Download Exchange Rates and Import Prices - Inter

Foreign Banks and The International
Provision of Credit
Linda Goldberg
Federal Reserve Bank of New York
October 25, 2004
Presentation for the
IADB XX Meeting of the Latin American Network of
Central Banks and Finance Ministries
These comments expressed in this presentation are those of the author and
do not necessarily reflect the position of the Federal Reserve Bank of New
York or the Federal Reserve System.
Important Motivating Question
Do foreign banks play a beneficial role in
promoting financial development and
stabilizing credit, or play a less benign role
by crowding our the domestic financial sector
and accentuating international shocks?
I will discuss two types of contributions of
foreign banks to emerging market financial
systems (both positive)
1. Foreign banks from well-supervised countries
promote emerging market financial sector
development
– by enhancing local financial sector efficiency
– by reducing the magnitude of local credit cycles.
• Do foreign banks transmit foreign shocks? -- yes.
• Do foreign banks accentuate the effects of such
shocks? -- no. Similar transmission across private
domestic banks and foreign-owned banks
I will discuss two types of contributions of
foreign banks to emerging market financial
systems (both positive)
2. Foreign banks promote institutional development in
emerging market hosts
First, some background on foreign bank
activity in emerging markets.
We start by observing that foreign entry is
often associated with tremendous regulatory
changes and post-crisis needs for financial
capital.
Since 1990 the extensive entry by foreign bank
financial multinationals has often been supported via
local bank acquisitions. The U.S. and Spain have
been especially active source countries.
20,000
15,000
10,000
38
21
22
5,000
23
32
34
20
16
7
14
7
14
8
4
a
Ki in
ng
N
et do
he m
rl a
nd
s
Ita
l
Au y
st
ri
Fr a
an
c
G
er e
m
an
y
C
an
ad
Be a
Ire lgiu
la
m
nd
-R
ep
Ja
p
Po an
rtu
g
Sw al
ed
e
G n
r
Sw ee
itz ce
er
la
nd
Sp
te
d
U
ni
te
d
St
at
es
0
U
ni
Value (in US$ Millions)
Chart 1: Value and Number of Acquisitions of Banks in
Developing Countries
25,000 74
by Source Country, 1990-2003
68
Source: Bank of England; Thompson Financial
Banks in Latin America were frequent targets in the
mid/late 1990s, as were banks in Eastern Europe and
more recently in Asia. Activity continued in 2002 and
2003, but Latin American divestitures also occurred.
Latin America
Eastern Europe
Asia
No. of acquisitions
14
12
10
8
6
4
2
0
1995
1996
1997
1998
1999
2000
2001
By 1999 bank assets under foreign control were
dramatically higher than 5 years prior. By 2003, we
saw a more nuanced pattern of developments.
Bank Assets Under Foreign Control, 1994, 1999, and 2003
(Assets of banks in which foreigners own 40% or more of bank)
1994
1999
2003
120
80
60
40
20
al
ay
si
a
Th
ai
la
nd
M
or
ea
K
l
ra
zi
B
bi
a
om
C
ol
ex
ic
o
M
er
u
P
le
en
ez
ue
la
V
C
hi
Tu
rk
ey
A
rg
en
tin
a
ol
an
C
d
ze
ch
R
ep
.
P
y
0
H
un
ga
r
Percent of Banking Sector
100
source: Mathieson & Roldos, 2001,plus calculations using Fitch IBCA Bankscope
What do foreign banks do in emerging markets?
First, a conceptual point / academic set of arguments.
In “Financial-Sector FDI and Host Countries: New and Old
Lessons”, I argue that foreign bank participation is the
financial sector analogue to FDI, even though FDI
terminology is more common for manufacturing and
extractive resource industries.
Many lessons from research on FDI apply to F-S FDI:
– technology transfers,
– productivity spillovers,
– wage effects,
– macroeconomic growth, and
– fiscal and tax concerns.
One special role of FS-FDI, because of its importance
to financial intermediation,is in shock transmission.
Banks magnify or dampen local business cycles, and
transmit foreign shocks through the lending channel.
Reasons for cyclicality in lending:
One special role of FS-FDI, because of its importance
to financial intermediation,is in shock transmission.
Banks magnify or dampen local business cycles, and
transmit foreign shocks through the lending channel.
Reasons for cyclicality in lending:

Market risk. Asset demands and supplies change
– ex. Berlin and Mester RFS 1999.
• Mismeasurement of difficulties in downturns and
strengths in boom periods --- ex. Borio et al. BIS 2001.
• Intertemporal smoothing, leading to countercyclical loan
demand and procyclical loan supply.
Both foreign banks (multinationals) and domestic
banks are pro-cyclical suppliers of credit. Both
contribute to international business cycle
integration.
• Domestic banks rely more on domestically generated
sources of funds for lending activity, so domestic bank
lending is highly procyclical. It is sensitive to domestic
cycles, and increases the amplitude of these cycles.
Both foreign banks (multinationals) and domestic
banks are pro-cyclical suppliers of credit. Both
contribute to international business cycle
integration.
• Foreign banks rely more on source country funds. They
transmit slightly more of their own country shocks to
markets in which they have a presence, but also reduce the
amplitude of locally generated cycles.
– Goldberg (2002, 2003) on US-ROW, foreign banks in
Latin America
– Healthy domestically-owned private banks in Latin
America exhibited sensitivities to foreign shocks similar
to sensitivities by foreign-owned banks.
Both foreign banks (multinationals) and domestic
banks are pro-cyclical suppliers of credit. Both
contribute to international business cycle
integration.
• Most research, often from World Bank studies, shows that
foreign banks do not worsen credit flows to small and
medium sized enterprises in Latin American countries.
– Research continues on this issue.
FS-FDI can improve local efficiency.
 Improved allocative efficiency.
 foreign investors enter into industries with high entry
barriers and reduce local monopolistic distortions.
 Higher technical efficiency.
 the increased competitive pressure and demonstration
effects by foreign banks may spur local firms to more
efficient use of existing resources.
FS-FDI can improve local efficiency.
 Improved allocative efficiency.
 foreign investors enter into industries with high entry
barriers and reduce local monopolistic distortions.
 Higher technical efficiency.
 the increased competitive pressure and demonstration
effects by foreign banks may spur local firms to more
efficient use of existing resources.
 Foreign banks operating in developing countries appear to
be more efficient than their domestic counterparts,
whether privately owned or government owned.
 Domestic banks are forced to become more efficient after
foreign entry, especially in the business lines in which
foreign banks choose to compete.
FS FDI can prompt local institutional development
 Bank integration with foreign head-office can lead to
stronger risk-management systems / operational controls
• Product innovation and expansion of services (broader
range of credit and deposit products, treasury, financial
advisory services, etc)
• Anecdotal evidence of spillovers to supervision
Some recent anecdotal information based on CE-3 (Poland,
Hungary, Czech Republic):
foreign bank entry improved system soundness: financial
strengthening and flexibility to resist shocks, increased banker training
and sophistication, strengthening of risk-management processes and
new product delivery. In addition, the prospect of joining the EU was a
catalyst to improve the supervisory and regulatory framework (Czech
Republic).
Determinants of international credit flows from
U.S. reporting banks:
Data on cross border flows and local lending
reinforce the point that business-cycle related
variables are not the only thing to watch.
Total cross-border lending from the U.S. is expanding
to Europe and Asia; total cross border claims on
La.America/Caribbean on average are flat or down.
U.S. Reporting Banks
Total Cross Border Claims
Total
Europe
Asia
Latin America and Caribbean
700
600
500
400
300
200
100
0
20
00
:Q
3
20
00
:Q
4
20
01
:Q
1
20
01
:Q
2
20
01
:Q
3
20
01
:Q
4
20
02
:Q
1
20
02
:Q
2
20
02
:Q
3
20
02
:Q
4
20
03
:Q
1
20
03
:Q
2
20
03
:Q
3
20
03
:Q
4
20
04
:Q
1
20
04
:Q
2
Total Corss Border Claims (Billions)
800
Period
The picture is even less rosy for U.S. net lending by
local affiliates in Latin American and Caribbean.
U.S. Reporting Banks Net Local Country Claims
Total
Europe
Asia
Latin America and Caribbean
90
80
70
60
50
40
30
20
10
:Q
4
20
01
:Q
1
20
01
:Q
2
20
01
:Q
3
20
01
:Q
4
20
02
:Q
1
20
02
:Q
2
20
02
:Q
3
20
02
:Q
4
20
03
:Q
1
20
03
:Q
2
20
03
:Q
3
20
03
:Q
4
20
04
:Q
1
20
04
:Q
2
20
00
:Q
3
0
20
00
Net Local Country Claims (Billions)
100
Period
Continuing challenges and issues for
discussion
• Even after repositioning of foreign banks, and
reduced exposure to some Latin American markets,
is there any evidence that the host economy is (on
balance) worse off?
– Linked to the question of whether institutional
improvements and efficiency gains persist.
– Is the financial system after reduced positions by
foreign banks nonetheless healthier from their
prior involvement, and the capital injected when
it was needed most?