Cross-border banking in developing economies: Trends and policy implications!

Mix-border banking in emerging markets and developing economies (EMDEs) has expanded across most regions and be large in accordance with some home and host economies. Mainly in the wake from the global financial trouble (GFC), financial groups headquartered in EMDEs have elevated their regional as well as global footprints (figure 1). A comprehensive literature around the implications of worldwide banking in EMDEs provides training for coping with mix-border banking activities (to have an overview, see, for instance Cull and Martinez Peria 2010, Claessens 2016, and World Bank 2018). This literature emphasizes the trade-offs between your benefits and charges of monetary integration through mix-border banking, which rely on the interaction between home and host country factors in addition to bank group features.

Figure 1: Mix-border EMDE banking ties

Sources: Claessens and Van Horen 2015 Bankscope.

Note: More dark lines indicate more powerful ties.

Inside a recent paper (Feyen et al. 2020), we evaluate publish-GFC trends in bank activities of monetary groups headquartered in 46 EMDEs, along with the possession structure of 51 prominent EMDE groups. Our analysis implies that EMDE groups have become in dimensions, geographical achieve, selection of activities within the financial and real sectors, and group complexity (table 1).

Table 1: Banking activities of groups headquartered in EMDEs

Subsidiaries of EMDE groups in overseas EMDEs1

$1 trillion

Total assets

11%

Annual 2009-13 growth rate of total assets

Countries with EMDE group presence

46

Number of home EMDEs

75

Number of host EMDEs

Relative size of subsidiaries of EMDE groups in overseas EMDEs

2% (8%)

Median (75th percentile) share of total banking assets in the group’s home

11% (31%)

Median (75th percentile) share of total banking assets in the group’s host

Cross-border claims of EMDE groups from seven countries on overseas EMDEs2

$847 billion

Vis-à-vis all counterparties around the world

$233 billion

Vis-à-vis intra-group entities around the world

 

1. Data for 2013 come from Claessens and Van Horen (2015) Bankscope.

2. Data for 2017Q1 come from Bank for Worldwide Settlements team calculations.

Note: Locational bank claims from EMDE groups headquartered in South america, Chile, Nigeria, Mexico, Panama, the Republic of Korea, and Poultry.

In addition, data in the sample of 51 prominent EMDE groups from 27 countries reveal that each EMDE group had, typically, majority possession of 30 foreign subsidiaries, which 17 come in EMDE host countries and 13 of those foreign subsidiaries have been in the actual sector. Subsidiaries were in some instances majority-owned to the sixth level lower the possession chain, suggesting these groups are complex when it comes to size, geographical achieve, selection of activities within the financial and real sectors, and group morphology (table 2).

Table 2: Key statistics for that EMDE groups (September 2017)

$9.7 trillion

Total assets

4.8%

Median assets of foreign subsidiaries to host GDP

Number of host countries

133

All hosts

92

EMDE hosts only

Assets in host countries

$823.7 billion

All hosts

$401.4 billion

EMDE hosts only

Number of foreign subsidiaries in host countries

1,503

All hosts

814 (622)

EMDE hosts only (same region)

Share of group assets in host countries

8.4%

All hosts

4.1% (3.2%)

EMDE hosts only (same region)

Share of group revenue generated in host countries

10.1%

All hosts

7.4% (5.7%)

EMDE hosts only (same region)

Note: The figures cover the financial and real sector of majority-owned subsidiaries only.

We employ mix-sectional regression analysis to document the connection between your worldwide activities of those EMDE groups as well as other group-level banking outcomes and funding strategies. The outcomes indicate that some facets of internationalization are connected with adverse outcomes, for example lower returns on assets (especially if subsidiaries have been in developing countries), greater risk, minimizing market capital. Internationalization can also be connected with a general change in funding strategy toward using less deposits and much more short-term funding for that banks with developed/non-regional country presence. This means that some groups may well be more susceptible to a sizable financial shock like the COVID-19 crisis.

As a result, building accurate risk profiles for EMDE groups by supervisors and also the groups themselves is crucial yet particularly challenging for groups operating across borders. The development of mix-border banking groups presents an intricate group of challenges for regulators in your home and host jurisdictions institutional capacity is really a key constraint used for those involved parties in lots of EMDEs. The next (non-exhaustive) training for that EMDEs happen to be distilled from the large policy literature:

Consolidated supervision: Legal and regulatory deficiencies hamper effective supervision in the group-wide level. Effectively enforced regulation that targets capital, liquidity, risk management, and company governance in the group level can also be missing in lots of EMDEs. A framework to make sure sufficient on-site supervision of overseas subsidiaries is frequently absent or looking for improvement. Comprising financial linkages across sectors, markets, and within and between groups can improve supervisory stress-testing practices.

Mix-border regulatory cooperation and harmonization: Enhanced regional coordination and regulatory harmonization between home and host countries can address regulatory arbitrage and also the buildup of mix-border risks. Prime candidates for harmonization range from the definition and calculation of capital and liquidity, corporate governance, bank licensing criteria, accounting and audit standards, limits on large exposures and related-party lending, and fitness and propriety of company directors, managers, and major shareholders. Such harmonization levels the arena for EMDE groups vis-à-vis domestic banks and enhances financial deepening and competition.

Mix-border crisis management and backbone: EMDE groups have grown to be potential conduits for shocks because they have become systemically essential in home (e.g., The other agents) and/or host (e.g., El Salvador) jurisdictions. Failing of these an organization could turn back accrued socioeconomic advantages of financial integration, yet most EMDEs aren’t fully outfitted to handle the more complicated situation of the systemic bank failure across borders. Incentive conflicts between your home and host supervisor may further exacerbate a mix-border crisis (D’Hulster 2012). Crisis management groups, which gather home and host supervisors to coordinate recovery and backbone planning of systemically important groups, should improve these challenges, however they largely stay in their infancy.

Corporate governance and risk management frameworks: EMDE groups have grown to be harder to handle, because they have become more complicated and want to navigate jurisdictions with variations in key areas, like the economic cycle, country risk, supervision and regulation, and accounting. Therefore, it is crucial that groups themselves implement effective frameworks for group-wide, mix-border corporate governance, capital and liquidity planning, and risk management (including intra-group transactions and exposures).

References

Claessens, S. (2016). “Global Banking: Recent Developments and Insights from Research.” Overview of Finance.

Claessens, S., and N. Van Horen (2015). “The Impact from the Global Financial Trouble on Banking Globalization.” IMF Economic Review, 63(4), 868-918.

Cull, R., and M. Martinez Peria (2010). “Foreign Bank Participation in Developing Countries: Exactly What Do We Know of the Motorists and Effects of the Phenomenon?” World Bank Policy Research Working Paper 5398.

D’Hulster, K. (2012). “Cross-Border Banking Supervision: Incentive Conflicts in Supervisory Information Discussing between Home and Host Supervisors.” Journal of Banking Regulation, 13(4), 300-319.

Feyen, E., N. Fiess, A. C. Bertay, and that i. Zuccardi Huertas (2020). “Cross-Border Banking in EMDEs: Trends, Scale, and Policy Implications.”

World Bank (2018). Global Financial Development Report 2017/2018 Bankers without Borders. Washington, Electricity: World Bank Group.

Leave a Reply

Your email address will not be published.