global financial development report brick...
TRANSCRIPT
Brick and Mortar Operations of International Banks
Robert CullResearch Manager, Research Department
Claudia Ruiz-OrtegaEconomist, Research Department
http://www.worldbank.org/financialdevelopment
GLOBAL FINANCIAL DEVELOPMENT REPORT 2017
SettingtheStage:BrickandMortarOperationsofForeignBanks
•OlderLiterature(1980suptoGFC)showedgenerallybeneficialeffectsforhostcountrybankingsectorson:• Competitionandefficiency• Stability
•Butmoremixedresultsonaccesstofinancialservices(credit)inhostcountries
Introduction Determinants&Trends Impact Regulation&Supervision Conclusions
But,resultsoncompetition/efficiencydependentoncontext
•Nonrandomselection•Mostoftheforeignbankswerewell-establishedandheadquarteredindevelopedcountries
•Heterogeneityineffects• Greaterinlessdevelopedhostcountries• Foreignbankswereoftenatacompetitivedisadvantageinmoredevelopedbankingsectors(Bergeretal.,2000;DeYoungandNolle,1996;Peek,Rosengren,andKasirye,1999)
Introduction Determinants&Trends Impact Regulation&Supervision Conclusions
Stabilityandcreditaccessdependentonhome/hostcountrycontext
Stability• Foreignbankshelpstabilizecreditflowsduringhostcountrybankingcrises• But,canalsotransmitfinancialshocksfromtheirhomecountriestohostcountrybankingsectors
Access•Movingbeyondcherrypickingandservinghomecountryclientsabroadrequires:• Betterinformationenvironment(accountingstandards,creditregistries,collateralregistries)• Strongframeworkforcontractenforcement
Introduction Determinants&Trends Impact Regulation&Supervision Conclusions
Inshort,effectsofforeignbankshavealwaysbeenheavilydependentonhome/hostcontext
Mostrecentstudiesfocusedonbanking/real sectoroutcomesalsounderscore thatconclusion
• Post-liberalizationgainsinaggregatecredit,growthanddeclinesingrowthvolatilityaregreaterifdomesticbankingsectorwasalreadycompetitive(Behn,Haselmann,Seru,andVig,2014)
• Foreignbanksfromdevelopedeconomiesespeciallydependentonstronglegalframeworkstofosterbusinessformation(Alfaro,Beck,andCalomiris,2015)
Introduction Determinants&Trends Impact Regulation&Supervision Conclusions
Post-GFCTrendslikelytoaffecthostcountrybankingsectors
•Changesintherosterofforeignbanks• Retrenchmentbydevelopedcountrybanks(lessthanX-border,butnotable)• GreaterSouth-Southentry;Regionalization
Alternativedeliverymechanisms(fintech)
Introduction Determinants&Trends Impact Regulation&Supervision Conclusions
Outlineofpresentation
• Determinantsofforeignbankentry
• Recenttrends
• Effectsofforeignbankpresenceon:• Competition/efficiency• Bankingstability• AccesstobankingservicesThroughthelensofPost-GFCdevelopmentsandtrends
• Emergingapproachestoregulateandsuperviseinternationalbanks
• Policyrecommendations
Introduction Determinants&Trends Impact Regulation&Supervision Conclusions
Determinantsofforeignbankentry
• Foreignbanksoperateabroadinorderto:• Followhome-countrycustomers(GoldbergandJohnson,1990;FocarelliandPozzolo,2000)• Pursueprofitableopportunitiesabroad(Sethetal.,1998;Yamori,1998)• Seekinternationalportfoliodiversification(Haydenetal.,2006;Garcia-HerreroandVazquez,2013)
•Whendoingso,thecostsofinformationinthehosteconomyarecrucial• Foreignbankstendtolocateinplaceswithlowerinformationcostsforthem(i.e.,institutional/cultural/geographicalproximity)(Buch,2003;VanHoren,2007;ClaessensandVanHoren,2014)
Introduction Determinants&Trends Impact Regulation&Supervision Conclusions
Additionalfactors
• Foreignbankentrydecisionsmaybedistortedby:
• Regulatoryarbitrage- foreignbanksmaytakegreaterriskinless-regulatedhosteconomies(Acharya,2003;KarolyiandTaboada,2015;Dong,SongandTao,2011;Ongena,PopovandUdell,2013)
• Restrictionsthatlimitcross-bordercapitalflowswithinamultinationalbankgroup(i.e.,macroprudentialpolicies,countercyclicalbuffers,ringfencing)
• Financialsafetynetsinthehosteconomy
Introduction Determinants&Trends Impact Regulation&Supervision Conclusions
RecenttrendsinforeignbankentryI
PANELA.NUMBEROFSUBSIDIARIESOFFOREIGNBANKS
PANELB.FOREIGNBANKCLOSURES
0
5
10
15
20
25
Highincome Developing
0
100
200
300
400
500
600
700
800
2001 2003 2005 2007 2009 2011 2013
Highincome Developing
Introduction Determinants&Trends Impact Regulation&Supervision Conclusions
RecenttrendsinforeignbankentryII
PANELC.FOREIGNACQUISITIONSOFDOMESTICBANKS
PANELD.OWNERSHIPTRANSFERALSOFFOREIGNBANKS
0
10
20
30
40
HighIncome Developing
0
5
10
15
HighincometoDeveloping
DevelopingtoHighincome
Introduction Determinants&Trends Impact Regulation&Supervision Conclusions
Impactofforeignbanksinahosteconomy
Efficiency&CompetitionFinancialStabilityAccesstoCredit
Introduction Determinants&Trends Impact Regulation&Supervision Conclusions
EfficiencyandCompetition
• Indevelopingcountries,foreignbankstendtobemoreefficientthanlocalones• Boninetal.,2005;Demirguc-KuntandHuizinga,1999;Claessensetal.,2001• Foreignbanksbringsuperior technologies, riskmanagementsystems,lowerfundingcosts
• Evidencesuggeststhatforeignbankstendtoraisetheefficiencyoflocalbanks• Byforcinglocalbankstolowerspreadsandrationalizetheircosts(Clarkeetal.,2003;UniteandSullivan,2001;Claessensetal.,2000)
• Positivespillovers:localbankslearnfromforeignones(Lehner andSchnitzer,2008;Zhu,2012;Jeonetal.,2011)
Introduction Determinants&Trends Impact Regulation&Supervision Conclusions
• Indevelopingcountries,foreignbankparticipationispositivelyassociatedwithmorecompetitivebankingsectors(Clarkeetal.,2003;Claessensetal.,2001)
• Competitionismoreintensewhen:• Moreefficientandlessriskyforeignbanksentermarketswithlessconcentratedbankingsectors(Jeonetal.,2011)• Entryoccursthroughgreenfieldinvestment(Claeys andHainz,2014)
Introduction Determinants&Trends Impact Regulation&Supervision Conclusions
EfficiencyandCompetition
FinancialStability
Risk-sharingthroughglobalbankinghastwosides
1. Theycanhelpsmoothlocalshocks• Lowerincidenceofcrises(Barthetal.,2004;Demirguc-Kuntetal.,1998)• Morestablecreditgrowthduringlocalcrises(Dages etal.,2000)• Morediversifiedpoolofliquidity,parentsupport
2. Theymaytransfershocksfromabroad• CollapseofJapanesestockprices(PeekandRosengren,1997,2000)• 1998RussianCrisis(Chava andPurnanandam,2011;Schnabl,2012)• Transmissionofforeignmonetarypolicy(Moraisetal.,2015)
Introduction Determinants&Trends Impact Regulation&Supervision Conclusions
FinancialStability- LendingcontractionduringtheGFC
DuringtheGFC,foreignbankscontractedlendingearlierandfasterthandomesticbanks
• Contractiondifferedacrossbankcharacteristics• Lessseverewhenforeignbanksarelargelocallyandrelymoreonlocaldeposit-takingandlessonwholesalefunding(DeHaasandVanLelyveld,2014)
• Regulationinhostcountrymattered• Morestabilitywhenbankingsector regulationinhostcountriesismorestrict(Anginer etal.,2016)
Introduction Determinants&Trends Impact Regulation&Supervision Conclusions
FinancialStabilityandnewgenerationofforeignbanks
RegionalizationofforeignbanksandSouth-Southbankingwillbringbothopportunities&risksforthefinancialstabilityofhosteconomies
• Opportunities:• Easiercoordinationbetweenhomeandhostcountries
• Risks&Challenges:• Shocksofhomeandhostcountriesmorecorrelated• Regulationinhomecountriesofnewforeignbanksismorelax
Introduction Determinants&Trends Impact Regulation&Supervision Conclusions
AccesstoCredit- largeheterogeneityacrosscountries
• Impactofforeignbanksoncreditaccessgreatlydependentonhostcountryfactors• Economicdevelopment, localbankingsectordevelopment, informationalandlegalenvironment
• Amongtheleast-developedcountries,therecanbeanegativeassociationbetweencreditaccessandforeignbankentry• Foreignbanks“cherry-pick”thelargestfirms,worsening thepoolofborrowersoflocalbanks(Detragiache etal.,2008)
• Associationfound ifforeignbankpresenceissmall,ifenforcingcontractsiscostly,andcreditinformation islimited(ClaessensandVanHoren,2014)
Introduction Determinants&Trends Impact Regulation&Supervision Conclusions
AccesstoCreditandInvestmentOpportunities
Foreignbankscanexpandcreditaccessandinvestmentopportunities:
• Byforcinglocalbankstogo“down-market”• Localbanks- advantagewithinformationallyopaqueclients(BeckandMartinezPeria,2010;BeckandBrown,2013;Mian,2003-2005)
• Bylendingtounderservedsegments• Improvementoflendingtechnologiesbasedonhardinformation(BergerandUdell,2006;DelaTorreetal.,2010)
• BypromotingtradeandFDI(Claessensetal.,2014;Ongena etal.,2014)
Introduction Determinants&Trends Impact Regulation&Supervision Conclusions
AccesstoCredit- RegionalizationandSouth-Southbanking
• Developingcountries’foreignbanksmorefamiliarizedwithhostcountry’senvironment• Performbetterinweakerlegalenvironments• Abletoovercomechallengesoflendingtosmallerclients(Mian,2006;ClaessensandvanHoren,2014)
• Businessformationrates• Morestronglycorrelatedwithdevelopingcountries’foreignbanks• However,developingcountries’banksmorelikelytofinanceindustrieswithstandardizedinputs(Alfaroetal.,2015)
Introduction Determinants&Trends Impact Regulation&Supervision Conclusions
Performanceofforeignbanksbytheircountryofheadquarters I
PANELA.CREDITGROWTH(%) PANELB.LOCALDEPOSITSTOTOTALLIABILITIES(%)
0
10
20
30
40
50
60
70
2001 2003 2005 2007 2009 2011 2013
Highincome Developing
40
50
60
70
80
90
100
2001 2003 2005 2007 2009 2011 2013
Highincome Developing
Introduction Determinants&Trends Impact Regulation&Supervision Conclusions
Performanceofforeignbanksbytheircountryofheadquarters II
PANELC.INTERESTINCOME(%) PANELD.NON-PERFORMINGLOANS(%)
50
55
60
65
70
75
80
2001 2003 2005 2007 2009 2011 2013Highincome Developing
0
2
4
6
8
10
12
2001 2003 2005 2007 2009 2011 2013
Highincome Developing
Introduction Determinants&Trends Impact Regulation&Supervision Conclusions
ApproachesforRegulation,SupervisionandResolution
• Havinglocalauthoritiessupervisinginternationalbanksissuboptimal
• InternationalSupervisoryCoordination• Hasbeenthepreferredwaytodealwiththismismatch• Exchangeinformation, harmonize regulationsandsupervision standards• BaselCommittee(global standard-setter)
• Problems:• Coordinationacrosscountries ischallengingandcomplex• Incentivesofhomeandhostauthoritiesmaynotbealigned
• Whenaforeignbankissystemicinthehostcountrybutnot largeinthehomecountry,homecountrymayhavelittleinterestinintervening
• Regardingresolution, G-SIBsareextremelyhardtoresolve
Introduction Determinants&Trends Impact Regulation&Supervision Conclusions
ApproachesforRegulation,SupervisionandResolution
• TheGFChighlightedtheseproblems• Coordinationarrangementsfailed(non-binding)• Lastminuteandadhocinterventionsinvolvingpublicsupport• “Banksareglobalinlifeandnationalindeath”(MervynKing,formerGovernoroftheBankofEngland)
• SincetheGFC…• Morerestrictiveregulationandmonitoringofinternationalbanks• Preventivemeasuresincaseofdistress(i.e.,TLAC)• Regulatorybarriers:macroprudentialmeasures,countercyclicalbuffers,ring-fencing
Introduction Determinants&Trends Impact Regulation&Supervision Conclusions
ApproachesforRegulation,SupervisionandResolution
• GFCrevealedtheneedforaconsistentframeworkforsupervisingandresolvinggloballyactivebanks
• Thefinancialtrilemma(Schoenmaker,2013)• Financialstability,financialintegrationandnationalfinancialpoliciesareincompatible
• Policymakersneedtodecidewhether tobemorefinanciallyintegrated(i.e.,theuniversalapproach)ormorefinanciallysovereign (i.e.,territorialapproach)
• Implementationofanyoftheseapproachesiscomplex
Introduction Determinants&Trends Impact Regulation&Supervision Conclusions
Territorialapproach• Non-cooperativeapproach• Hindersbenefits offoreignbanks
Universalapproach• i.e.,BankingUnion• Legallybinding frameworks• Centraldecisionmaking
MorefinancialintegrationLessnationalsovereignty
Intermediateapproach• Elementsofuniversal
approach• i.e.,resolution procedures
Conclusions
• Foreignbankscanimprovelocalbankingsectors,butbenefitsaremorelikelyiftheproperregulatoryandsupervisoryframeworksareinplace
• Toreapbenefitsofforeignbanks:• Financialliberalizationaccompaniedbyinstitutionalreformsthatimproveinformationenvironmentandcontractenforcement
• Diversifiedrosterofhomecountries’foreignbanks(forstabilityandaccess)
• Regardingnewgenerationofforeignbanks:• Homecountrieswithmorelaxregulationstandards• Potentiallyhurtrisk-smoothing(morecorrelatedshocks)• Mayfacilitatecoordinationamongauthorities• Maybebettertoovercomechallengesoflending“down-market”
• Fintechisrapidlychangingthesector,bringingnewchallengesforregulationandsupervision
Introduction Determinants&Trends Impact Regulation&Supervision Conclusions
Conclusions
• Intermsofregulation/supervision/resolution:• Regulation,supervisionandresolutionofforeignbanksisextremelycomplex
• IncentivesacrossauthoritiestodealwithG-SIBsareimperfect
• Whiletheuniversalapproachmaybetooextremeformostcountries,someofitselementscouldbeworthadopting• i.e.,harmonizing procedures forresolution• i.e.,havinganex-anteplanonhowtoshareburdens incaseofdistress,ratherthantoimproviseex-post
Introduction Determinants&Trends Impact Regulation&Supervision Conclusions