Thursday, March 29

Being a foreigner among domestic banks: Asset or liability?

Fascinating study. I quote the abstract

Do foreign banks perform better than domestic banks? The existing literature has come up with different answers, in part as data coverage has varied and often been limited. Studying the performance of foreign relative to domestic banks in many countries between 1999 and 2006, we find that the answer importantly depends on a number of factors. Specifically, foreign banks tend to perform better when from a high income country and when regulation in the host country is relatively weak. They also perform better when larger and having a bigger market share. Foreign banks from home countries with the same language and similar regulation as the host country also perform better. Geographical closeness, however, does not improve performance. These findings show that it is important to control for heterogeneity among foreign banks when studying their performance and help reconcile some contradictory results found in the literature.

Living in London where there is ferocious competition amongst so many banks and having seen the footprint across the world where there are foreign banks entering / withdrawing / competing, its an interesting perspective. So what do I do if I was a bank faced with competition? I would withdraw where I do not have sufficient market share. I will pour in more resources where I can bulk up and where regulation is lower/different from my home country. This is also a factor when people talk about banks moving elsewhere. Its no surprise that the profitable (not the biggest) banks usually come from high income countries. Interesting stuff.

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