the host economy. However, of these advantages to materialize, host and residential countries must have in position the correct regulatory and supervisory frameworks, and also the entry of foreign banks should be supported by institutional and legal reforms that strengthen the data atmosphere and contract enforcement from the host economy.
Quite simply, the outcome that foreign banks might have around the overall use of credit and growth and development of the neighborhood banking sector is greatly determined by host country factors. Under proper conditions, foreign banks could bring superior technology, better supervision practices, or bigger economies of scale for hosting economies that could materialize in elevated use of credit along with a more developed financial sector. However, if the price of obtaining details about new customers is simply too high for foreign banks (e.g., as a result of poor contract enforcement or information atmosphere), they might concentrate their lending around the largest, safest firms. Overall use of credit might be reduced if local banks end up not able to compete effectively using the entering foreign banks. For the reason that situation, foreign banks couldn’t only limit their lending towards the largest customers but additionally, by their entry, could pressure some domestic banks from the market.
When it comes to financial stability, evidence overwhelmingly implies that while foreign banks might help host countries through local financial crises (by for instance smoothing credit flows), they can also import shocks from abroad (Cull and Martínez Pería 2013 Morais et al., forthcoming Schnabl 2012). The propagation of shocks could be minimized through mix-border cooperation between government bodies at home and host countries. Additionally, host economies can better manage the propagation of shocks by permitting the entry of foreign banks at home countries with stricter bank rules, or by diversifying the roster of foreign banks by home country (to mitigate the outcome of shocks from the specific country).
This last point raises the discussion from the composition of foreign banks, that has been evolving quickly and may have important implications for use of credit and stability. Regionalization within the roster of foreign banks in addition to South-South bank entry have been receiving an upswing because the global financial trouble (figure 1). These new foreign banks are most likely more appropriate for everyone smaller sized and much more informationally opaque segments, for example SMEs and households, because they are more acquainted with the institutions and also the culture of host developing countries. For stability however, towards the extent shocks tend to be more correlated within regions compared to what they are globally, greater regionalization can limit risk discussing. Furthermore, foreign banks from less controlled and institutionally less strong home countries may pose additional risks towards the host economy. Since these trends are quite recent, the internet results of regionalization and South-South banking aren’t yet fully obvious.
Figure 1. South-South Banking Subsidiary Systems, 2005 and 2014
Panel a. Systems in 2005 Panel b. Systems in 2014
Panel a. Systems in 2005 Panel b. Systems in 2014
Note: Visualization according to Bertay, Demirgüç-Kunt, and Huizinga (2017). The maps show host developing countries of foreign bank subsidiaries and also the home countries where individuals banks are headquartered. The connections reflect a minumum of one foreign majority-owned subsidiary for every country pair.
Around the subject of stability, cooperation between home and host countries must increase, as time following the Global Financial Trouble demonstrated that merely counting on worldwide contracts and also the exchange of knowledge is not enough: current cooperation plans give host country government bodies limited capability to correctly supervise worldwide banks, and supervisors at home and host countries don’t consider fully the results of the decisions beyond their borders. Closer coordination of regulation and supervision has become much more relevant now, because the composition of players and technology within the finance area keep altering the.
Summing up, foreign banks by themselves aren’t any cure all for guaranteeing financial development and stability. Those things taken by host country government bodies pre and post the entry of foreign banks will largely determine the outcome that foreign banks dress in the host economy. Host countries should therefore try to produce the conditions required to make use of worldwide banking. Regulators in developing countries should adopt a powerful financial regulatory and supervisory framework, supported by institutional reforms, a better information atmosphere and contract enforcement that strengthen the neighborhood banking sector and therefore help enable domestic banks to compete effectively with foreign banks (Demirgüç-Kunt, Beck, and Honohan 2008).
Worldwide banking and other associated topics is going to be discussed within the approaching Overview Span of Financial Sector Issues around the globe Bank. Get more information at details about the program and the way to register.
Bertay, A. C., Demirgüç-Kunt, A., and Huizinga, H. 2013. “Do We Want Big Banks? Evidence on Performance, Strategy and Market Discipline.” Journal of monetary Intermediation 224: 532-558.
Cull, R. and Martinez Peria, M. S., 2013. “Bank Possession and Lending Patterns throughout the 2008-2009 Economic Crisis: Evidence from South America and Eastern Europe.” Journal of Banking & Finance, 37(12): 4861-4878.
Demirgüç-Kunt, Asli, Thorsten Beck, and Patrick Honohan. 2008. “Finance for those? Policies and Pitfalls in Expanding Access.” World Bank, Washington, Electricity.
Morais, B., J. L. Peydró, Jessica Roldan and Claudia Ruiz Ortega. Forthcoming. “The Worldwide Bank Lending Funnel of Financial Policy Rates and Quantitative Easing: Credit Supply, Achieve-for-yield, and Real Effects.” Journal of Finance.
Schnabl, P. 2012. “The Worldwide Transmission of Bank Liquidity Shocks: Evidence from your Emerging Market.” Journal of Finance 67(3): 897-932.
World Bank, 2018, Global Financial Development Report 2017/2018: Bankers without Borders. Washington Electricity: World Bank.