Global Financial Development Report 2017 / 2018:
Bankers without Borders

Chapter 2

Brick-and-Mortar Operations of International Banks

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KEY MESSAGES

  • Foreign banks, through their brick and mortar operations, have the potential to improve the performance of local banks as well as the degree of competition in the local banking sector and the overall access to credit in the host economy. These benefits are more likely to materialize when the proper regulatory and supervisory frameworks are in place in the host and home countries, and when financial liberalization is accompanied by institutional reforms that strengthen the information environment and contract enforcement of the host economy.
Contribution of Local Deposits, Equity, and Short-Term and Long-Term Funding to Total Bank Funding, 2000–14
GFDR-2018-Figure-2
Source: Bertay, Demirgüç-Kunt, and Huizinga 2017.
  • Although foreign banks can help smooth credit flows during local financial crises, they also can import shocks from abroad. Cross-border cooperation between authorities from the home and host countries can help minimize the propagation of shocks. In addition, host economies can opt to allow the entry of foreign banks from home countries with stricter bank regulations, or to diversify the roster of foreign banks by home country in order to mitigate the impact of shocks from a specific country.
Liquidity and Cross-Border Funding of European Bank Subsidiaries in Europe and Central Asia and Latin America and the Caribbean Regions
GFDR-2018-Figure-B2.11.1.png
Sources: a) Staff calculations, based on Bankscope (database). b) Álvarez, García, and Gouveia 2016, based on Bank for International Settlements International Banking Statistics.
  • The composition of foreign banks is evolving rapidly. Since the global financial crisis, most bank exits have been by banks with headquarters in high-income countries, whereas South-South entry has been increasing and greater regionalization in the roster of foreign banks has been observed. These trends could affect who gets credit because South-South banking may be better at overcoming the challenges of lending to the smaller and more opaque clients common in developing countries. Nevertheless, greater South-South banking may also entail additional risks from hosting foreign banks from less regulated and institutionally weaker home countries.
Acquisitions, Transferals, Greenfield Entries, and Closures of Foreign Banks, 2000–13
GFDR-2018-Figure-B2.4
Source: Analysis is based on Claessens and van Horen’s Foreign Bank Ownership Database, matched with consolidated Bankscope statements (Claessens and van Horen 2015).
Note: “High-income” and “developing” categories correspond to banks headquartered in high-income and developing countries, as defined by the World Bank. The gray area indicates the global financial crisis period.
  • More intensive cooperation is needed between home and host countries, going beyond international agreements and the exchange of information. Under the current cooperation arrangements, host country authorities have limited ability to properly supervise international banks, and supervisors from home and host countries do not consider the effects of their decisions beyond their borders. Alternative cases:
    • Universal approach: European Banking Union
    • Intermediate cooperation approaches:
      • The ASEAN case
      • The WAEMU case