Description
Many observers believe that significant global inte-gration is under way in the banking industry and that, in the coming years, individual banks will expand their reach into many countries.
Global Integration in the Banking Industry.
Allen N. Berger, of the Board's Division of Research
and Statistics, and David C. Smith, of the Board's
Division of International Finance, prepared this
article. Jennifer Judge provided research assistance.
NOT E . Much of the analysis in this article is based on Allen N.
Berger, Qinglei Dai, Steven Ongena, and David C. Smith, "To What
Extent Will the Banking Industry Be Globalized? A Study of Bank
Nationality and Reach in 20 European Nations,'' Journal of Banking
and Finance, vol. 27 (March 2003), pp. 383-415. The authors of
the present article thank David Birks for making available the
"GlobalCash-Europe96" data and Gregory P. Nini for writing the
programthat examines syndicated loans.
Many observers believe that significant global inte-
gration is under way in the banking industry and that,
in the coming years, individual banks will expand
their reach into many countries. Likewise, these
observers expect that many national banking markets
will develop large foreign components; as that hap-
pens, the nationality of a bank in such a market will
matter little to prospective customers.
[note: 1]. For example, Paul R. Krugman and Maurice Obstfeld, in their
International Economics: Theory and Policy, 5th ed. (Reading, Mass.:
Addison-Wesley, 2000), state that "one of the most pervasive features
of the commercial banking industry of the 1990s is that banking
activities have become globalized'' (p. 649). [end of note.]
These forecasts are based on the observation that,
over the past two or three decades, many nations
have removed important regulatory barriers to inter-
national banking. Advances in technology also now
allow financial institutions to manage larger informa-
tion flows across more locations and to evaluate
and manage risks at lower costs than ever before.
Together, these developments have reduced the costs
of supplying banking services across borders. At the
same time, growth in the international activities and
trade of multinational corporations has increased the
demand for services from financial institutions that
operate across borders.
Despite these developments, the banking industry
appears today to be far from globally integrated,
particularly in industrialized countries. For example,
the foreign share of bank assets in most industrialized
countries remains at or below 10 percent. And
although bank consolidation has been intense within
industrialized countries, mergers and acquisitions
across the borders of these countries have been much
less common.
[note: 2]. For the 10 percent figure, see Stijn Claessens, Asli Demirguj-
Kunt, and Harry Huizinga, "How Does Foreign Entry Affect the
Domestic Banking Market?'' Journal of Banking and Finance, vol. 25
(May 2001), table 1, p. 896. For mergers and acquisitions across
borders, see Group of Ten, Report on Consolidation in the Financial
Sector (Basel, Switzerland: Bank for International Settlements, 2001). [end of note.]
To evaluate more closely the extent to which bank-
ing is becoming globally integrated, we study the
nationality and international reach of banks that pro-
vide financial services across Europe to affiliates of
multinational corporations. We examine these affili-
ates because they are among the customers most
likely to demand the services of international banks,
and we focus on Europe because barriers to financial
integration have been extensively reduced on that
continent. A finding that banking integration has
advanced little even under such favorable conditions
would cast doubt on the prospects for the globaliza-
tion of banking more generally.
We rely mostly on an extensive, carefully con-
ducted 1996 survey of the short-term banking prac-
tices of more than 2,000 European affiliates of multi-
national corporations. Perhaps surprisingly, we find
that close to two-thirds of these affiliates choose a
bank headquartered in the nation in which they are
operating (a host-nation bank) rather than a bank
from their home country or a third nation. Moreover,
having chosen a host-nation bank, an affiliate is more
likely to select a bank limited to local or regional
operations rather than a large bank with global reach.
We also examine time-series data that might reveal
the degree to which global integration has increased
over the past decade. These data cover European
syndicated loans, the ratio of domestic private bank
claims to total (domestic plus foreign) bank claims,
and the dispersion of nonfinancial goods prices across
Europe. In brief, the time-series data show a picture
for the current period that is not substantially differ-
ent from that at the time of the 1996 survey.
These results are consistent with the idea that affili-
ates value host-nation banks over others because
host-nation banks better understand their own market
and may possess superior information about local
nonfinancial suppliers and customers. Our results also
imply that affiliates that have chosen host-nation
banks value the more customized and relationship-
based services offered by banks with local or regional
reach, as opposed to the broad-based services offered
by a host-nation bank that has global reach.
Our findings suggest that even as economic forces
push toward globalization, the high demand for host-
based expertise by bank customers, coupled with the
competitive advantages that host-nation banks have
in providing this expertise, implies that many bank-
ing services could very well remain local. In other
words, banking markets need not become much more
integrated as the globalization of other economic
sectors continues.
FOCUS ON EUROPE.
Europe is an ideal setting for studying international
integration because its countries have taken a number
of steps to reduce regulatory barriers to cross-border
banking. These steps are known collectively as the
''single market'' program.
[note: 3]. J ean Dermine, "Banking in Europe: Past, Present, and Future,''
in Vitor Gaspar, Philipp Hartmann, and Olaf Sleijpen, eds., The
Transformation of the European Financial System, Second ECB Cen-
tral Banking Conference (Frankfurt: European Central Bank, 2003)
pp. 31-116. [end of note.]
Under this program, the
European Commission and the European Union (EU)
Council of Ministers established directives intended
to guarantee equal regulatory treatment of foreign
banks by national authorities, unfettered provision of
financial services across borders, home-country con-
trol of bank supervision, and home-country imple-
mentation of bank solvency requirements.
[note: 4]. Currently, the fifteen members of the European Union (Austria,
Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy,
Luxembourg, the Netherlands, Portugal, Spain, Sweden, and the
United Kingdom) and the three additional nations of the European
Economic Area (Iceland, Liechtenstein, and Norway) have agreed to
abide by the bank-related directives. [end of note.]
The EU
Council also passed regulations to liberalize cross-
border capital flows and harmonize regulations across
member countries that cover capital adequacy, credit
exposure, and banks' participation in nonfinancial
activities. Most of these directives had been imple-
mented by the mid-1990s. In 1999, eleven members
of the EU also entered into the European Monetary
Union (EMU) and began to trade in a single currency,
the euro.
[note: 5]. The original EMU members are Austria, Belgium, Finland,
France, Germany, Ireland, Italy, Luxembourg, the Netherlands, Portu-
gal, and Spain. On J anuary 1, 2001, Greece became the twelfth
country to adopt the euro. [end of note.]
The EU Council has as one of its goals the creation
of a single, integrated banking market. An assump-
tion behind such a goal is that cross-border competi-
tion fosters efficient, low-cost banking by allowing
more efficient banks to move across borders and
compete with less-efficient banks formerly protected
by their nation's borders. Competition forces the
inefficient banks to either improve or to leave the
market. As the lowest-cost producers of banking ser-
vices expand across many borders, they drive prices
closer to marginal costs.
Europe has other characteristics that support finan-
cial integration. The proximity of most of its coun-
tries to each other should keep cross-border transac-
tion costs low. In addition, the countries of western
Europe are technologically advanced. As of the early
1990s, they were producing more science and engi-
neering Ph.D.s than either the United States or Asia
and were spending as much as the United States on
nondefense-related research and development.
[note: 6]. National Science Foundation, Human Resources for Science &
Technology: The European Region, NSF 96-316 (Arlington, Va.:
NSF, 1996). Organisation for Economic Co-operation and Develop-
ment, OECD Science and Technology Indicators (Paris: OECD, 1995). [end of note.]
Even within Europe, however, the evidence sug-
gests that the integration of banking is advancing
little, if at all. With the exception of the recent
consolidation across the Nordic countries, bank
merger and acquisition activity has been minimal
across European borders.
[note: 7]. The Nordic countries are Denmark, Finland, Iceland, Norway,
and Sweden. See Claudia M. Buch and Gayle L. Delong, ''Cross-
Border Bank Mergers: What Lures the Rare Animal?'' Journal of
Banking and Finance (forthcoming); Patrick Beitel and Dirk
Schiereck, ''Value Creation at the Ongoing Consolidation of the
European Banking Market,'' Institute for Mergers and Acquisitions,
working paper; and Steven Ongena, J ason Karceski, and David C.
Smith, ''The Impact of Bank Consolidation on Commercial Borrower
Welfare,'' International Finance Discussion Papers 679 (Board of
Governors of the Federal Reserve System, 2000). [end of note.]
Remaining informal barriers in Europe could help
explain this slow pace. One potential barrier is brand
loyalty to local services. Observers often cite reluc-
tance by bankers in Europe to compete in foreign
countries in which they believe that loyalty to local
products is strong. So, for example, Swiss banks do
little business in Germany, and German banks do
little business in Switzerland. Yet German and Swiss
banks both have a strong presence in the United
States, where loyalty to local brands is viewed as
less of an issue. National government policies could
also inhibit cross-border competition. For instance,
despite an explicit commitment to a level playing
field, European governments often promote the
expansion of their own nations' banks through tax
breaks, subsidies, guarantees, and direct ownership.
[note: 8]. Rafael La Porta, Florencio Lopez-de-Silanes, and Andrei
Shleifer, "Government Ownership of Banks,'' Journal of Finance,
vol. 57 (February 2002), pp. 265-301. [end of note.]
We argue that such barriers are not the only expla-
nation for the observed lack of integration in Europe.
The slow pace of integration could result in large part
from competitive advantages enjoyed by host-nation
banks.
NATIONALITY AND REACH OF BANKS.
In a frictionless banking market with no barriers to
integration, commercial customers will select the
bank that provides the price, quality, and mix of
services that will best facilitate their business opera-
tions. Two potentially important criteria for a foreign
affiliate's choice are the bank's nationality and reach.
Bank nationality refers to the country in which the
bank is headquartered. Some affiliates might value
banking services that require a detailed knowledge
of the country in which the affiliate operates. Banks
headquartered in the nation that hosts the affiliate will
likely have an advantage in offering these services,
which we term ''host-based'' expertise. So, for exam-
ple, an affiliate of a U.S. corporation operating in
Germany might choose a German bank because such
a bank will best understand the culture, business
practices, and regulatory conditions in Germany. The
bank may even have unique access to information
about German nonfinancial suppliers and customers.
Other affiliates might value a bank that offers
''home-based'' expertise—that is, an understanding
of the home market of the affiliate's parent—because
it is important to the affiliate to rely on a bank
familiar with its home territory.
[note: 9]. Berger, Dai, Ongena, and Smith, ''To What Extent Will the
Banking Industry Be Globalized?'' refer to host-based expertise as
''concierge'' services and home-based expertise as "home cookin'''
services. [end of note.]
Perhaps the bank
already serves the parent corporation in the home
country. Banks headquartered in the affiliate' s home
country should have an advantage in offering home-
based expertise. A U.S. affiliate operating in Ger-
many that values home-based expertise might then
prefer a U.S. bank because of its advantage in offer-
ing such services.
Banks from third countries (that is, from neither
the host nor the home country) may not have host-
based or home-based expertise, but they might com-
petitively offer services in other dimensions valued
by an affiliate. For instance, a U.S. corporate affiliate
in Germany may value, say, a Dutch bank for a
specialized service not offered by host- or home-
nation banks.
Bank reach refers to the size and geographic scope
of the bank. Some affiliates may value a large, global
bank that can offer a broad range of financial ser-
vices, expertise within many foreign markets, supe-
rior risk diversification, and the ability to facilitate
large deals. For the affiliate operating in Germany,
this choice need not depend on bank nationality
because the affiliate could choose a global German
bank (for example, Deutsche Bank), a global U.S.
bank (for example, Citibank), or a global third-nation
bank (for example, the Dutch bank ABN AMRO).
A different set of affiliates may prefer the advantages
of a smaller bank that offers services in only a local
area because such a bank is more likely to establish a
close relationship with the affiliate and provide cus-
tomized services. Such an affiliate that operates in
Germany might select a German bank that has a local
character and operates only in Germany or maybe
even in only one part of the country. Still other
affiliates may prefer a bank that blends international
reach with local, personalized services. Such a bank's
reach may be limited to a specific region or set of
countries. So, a U.S. affiliate operating in Germany
that prefers a blend of the far-reaching services of a
global bank and the more personalized character of a
local bank might choose an institution that confines
itself to operating mainly on the European continent
(for example, the Nordic-based banking concern
Nordea).
In the absence of barriers, the extent of integration
in the banking industry will depend on how custom-
ers value different banking services and the extent
to which banks of a given nationality and reach can
provide those services. Importantly, if customers
place a high value on global services and have little
value for host-based or home-based expertise, then
we might expect to see an integrated banking indus-
try, perhaps with a few global banks dominating
markets around the world. Conversely, if customers
value host-based expertise and place less value on
global services, then we should observe limited bank-
ing industry integration. Thus, depending on the ser-
vices valued by bank customers, we could have a
world with extensive integration or one with little
integration.
In the next section, we use the concepts of bank
nationality and reach to examine our primary data
set.
THE 1996 SURVEY.
Our main source for connecting foreign affiliates of
multinational corporations with their banks is
''GlobalCash-Europe96,'' a survey of the short-term
banking services provided to large, nonbank corpo-
rations.
[note: 10]. The objective of the survey is to gather information on the cash
management practices of corporations. However, the European
usage of 'cash management'' covers virtually all short-term banking
services. [end of note.]
The survey was conducted in 1996 across
twenty European nations by The Bank Relationship
Consultancy and the School of Management at the
University of Bath, in the United Kingdom.
[note: 11]. For a detailed description of the survey, see Steven Ongena and
David C. Smith, "What Determines the Number of Bank Relation-
ships: Cross-country Evidence,'' Journal ofFinancial Intermediation,
vol. 9 (J anuary 2000), pp. 26-56. [end of note.]
Short-
term banking services include lending, deposit-
taking, liquidity management, foreign exchange man-
agement, and other financial services that have a time
horizon of less than one year. A foreign affiliate of a
corporation can take the form of a subsidiary, branch
office, sales office, manufacturing plant, or some
other related entity that requires banking services
within a given country.
Responses to the survey were obtained from 1,129
corporations. These corporations had a total of 2,118
foreign affiliates operating in twenty countries in
Europe, or about two affiliates per corporation. The
parent corporations of most of these affiliates were
headquartered in Europe, although 24 percent were
headquartered outside Europe, mostly in the United
States.
The survey asked corporations to identify the banks
their foreign affiliates used for short-term banking
services within each of the twenty countries.
[note: 12]. A respondent could identify up to two banks for each
country—a ''primary'' and ''secondary'' bank. To avoid biases associ-
ated with double counting, we report all sample statistics using only
the affiliate's primary bank choice. Berger, Dai, Ongena, and Smith,
''To What Extent Will the Banking Industry Be Globalized?'' find that
the results reported here are not altered by use of an alternative
definition that includes a secondary bank. [end of note.]
The
nationalities of the sample banks named by the
respondents were obtained from Fitch IBCA, a data-
base containing information on the ownership struc-
ture of banks. Each bank subsidiary was assumed to
take on the nationality and reach of its parent. Under
this assumption, 255 banks provided short-term bank-
ing services for the 2,118 affiliates.
For each affiliate-bank observation, we identified
the bank's nationality and reach. For nationality,
banks are classified as either host-nation, home-
nation, or third-nation banks. A host-nation bank is
headquartered in the country in which the affiliate
operates, ahome-nation bank is headquartered in the
same country in which the affiliate's parent is head-
quartered, and athird-nation bank is headquartered in
neither the home nor host country.
For reach, banks are classified as global, regional,
or local. Global banks are defined to have the widest
reach. They provide services to the affiliates in at
least nine of the twenty European nations from which
respondents were drawn and have at least $100 bil-
lion in consolidated assets as of year-end 1995. Local
banks are defined to have the narrowest reach, pro-
viding services to the affiliates in the European nation
of their headquarters only and having consolidated
assets of less than $100 billion. By definition, all
local banks serve only as host-nation banks. Finally,
regional banks are defined to have intermediate
reach. They operate in more than one country or have
more than $100 billion in assets; but they operate in
too few countries, or are too small, to be a global
bank. Of the 255 banks in our sample, 8 are global,
73 are regional, and the remaining 174 are local.
By their nature, the bank reach classifications are
somewhat arbitrary and Eurocentric. For instance,
banks that have a strong European presence but do
not operate outside of Europe could be classified as
''global'' under our system. Nevertheless, all eight
banks are generally recognized as large, global banks
(table 1). The findings are materially unchanged
when the dividing lines between global and regional
banks and between regional and local banks are
altered. Overall, we are confident that the results are
not an artifact of our definition of bank reach.
Table 1. Banks in the 1996 sample that are defined as having global reach
Bank name
Assets worldwide
(billions of dollars,
year-end 1995)
Rank in American Banker,
by year-end 1995
worldwide assets
Number of surveyed
countries in which the
bank operates
Headquarters
Deutsche Bank 502.3 1 10 Germany
ABN AMRO 339.4 12 19 Netherlands
Credit Lyonnais 337.6 13 9 France
Societe Generale 324.8 17 19 France
Banque Nationale de Paris 323.5 18 12 France
Citibank 255.3 28 20 United States
Bank of America 230.2 34 18 United States
Chase Manhattan Bank 120.5 62 19 United States
NOTE. Banks with global reach are defined as those that operate in at least
nine of twenty European nations and had at least $100 billion in worldwide
assets as of year-end 1995.
SOURCE. Allen N. Berger, Qinglei Dai, Steven Ongena, and David C. Smith,
''To What Extent Will the Banking I ndustry Be Globalized? A Study of Bank
Nationality and Reach in 20 European Nations,'' Journal of Banking and
Finance, vol. 27 (March 2003), table 1, p. 391.
With respect to bank nationality, we find that
nearly two-thirds of all affiliates (66 percent) use a
bank headquartered in the host nation for their short-
term banking services (table 2). The remaining affili-
ates split evenly between using a home-nation bank
(18 percent) and a third-nation bank (17 percent).
2. Distribution of bank nationality and bank reach, by host nation, 1996
Percent except as noted
Host nation
Total bank
assets of nation
(billions of
dollars,
year-end 1995)
Number of
affiliates
Bank nationality:
Host
1
Bank nationality:
Home
2
Bank nationality:
Thi rd
3
Bank reach:
Global
4
Bank reach:
Regional
5
Bank reach: Local
6
All 9,563 2,118 65.5 17.7 16.9 35.1 52.8 12.0
Large banking sector:
Germany 3,041 240 73.3 14.2 12.5 40.0 49.2 10.8
Large banking sector: France 1,527 223 76.7 12.1 11.2 66.8 17.0 16.1
Large banking sector: United Ki ngdom 1,278 224 52.2 29.0 18.8 25.9 71.9 2.2
Large banking sector: Italy 831 119 70.6 17.6 11.8 27.7 43.7 28.6
Large banking sector: Switzerland 557 103 76.7 15.5 7.8 13.6 78.6 7.8
Large banking sector: Spain 552 126 57.9 26.2 15.9 26.2 54.8 19.0
Large banking sector: Netherlands 457 166 78.3 11.4 10.2 76.5 21.1 2.4
Large banking sector: Total 8,241 1,201 69.1 17.9 13.0 42.5 46.1 11.4
Small banking sector:
Belgium 389 150 59.3 21.3 19.3 35.3 64.0 .7
Small banking sector: Austria 297 79 79.7 8.9 11.4 20.3 72.2 7.6
Small banking sector: Sweden 106 109 85.3 9.2 5.5 11.0 79.8 9.2
Small banking sector: Norway 95 83 74.7 15.7 9.6 10.8 80.7 8.4
Small banking sector: Portugal 89 54 51.9 20.4 27.8 27.8 29.6 42.6
Small banking sector: Finland 88 48 77.1 12.5 10.4 16.7 68.8 14.6
Small banking sector: Denmark 75 100 85.0 7.0 8.0 12.0 79.0 9.0
Small banking sector: Greece 47 40 40.0 20.0 40.0 45.0 32.5 22.5
Small banking sector: I reland 26 73 56.2 19.2 24.7 21.9 74.0 4.1
Small banking sector: Luxembourg 13 40 15.0 17.5 67.5 27.5 57.5 15.0
Small banking sector: Total 1,224 776 67.0 14.8 18.2 21.9 67.7 10.4
Former Eastern bloc:
Czech Republic 43 49 28.6 28.6 42.9 42.9 28.6 28.6
Former Eastern bloc: Poland 36 60 28.3 26.7 45.0 50.0 21.7 28.3
Former Eastern bloc: Hungary 16 32 18.8 43.8 37.5 40.6 40.6 18.8
Former Eastern bloc: Total 96 141 26.2 31.2 42.6 45.4 28.4 26.2
NOTE. Banks are those chosen by affiliates of multinational corporations
operating in twenty European countries and surveyed in 1996. The banks
provide short-term banking services to the affiliates that selected them.
Components may not sum to totals because of rounding.
1. A host-nation bank is headquartered in the nation in which the affiliate
operates.
2. A home-nation bank is headquartered in the same nation in which the
affiliate's parent is headquartered.
3. A third-nation bank is headquartered in neither the host nation nor the
home nation.
4. A global bank provides services to the affiliates in at least nine of the
twenty European nations and had at least $100 billion in worldwide assets as of
year-end 1995.
5. A regional bank is neither global (is in too few nations or is too small) nor
local (is in too many nations or is too large).
6. A local bank provides services to the affiliates only in the European nation
of the bank's headquarters and had worldwide assets of less than $100 billion as
of year-end 1995.
SOURCE. Berger, Dai, Ongena, and Smith, ''To What Extent Will the Bank-
ing I ndustry Be Globalized?'' table 2, p. 392.
This pattern suggests that preferences for host-based
expertise are strong and tend to dominate bank selec-
tions. This finding also contrasts with the perception
in much of the academic literature that foreign affili-
ates favor their home-nation banks.
[note: 13]. For example, see Larry G. Goldberg and Anthony Saunders,
''The Determinants of Foreign Bank Activity in the U.S.,'' Journal
of Banking and Finance, vol. 15 (March 1981), pp. 17-32; and
E.C. Kaplanis and Richard A. Brealey, ''The Determination of For-
eign Bank Location,'' Journal of International Money and Finance,
vol. 15 (August 1996), pp. 577-97. [end of note.]
With respect to bank reach, about 35 percent of the
affiliates choose global banks, 53 percent choose
regional banks, and 12 percent choose local banks.
These data suggest that while a vast majority of the
foreign affiliates of multinational corporations prefer
banks that span multiple nations (that is, global or
regional banks), only about one-third choose global
banks.
We also examine the distribution of bank national-
ity and reach within each of the twenty host coun-
tries, sorted by the total size of the nation's banking
sector and grouped into one of three categories: large-
banking-sector nation, small-banking-sector nation,
or former Eastern-bloc nation (table 2). The data
show that bank nationality choice can differ greatly
across industrialized host nations, particularly among
small-banking-sector countries. For instance, only
15 percent of the affiliates operating in Luxembourg
use a host-nation bank, whereas about 85 percent of
those in Sweden do so. We separately consider the
banking systems of the former Eastern-bloc nations
because they tend to have legal and financial systems
that are relatively new compared with those of west-
ern Europe.
[note: 14]. The former Eastern-bloc countries in the sample are the Czech
Republic, Hungary, and Poland. [end of note.]
Only 26 percent of the affiliates operat-
ing in the former Eastern-bloc nations use a host
bank; about 43 percent select a bank from a third
nation. Thus, use of host-nation banks in the former
Eastern-bloc nations is much less frequent than in the
industrialized nations of western Europe.
The data on bank reach also show considerable
variation across host nations. Global banks are cho-
sen relatively more frequently in large-banking-sector
nations (43 percent) and in former Eastern-bloc
nations (45 percent) than in small-banking-sector
nations (22 percent). This observed pattern seems to
indicate that global banks prosper best in markets
open to bank competition (large-banking-sector
nations) and in markets with less-established
banking systems (former Eastern-bloc nations). Also
notable is the variation in reach among the large-
banking-sector nations. For example, about two-
thirds of the affiliates operating in France use a global
bank; more than two-thirds of the affiliates operating
in Switzerland and the United Kingdom use regional
banks; and more than one-fourth of the affiliates
operating in Italy use local banks.
We also examine the distribution of bank
nationality and reach according to the home nation
of the affiliate, including countries outside the twenty
host European nations (table 3). Of the foreign affili-
ates with corporate headquarters in European coun-
tries with both large and small banking sectors,
70 percent select a host-nation bank and only about
11 percent opt for a home-nation bank. This result is
surprising, given that many of the European corpo-
rations have large home-nation banks close by from
which to choose. In fact, the only outlier home nation
is the United States. Of the affiliates whose parents
are headquartered in the United States, 42 percent
choose home-nation banks, a rate much higher than
that for affiliates from other countries. This finding
could reflect the ability of U.S.-owned banks to oper-
ate relatively efficiently in foreign countries, consis-
tent with the academic literature.
[note: 15]. See Allen N. Berger, Robert DeYoung, Hesna Genay, and
Gregory F. Udell, ''Globalization of Financial Institutions: Evidence
from Cross-Border Banking Performance,'' in Robert E. Litan and
Anthony Santomero, eds., Brookings—Wharton Papers on Financial
Services (Washington: Brookings Institution Press, 2000), pp. 23-158.
[end of note.]
Table 3. Distribution of bank nationality and bank reach, by home nation, 1996
Percent except as noted
Home nation
Total bank
assets of nation
(billions of
dollars,
year-end 1995)
Number of
affiliates
Bank Nationality:
Host
Bank Nationality:
Home
Bank Nationality:
Third
Bank Reach:
Global
Bank Reach:
Regional
Bank Reach:
Local
All 22,151 2,118 65.5 17.7 16.9 35.1 52.8 12.0
Large banking sector:
Germany 3,041 177 76.8 7.9 15.3 31.6 55.4 13.0
Large banking sector: France 1,527 50 60.0 26.0 14.0 32.0 54.0 14.0
Large banking sector: United Ki ngdom 1,278 364 79.1 6.3 14.6 30.5 57.1 12.4
Large banking sector: Italy 831 84 54.8 9.5 35.7 36.9 51.2 11.9
Large banking sector: Switzerland 557 84 63.1 3.6 33.3 48.8 40.5 10.7
Large banking sector: Spain 552 12 66.7 25.0 8.3 41.7 25.0 33.3
Large banking sector: Netherlands 457 121 47.1 26.4 26.4 48.8 45.5 5.8
Large banking sector: Total 8,241 892 69.3 10.8 20.0 35.8 52.5 11.8
Small banking sector:
Belgium 389 4 100.0 .0 .0 .0 100.0 .0
Small banking sector: Austria 297 39 64.1 28.2 7.7 17.9 51.3 30.8
Small banking sector: Sweden 106 164 73.8 12.8 13.4 21.3 67.7 11.0
Small banking sector: Norway 95 65 63.1 7.7 29.2 23.1 63.1 13.8
Small banking sector: Portugal 89 12 25.0 25.0 50.0 58.3 33.3 8.3
Small banking sector: Finland 88 177 83.1 4.5 12.4 21.5 63.8 14.7
Small banking sector: Denmark 75 134 70.1 17.9 11.9 17.2 62.7 20.1
Small banking sector: Greece 47 5 40.0 20.0 40.0 80.0 20.0 .0
Small banking sector: I reland 26 100 58.0 9.0 33.0 43.0 47.0 10.0
Small banking sector: Luxembourg 13 16 81.3 .0 18.8 18.8 62.5 18.8
Small banking sector: Total 1,224 716 70.9 11.5 17.6 24.4 60.8 14.8
Former Eastern bloc:
Czech Republic 43 2 100.0 .0 .0 .0 50.0 50.0
Former Eastern bloc: Poland 36 2 100.0 .0 .0 50.0 .0 50.0
Former Eastern bloc: Hungary 16 0 n.a. n.a. n.a. n.a. n.a. n.a.
Former Eastern bloc: Total 96 4 100.0 .0 .0 25.0 25.0 50.0
Other:
J apan 6,746 9 77.8 .0 22.2 33.3 44.4 22.2
Other: United States 5,012 470 49.1 41.7 9.1 51.1 41.7 7.2
Other: Canada 408 22 72.7 .0 27.3 18.2 59.1 22.7
Other: Other 422 5 60.0 .0 40.0 40.0 40.0 20.0
Other: Total 12,588 506 50.8 38.7 10.5 49.2 42.5 8.3
NOTE. See notes to table 2. n.a. Not applicable.
Although bank nationality and reach are two dis-
tinct concepts, they can be related. For instance, we
have already seen that banks with local reach have,
by definition, host-nation nationality. Other depen-
dencies may result from how banks with a given
reach are distributed across countries. For example,
some countries do not have a global bank headquar-
tered within their borders. Banks in these countries
cannot offer both host-based expertise and global
services to affiliates that value such a combination.
Likewise, banks from these countries cannot jointly
offer home-based and global services to affiliates of
native corporations operating abroad. Finally, some
banking systems may be too new or undeveloped to
offer competitive banking services at even a local
level.
We study potential dependencies between bank
nationality and reach by assuming that bank reach
depends first on the selection of bank nationality. We
reason that, in the absence of barriers to integration, a
bank's reach will be limited by the extent to which
customers value cross-border banking relations. For
example, in the extreme case that all bank customers
selected host-nation banks for all of their services,
there would be no need for banks with global reach.
A two-stage decision tree illustrates our framework
(diagram 1). In the first stage, an affiliate decides on
bank nationality; in the second stage, it chooses bank
reach. Note that by definition, a local bank does not
arise as a second-stage choice when an affiliate
chooses a home-nation or third-nation bank in the
first stage. At the nodes of the top branches of the
tree, we report the sample frequencies for selecting
a host-nation, home-nation, and third-nation bank,
while at the bottom branch nodes, we report the
sample frequencies for selecting a global, regional,
and local bank given the prior choice of bank
nationality.
Diagram 1. Distribution of bank nationality and bank reach in a two-stage decision tree
[at the top is the Total Sample: 2118 affiliates in twenty European nations.
The three branches below are in the Bank Nationality section and they are: Host 65.5% (1387 affiliates),
Home 17.7% (374 affiliates), and Third 16.8% (357 affiliates).
The branches below them are in the Bank Reach section. Host has three branches: Global 20.5% (285 affiliates),
Regional 61.1% (847 affiliates), and Local 18.4% (255 affiliates). Home has two branches: Global 62.3%
(233 affiliates) and Regional 37.7% (141 affiliates). Third has two branches: Global 63.3% (266 affiliates) and
Regional 36.7% (131 affiliates).]
NOTE. See notes to table 2. By definition, a local bank does not arise as a
second-stage choice when an affiliate chooses a home-nation or third-nation
bank.
As shown earlier, almost two-thirds of the affiliates
use host-nation banks over home- and third-nation
banks (table 2), a pattern consistent with strong host-
based expertise. Affiliates' choices for bank reach
differ greatly, depending on bank nationality (dia-
gram 1). After selecting a host-nation bank, about
21 percent of the affiliates use a global bank. By
comparison, of affiliates that select either a home-
nation or third-nation bank, about 63 percent use
a global bank. In other words, affiliates tend to use
banks with global reach once they choose a home-
nation or third-nation bank, but they tend to use a
regional or local bank once they choose a host-nation
bank.
One aspect of the data that could be driving these
patterns is that, as of 1996, only three host nations—
France, Germany, and the Netherlands—had a global
bank headquartered within their borders. That is,
affiliates choosing a host-nation bank in any of the
other seventeen nations in our sample could not also
select a global bank. This limitation could simply
reflect an equilibrium outcome—that is, the demand
for global services within these countries is not great
enough to induce a host-nation bank to expand its
reach globally or to induce an existing global bank
to move its headquarters to one of these countries.
Alternatively, this outcome could reflect supply con-
ditions in the host nation.
We look more closely at Germany to gain some
insight into how the distribution of bank choices
might differ in a market in which all types of banks
are available (diagram 2). Germany not only has a
host-nation bank that is global (Deutsche Bank), but
it also has three strong nationwide systems of local
and regional commercial banks from which affili-
ates may choose: the Landesbanken (state banks),
Sparkassen (savings banks), and Hypothekbanken
(building societies).
Diagram2. Distribution of bank nationality and bank reach in Germany in a two-stage decision tree
[at the top is the Total Sample: 240 affiliates in Germany.
The three branches below are in the Bank Nationality section and they are: Host 73.3% (176 affiliates),
Home 14.2% (34 affiliates), and Third 12.5% (30 affiliates).
The branches below them are in the Bank Reach section. Host has three branches: Global 34.1% (60 affiliates),
Regional 14.8% (26 affiliates), and Local 51.1% (90 affiliates). Home has two branches: Global 55.9%
(19 affiliates) and Regional 44.1% (15 affiliates). Third has two branches: Global 56.7% (17 affiliates) and
Regional 43.3% (13 affiliates).]
The German data in diagram 2 suggest that the
supply conditions alone do not create the patterns
shown in diagram 1. A substantial proportion of the
foreign affiliates operating in Germany still select a
host-nation (that is, German) bank for their banking
services. More important, if they choose a German
bank, affiliates choose a regional or local bank over a
global bank by a two-to-one margin; whereas, if they
choose a home-nation or third-nation bank, most
affiliates then choose a global bank.
The cross-country variation in bank nationality and
reach was analyzed more formally using a regression
model that attempted to control for the demand and
supply factors within host nations, the geographic,
cultural, and financial differences between host and
home nations, and the attributes of a foreign affili-
ate's parent corporation.
[note: 16]. Berger, Dai, Ongena, and Smith, ''To What Extent Will the
Banking Industry Be Globalized?'' [end of note.]
The regression analysis
confirmed the importance of host-nation-based exper-
tise in the choice of bank. An additional finding was
that host-nation banks are less likely to be chosen in
the former Eastern-bloc countries, and home-nation
banks typically fill the void left by the host-nation
banks in these countries. We speculate that the bank-
ing systems within these countries are not yet
developed enough to offer competitive host-based
expertise.
One limitation of the 1996 survey evidence is that
it offers only a ''snapshot'' of the provision of bank-
ing services rather than a picture of the evolution of
banking markets over time. Moreover, the snapshot
was seven years ago; significant integration could
have occurred since that time.
A LOOK AT THE TIME-SERIES DATA.
We begin our time-series analysis with two measures
of banking industry integration for the period from
1992 to 2002. The first measure is the proportion of
syndicated loans that host-nation banks provide to
European affiliates of multinational corporations.
That is, we start with the same types of affiliates as
examined in the previous section, but we now track
the nationality of those banks that provide syndicated
loans to the affiliates.
The syndicated loan market is a popular mecha-
nism for extending loans to medium-sized and large
borrowers and is often thought to be the most glo-
bally integrated sector of the banking industry. Our
measure is constructed fromLoanware, a database
that tracks syndicated loan agreements from around
the world.
[note: 17]. Loanware is a product of Dealogic, Ltd. A syndicated loan
agreement is a loan contract between a borrower and a group ofbanks,
typically headed by a ''lead'' or ''arranging'' bank or group of banks. [end of note.]
For the 1992-2002 period, we review
1,556 syndicated loans to foreign affiliates of multi-
national corporations operating in Europe.
The degree of integration as measured by the pro-
portion of syndicated loans financed by host-nation
banks did not increase over the past decade (chart 1).
In 1992, host-nation banks financed 35 percent of the
syndicated loans; in 2002, they financed the same
proportion. Since 1996, the proportion of host-nation
banks financing syndicated loans has fluctuated
between 39 percent and 21 percent. Thus, the syndi-
cated loan data provide no evidence to suggest that
the level of bank integration has changed much since
the 1996 survey.
Chart 1. I ndicators of banking market integration in Europe,
1992-2002
[This chart has two graphs: Share of syndicated loans provided by host
nation banks, and Share of total bank claims that are domestic.
Top panel: share of syndicated loans provided by host-nation banks.
The graph starts 1992 at about 36%, then goes down to about 27% in
1997. In 1998 it is up to about 40%, then down to about 20% by 2001.
it ends 2002 at about 36%. Bottompanel: share of total bank claims that are domestic. It starts 1992
at about 78% and slopes down through the graph to about 70% in 2002.]
SOURCE. For top panel, seetext note 17; for bottompanel, seetext note 18.
The syndicated loan data suffer from a potential
drawback. If the syndicated loan market was already
fully integrated in 1992, then one might not expect
it to change much over the decade. Indeed, we see
that by 1992 foreign banks (home- and third-nation
banks) already covered roughly two-thirds of the
loans provided to foreign affiliates (chart 1, top
panel), which might be close to full integration.
Another measure of integration that provides a
more general assessment of changes through time is
the share of total private bank debt claims (domestic
and foreign) that are claims on domestic customers.
This measure is calculated for banks residing in
twelve countries in western Europe (Austria, Bel-
gium, Denmark, France, Germany, Ireland, Italy,
the Netherlands, Spain, Sweden, Switzerland, and
the United Kingdom), plus Canada, J apan, and the
United States.
[note: 18]. ''Claims'' refer to loans, notes, and equity claims that banks
hold against customers. Foreign claims refer to claims on customers
outside of a bank's resident country. Foreign claims are obtained from
the Bank for International Settlements' locational statistiscs through
www.bis.org. To avoid the double counting of claims against subsidi-
aries, we subtract local office claims fromtotal foreign bank claims.
Private domestic bank claims are fromthe International Monetary
Fund's International Financial Statistics. [end of note.]
We interpret a decline in the share of domestic
bank claims to total bank claims as an increase in the
level of integration. The proportion has fallen some-
what over the past decade (chart 1, bottom panel). It
hovered around 78 percent from 1992 through 1995
and then began to decline slowly. By 2002, the pro-
portion had fallen to 70 percent. This decrease indi-
cates that banks have increased their foreign claims
over the past decade slightly faster than the rate at
which they expanded their domestic claims.
We provide one more piece of time-series evidence
on the progress of integration, and that is the pace of
price convergence across countries. J ohn Rogers uses
a comprehensive and detailed set of prices for 139
nonfinancial consumer goods in twenty-five Euro-
pean cities from 1990 to 2001 to measure the speed at
which prices converged as barriers to cross-border
trade were diminished within Europe.
[note: 19]. J ohn H. Rogers, ''Monetary Union, Price Level Convergence,
and Inflation: How Close is Europe to the United States?'' Interna-
tional Finance Discussion Papers 740 (Board of Governors of the
Federal Reserve System, 2002). [end of note.]
Rogers com-
pares the dispersion of prices in European cities,
including a subset of cities within the eleven original
countries of the EMU, to the dispersion of prices for
a similar set of goods across cities within the United
States.
[note: 20]. Price dispersion is defined as the cross-city standard deviation
of a product's price (calculated after normalizing the price by the
average price of the product). [end of note.]
By 1996, the dispersion in prices across
the European countries had narrowed significantly
(chart 2). In fact, prices within the EMU countries
had converged to a degree comparable to that
observed in the United States. Most of the conver-
gence occurred in the earlier part of the period, with
little or no further convergence occurring after 1996.
In sum, the various sets of time-series data exam-
ined here suggest that little further integration has
occurred in Europe since our sample was collected
in 1996, although the BIS banks claims statistics
suggest that banks have expanded somewhat across
borders since 1999.
Chart 2. Price dispersion for traded goods in Europe and the
United States, 1990-2001
[graph plotting three lines: selected european countries,
EMU-11, and United States.
Selected European Countries starts 1990 at about 22%,
then goes down until 1993 where it its about 14% where
it stays until 1994, then it goes up to about 16% in 1995,
then down to about 12% in 1998 and stays around there
until 2001. EMU-11 starts 1990 at about 17%, then goes down to about
9% in 1993, then up to about 11% in 1995, then down to
about 7.5% in 2002. United States starts 1990 at about 7%, then slowly tends
upwards reaching about 9% in 2001.]
NOTE. The EMU-11 consists of Austria, Belgium, Finland, France,
Germany, Ireland, Italy, Luxembourg, the Netherlands, Portugal, and Spain.
The selected European countries are the EMU-11, the United Kingdom,
Sweden, and Switzerland. For definition of price dispersion, seetext note 20.
SOURCE. J ohn H. Rogers, "Monetary Union, Price Level Convergence, and
Inflation: How Close Is Europe to the United States?" International Finance
Discussion Papers 740 (Board of Governors of the Federal Reserve System,
2002).
SUMMARY.
The barriers to global integration in the banking
industry have been significantly reduced over the past
two decades. Among the contributing factors have
been the lifting of regulatory restrictions on cross-
border banking, technological advances that allow for
better management of financial institutions across
borders, and increases in nonfinancial activities that
create demands for international banking services.
Despite these reduced barriers, the integration of the
banking industry in most developed countries has
fallen far short of the expectations of many observers.
Some potentially powerful market forces based on
the competitive advantages of domestic and foreign
banks may help explain the lack of an advance in
global banking. We argue that foreign banking orga-
nizations may be at significant competitive dis-
advantages in providing the price, quality, and mix of
services that best suit bank customers, and that such
disadvantages may limit the integration of the bank-
ing industry.
Our main findings, which are based on a 1996
cross-section of European affiliates of multinational
corporations, suggest that almost two-thirds of these
affiliates receive short-term banking services from a
bank headquartered in the affiliate's host nation. This
result is consistent with a strong host-based-expertise
effect, in which host-nation banks have significant
competitive advantages in understanding the culture,
business practices, and regulatory conditions of the
host nation. However, in the former Eastern-bloc
nations, the data suggest that only about one-fourth
of these same types of affiliates are served by host-
nation banks. This finding is consistent with the
possibility that host-nation banks in these nations
are not equipped to provide the package of banking
services that would give them an advantage over
foreign institutions.
We also examine three sets of time-series data on
the progress of integration in Europe from 1992 to
2002. The main purpose is to explore the possibility
that our '' snapshot'' of banking as of 1996 might
have predated significant advances in the integration
of the European banking industry. We show data on
the changes in (1) the proportions of the syndicated
loan market that are underwritten by domestic banks,
(2) the changes in the proportions of total bank
claims that are held by domestic banks, and (3) the
convergence of prices of consumer goods across
Europe. These data suggest that, if anything, most
of the effects of the reduced barriers had already
occurred by 1996.
Overall, the findings suggest that domestic banks
possess some competitive advantages that may sig-
nificantly limit the global integration of the banking
industry. In industrialized nations, domestically based
institutions appear likely to retain significant market
shares for some financial services that could poten-
tially be provided by foreign institutions, even when
the barriers to bank integration have declined dra-
matically. In contrast, foreign banks may obtain much
higher shares in some less-industrialized nations
because of competitive advantages over domestic
institutions that are less well developed.
doc_396404768.pdf
Many observers believe that significant global inte-gration is under way in the banking industry and that, in the coming years, individual banks will expand their reach into many countries.
Global Integration in the Banking Industry.
Allen N. Berger, of the Board's Division of Research
and Statistics, and David C. Smith, of the Board's
Division of International Finance, prepared this
article. Jennifer Judge provided research assistance.
NOT E . Much of the analysis in this article is based on Allen N.
Berger, Qinglei Dai, Steven Ongena, and David C. Smith, "To What
Extent Will the Banking Industry Be Globalized? A Study of Bank
Nationality and Reach in 20 European Nations,'' Journal of Banking
and Finance, vol. 27 (March 2003), pp. 383-415. The authors of
the present article thank David Birks for making available the
"GlobalCash-Europe96" data and Gregory P. Nini for writing the
programthat examines syndicated loans.
Many observers believe that significant global inte-
gration is under way in the banking industry and that,
in the coming years, individual banks will expand
their reach into many countries. Likewise, these
observers expect that many national banking markets
will develop large foreign components; as that hap-
pens, the nationality of a bank in such a market will
matter little to prospective customers.
[note: 1]. For example, Paul R. Krugman and Maurice Obstfeld, in their
International Economics: Theory and Policy, 5th ed. (Reading, Mass.:
Addison-Wesley, 2000), state that "one of the most pervasive features
of the commercial banking industry of the 1990s is that banking
activities have become globalized'' (p. 649). [end of note.]
These forecasts are based on the observation that,
over the past two or three decades, many nations
have removed important regulatory barriers to inter-
national banking. Advances in technology also now
allow financial institutions to manage larger informa-
tion flows across more locations and to evaluate
and manage risks at lower costs than ever before.
Together, these developments have reduced the costs
of supplying banking services across borders. At the
same time, growth in the international activities and
trade of multinational corporations has increased the
demand for services from financial institutions that
operate across borders.
Despite these developments, the banking industry
appears today to be far from globally integrated,
particularly in industrialized countries. For example,
the foreign share of bank assets in most industrialized
countries remains at or below 10 percent. And
although bank consolidation has been intense within
industrialized countries, mergers and acquisitions
across the borders of these countries have been much
less common.
[note: 2]. For the 10 percent figure, see Stijn Claessens, Asli Demirguj-
Kunt, and Harry Huizinga, "How Does Foreign Entry Affect the
Domestic Banking Market?'' Journal of Banking and Finance, vol. 25
(May 2001), table 1, p. 896. For mergers and acquisitions across
borders, see Group of Ten, Report on Consolidation in the Financial
Sector (Basel, Switzerland: Bank for International Settlements, 2001). [end of note.]
To evaluate more closely the extent to which bank-
ing is becoming globally integrated, we study the
nationality and international reach of banks that pro-
vide financial services across Europe to affiliates of
multinational corporations. We examine these affili-
ates because they are among the customers most
likely to demand the services of international banks,
and we focus on Europe because barriers to financial
integration have been extensively reduced on that
continent. A finding that banking integration has
advanced little even under such favorable conditions
would cast doubt on the prospects for the globaliza-
tion of banking more generally.
We rely mostly on an extensive, carefully con-
ducted 1996 survey of the short-term banking prac-
tices of more than 2,000 European affiliates of multi-
national corporations. Perhaps surprisingly, we find
that close to two-thirds of these affiliates choose a
bank headquartered in the nation in which they are
operating (a host-nation bank) rather than a bank
from their home country or a third nation. Moreover,
having chosen a host-nation bank, an affiliate is more
likely to select a bank limited to local or regional
operations rather than a large bank with global reach.
We also examine time-series data that might reveal
the degree to which global integration has increased
over the past decade. These data cover European
syndicated loans, the ratio of domestic private bank
claims to total (domestic plus foreign) bank claims,
and the dispersion of nonfinancial goods prices across
Europe. In brief, the time-series data show a picture
for the current period that is not substantially differ-
ent from that at the time of the 1996 survey.
These results are consistent with the idea that affili-
ates value host-nation banks over others because
host-nation banks better understand their own market
and may possess superior information about local
nonfinancial suppliers and customers. Our results also
imply that affiliates that have chosen host-nation
banks value the more customized and relationship-
based services offered by banks with local or regional
reach, as opposed to the broad-based services offered
by a host-nation bank that has global reach.
Our findings suggest that even as economic forces
push toward globalization, the high demand for host-
based expertise by bank customers, coupled with the
competitive advantages that host-nation banks have
in providing this expertise, implies that many bank-
ing services could very well remain local. In other
words, banking markets need not become much more
integrated as the globalization of other economic
sectors continues.
FOCUS ON EUROPE.
Europe is an ideal setting for studying international
integration because its countries have taken a number
of steps to reduce regulatory barriers to cross-border
banking. These steps are known collectively as the
''single market'' program.
[note: 3]. J ean Dermine, "Banking in Europe: Past, Present, and Future,''
in Vitor Gaspar, Philipp Hartmann, and Olaf Sleijpen, eds., The
Transformation of the European Financial System, Second ECB Cen-
tral Banking Conference (Frankfurt: European Central Bank, 2003)
pp. 31-116. [end of note.]
Under this program, the
European Commission and the European Union (EU)
Council of Ministers established directives intended
to guarantee equal regulatory treatment of foreign
banks by national authorities, unfettered provision of
financial services across borders, home-country con-
trol of bank supervision, and home-country imple-
mentation of bank solvency requirements.
[note: 4]. Currently, the fifteen members of the European Union (Austria,
Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy,
Luxembourg, the Netherlands, Portugal, Spain, Sweden, and the
United Kingdom) and the three additional nations of the European
Economic Area (Iceland, Liechtenstein, and Norway) have agreed to
abide by the bank-related directives. [end of note.]
The EU
Council also passed regulations to liberalize cross-
border capital flows and harmonize regulations across
member countries that cover capital adequacy, credit
exposure, and banks' participation in nonfinancial
activities. Most of these directives had been imple-
mented by the mid-1990s. In 1999, eleven members
of the EU also entered into the European Monetary
Union (EMU) and began to trade in a single currency,
the euro.
[note: 5]. The original EMU members are Austria, Belgium, Finland,
France, Germany, Ireland, Italy, Luxembourg, the Netherlands, Portu-
gal, and Spain. On J anuary 1, 2001, Greece became the twelfth
country to adopt the euro. [end of note.]
The EU Council has as one of its goals the creation
of a single, integrated banking market. An assump-
tion behind such a goal is that cross-border competi-
tion fosters efficient, low-cost banking by allowing
more efficient banks to move across borders and
compete with less-efficient banks formerly protected
by their nation's borders. Competition forces the
inefficient banks to either improve or to leave the
market. As the lowest-cost producers of banking ser-
vices expand across many borders, they drive prices
closer to marginal costs.
Europe has other characteristics that support finan-
cial integration. The proximity of most of its coun-
tries to each other should keep cross-border transac-
tion costs low. In addition, the countries of western
Europe are technologically advanced. As of the early
1990s, they were producing more science and engi-
neering Ph.D.s than either the United States or Asia
and were spending as much as the United States on
nondefense-related research and development.
[note: 6]. National Science Foundation, Human Resources for Science &
Technology: The European Region, NSF 96-316 (Arlington, Va.:
NSF, 1996). Organisation for Economic Co-operation and Develop-
ment, OECD Science and Technology Indicators (Paris: OECD, 1995). [end of note.]
Even within Europe, however, the evidence sug-
gests that the integration of banking is advancing
little, if at all. With the exception of the recent
consolidation across the Nordic countries, bank
merger and acquisition activity has been minimal
across European borders.
[note: 7]. The Nordic countries are Denmark, Finland, Iceland, Norway,
and Sweden. See Claudia M. Buch and Gayle L. Delong, ''Cross-
Border Bank Mergers: What Lures the Rare Animal?'' Journal of
Banking and Finance (forthcoming); Patrick Beitel and Dirk
Schiereck, ''Value Creation at the Ongoing Consolidation of the
European Banking Market,'' Institute for Mergers and Acquisitions,
working paper; and Steven Ongena, J ason Karceski, and David C.
Smith, ''The Impact of Bank Consolidation on Commercial Borrower
Welfare,'' International Finance Discussion Papers 679 (Board of
Governors of the Federal Reserve System, 2000). [end of note.]
Remaining informal barriers in Europe could help
explain this slow pace. One potential barrier is brand
loyalty to local services. Observers often cite reluc-
tance by bankers in Europe to compete in foreign
countries in which they believe that loyalty to local
products is strong. So, for example, Swiss banks do
little business in Germany, and German banks do
little business in Switzerland. Yet German and Swiss
banks both have a strong presence in the United
States, where loyalty to local brands is viewed as
less of an issue. National government policies could
also inhibit cross-border competition. For instance,
despite an explicit commitment to a level playing
field, European governments often promote the
expansion of their own nations' banks through tax
breaks, subsidies, guarantees, and direct ownership.
[note: 8]. Rafael La Porta, Florencio Lopez-de-Silanes, and Andrei
Shleifer, "Government Ownership of Banks,'' Journal of Finance,
vol. 57 (February 2002), pp. 265-301. [end of note.]
We argue that such barriers are not the only expla-
nation for the observed lack of integration in Europe.
The slow pace of integration could result in large part
from competitive advantages enjoyed by host-nation
banks.
NATIONALITY AND REACH OF BANKS.
In a frictionless banking market with no barriers to
integration, commercial customers will select the
bank that provides the price, quality, and mix of
services that will best facilitate their business opera-
tions. Two potentially important criteria for a foreign
affiliate's choice are the bank's nationality and reach.
Bank nationality refers to the country in which the
bank is headquartered. Some affiliates might value
banking services that require a detailed knowledge
of the country in which the affiliate operates. Banks
headquartered in the nation that hosts the affiliate will
likely have an advantage in offering these services,
which we term ''host-based'' expertise. So, for exam-
ple, an affiliate of a U.S. corporation operating in
Germany might choose a German bank because such
a bank will best understand the culture, business
practices, and regulatory conditions in Germany. The
bank may even have unique access to information
about German nonfinancial suppliers and customers.
Other affiliates might value a bank that offers
''home-based'' expertise—that is, an understanding
of the home market of the affiliate's parent—because
it is important to the affiliate to rely on a bank
familiar with its home territory.
[note: 9]. Berger, Dai, Ongena, and Smith, ''To What Extent Will the
Banking Industry Be Globalized?'' refer to host-based expertise as
''concierge'' services and home-based expertise as "home cookin'''
services. [end of note.]
Perhaps the bank
already serves the parent corporation in the home
country. Banks headquartered in the affiliate' s home
country should have an advantage in offering home-
based expertise. A U.S. affiliate operating in Ger-
many that values home-based expertise might then
prefer a U.S. bank because of its advantage in offer-
ing such services.
Banks from third countries (that is, from neither
the host nor the home country) may not have host-
based or home-based expertise, but they might com-
petitively offer services in other dimensions valued
by an affiliate. For instance, a U.S. corporate affiliate
in Germany may value, say, a Dutch bank for a
specialized service not offered by host- or home-
nation banks.
Bank reach refers to the size and geographic scope
of the bank. Some affiliates may value a large, global
bank that can offer a broad range of financial ser-
vices, expertise within many foreign markets, supe-
rior risk diversification, and the ability to facilitate
large deals. For the affiliate operating in Germany,
this choice need not depend on bank nationality
because the affiliate could choose a global German
bank (for example, Deutsche Bank), a global U.S.
bank (for example, Citibank), or a global third-nation
bank (for example, the Dutch bank ABN AMRO).
A different set of affiliates may prefer the advantages
of a smaller bank that offers services in only a local
area because such a bank is more likely to establish a
close relationship with the affiliate and provide cus-
tomized services. Such an affiliate that operates in
Germany might select a German bank that has a local
character and operates only in Germany or maybe
even in only one part of the country. Still other
affiliates may prefer a bank that blends international
reach with local, personalized services. Such a bank's
reach may be limited to a specific region or set of
countries. So, a U.S. affiliate operating in Germany
that prefers a blend of the far-reaching services of a
global bank and the more personalized character of a
local bank might choose an institution that confines
itself to operating mainly on the European continent
(for example, the Nordic-based banking concern
Nordea).
In the absence of barriers, the extent of integration
in the banking industry will depend on how custom-
ers value different banking services and the extent
to which banks of a given nationality and reach can
provide those services. Importantly, if customers
place a high value on global services and have little
value for host-based or home-based expertise, then
we might expect to see an integrated banking indus-
try, perhaps with a few global banks dominating
markets around the world. Conversely, if customers
value host-based expertise and place less value on
global services, then we should observe limited bank-
ing industry integration. Thus, depending on the ser-
vices valued by bank customers, we could have a
world with extensive integration or one with little
integration.
In the next section, we use the concepts of bank
nationality and reach to examine our primary data
set.
THE 1996 SURVEY.
Our main source for connecting foreign affiliates of
multinational corporations with their banks is
''GlobalCash-Europe96,'' a survey of the short-term
banking services provided to large, nonbank corpo-
rations.
[note: 10]. The objective of the survey is to gather information on the cash
management practices of corporations. However, the European
usage of 'cash management'' covers virtually all short-term banking
services. [end of note.]
The survey was conducted in 1996 across
twenty European nations by The Bank Relationship
Consultancy and the School of Management at the
University of Bath, in the United Kingdom.
[note: 11]. For a detailed description of the survey, see Steven Ongena and
David C. Smith, "What Determines the Number of Bank Relation-
ships: Cross-country Evidence,'' Journal ofFinancial Intermediation,
vol. 9 (J anuary 2000), pp. 26-56. [end of note.]
Short-
term banking services include lending, deposit-
taking, liquidity management, foreign exchange man-
agement, and other financial services that have a time
horizon of less than one year. A foreign affiliate of a
corporation can take the form of a subsidiary, branch
office, sales office, manufacturing plant, or some
other related entity that requires banking services
within a given country.
Responses to the survey were obtained from 1,129
corporations. These corporations had a total of 2,118
foreign affiliates operating in twenty countries in
Europe, or about two affiliates per corporation. The
parent corporations of most of these affiliates were
headquartered in Europe, although 24 percent were
headquartered outside Europe, mostly in the United
States.
The survey asked corporations to identify the banks
their foreign affiliates used for short-term banking
services within each of the twenty countries.
[note: 12]. A respondent could identify up to two banks for each
country—a ''primary'' and ''secondary'' bank. To avoid biases associ-
ated with double counting, we report all sample statistics using only
the affiliate's primary bank choice. Berger, Dai, Ongena, and Smith,
''To What Extent Will the Banking Industry Be Globalized?'' find that
the results reported here are not altered by use of an alternative
definition that includes a secondary bank. [end of note.]
The
nationalities of the sample banks named by the
respondents were obtained from Fitch IBCA, a data-
base containing information on the ownership struc-
ture of banks. Each bank subsidiary was assumed to
take on the nationality and reach of its parent. Under
this assumption, 255 banks provided short-term bank-
ing services for the 2,118 affiliates.
For each affiliate-bank observation, we identified
the bank's nationality and reach. For nationality,
banks are classified as either host-nation, home-
nation, or third-nation banks. A host-nation bank is
headquartered in the country in which the affiliate
operates, ahome-nation bank is headquartered in the
same country in which the affiliate's parent is head-
quartered, and athird-nation bank is headquartered in
neither the home nor host country.
For reach, banks are classified as global, regional,
or local. Global banks are defined to have the widest
reach. They provide services to the affiliates in at
least nine of the twenty European nations from which
respondents were drawn and have at least $100 bil-
lion in consolidated assets as of year-end 1995. Local
banks are defined to have the narrowest reach, pro-
viding services to the affiliates in the European nation
of their headquarters only and having consolidated
assets of less than $100 billion. By definition, all
local banks serve only as host-nation banks. Finally,
regional banks are defined to have intermediate
reach. They operate in more than one country or have
more than $100 billion in assets; but they operate in
too few countries, or are too small, to be a global
bank. Of the 255 banks in our sample, 8 are global,
73 are regional, and the remaining 174 are local.
By their nature, the bank reach classifications are
somewhat arbitrary and Eurocentric. For instance,
banks that have a strong European presence but do
not operate outside of Europe could be classified as
''global'' under our system. Nevertheless, all eight
banks are generally recognized as large, global banks
(table 1). The findings are materially unchanged
when the dividing lines between global and regional
banks and between regional and local banks are
altered. Overall, we are confident that the results are
not an artifact of our definition of bank reach.
Table 1. Banks in the 1996 sample that are defined as having global reach
Bank name
Assets worldwide
(billions of dollars,
year-end 1995)
Rank in American Banker,
by year-end 1995
worldwide assets
Number of surveyed
countries in which the
bank operates
Headquarters
Deutsche Bank 502.3 1 10 Germany
ABN AMRO 339.4 12 19 Netherlands
Credit Lyonnais 337.6 13 9 France
Societe Generale 324.8 17 19 France
Banque Nationale de Paris 323.5 18 12 France
Citibank 255.3 28 20 United States
Bank of America 230.2 34 18 United States
Chase Manhattan Bank 120.5 62 19 United States
NOTE. Banks with global reach are defined as those that operate in at least
nine of twenty European nations and had at least $100 billion in worldwide
assets as of year-end 1995.
SOURCE. Allen N. Berger, Qinglei Dai, Steven Ongena, and David C. Smith,
''To What Extent Will the Banking I ndustry Be Globalized? A Study of Bank
Nationality and Reach in 20 European Nations,'' Journal of Banking and
Finance, vol. 27 (March 2003), table 1, p. 391.
With respect to bank nationality, we find that
nearly two-thirds of all affiliates (66 percent) use a
bank headquartered in the host nation for their short-
term banking services (table 2). The remaining affili-
ates split evenly between using a home-nation bank
(18 percent) and a third-nation bank (17 percent).
2. Distribution of bank nationality and bank reach, by host nation, 1996
Percent except as noted
Host nation
Total bank
assets of nation
(billions of
dollars,
year-end 1995)
Number of
affiliates
Bank nationality:
Host
1
Bank nationality:
Home
2
Bank nationality:
Thi rd
3
Bank reach:
Global
4
Bank reach:
Regional
5
Bank reach: Local
6
All 9,563 2,118 65.5 17.7 16.9 35.1 52.8 12.0
Large banking sector:
Germany 3,041 240 73.3 14.2 12.5 40.0 49.2 10.8
Large banking sector: France 1,527 223 76.7 12.1 11.2 66.8 17.0 16.1
Large banking sector: United Ki ngdom 1,278 224 52.2 29.0 18.8 25.9 71.9 2.2
Large banking sector: Italy 831 119 70.6 17.6 11.8 27.7 43.7 28.6
Large banking sector: Switzerland 557 103 76.7 15.5 7.8 13.6 78.6 7.8
Large banking sector: Spain 552 126 57.9 26.2 15.9 26.2 54.8 19.0
Large banking sector: Netherlands 457 166 78.3 11.4 10.2 76.5 21.1 2.4
Large banking sector: Total 8,241 1,201 69.1 17.9 13.0 42.5 46.1 11.4
Small banking sector:
Belgium 389 150 59.3 21.3 19.3 35.3 64.0 .7
Small banking sector: Austria 297 79 79.7 8.9 11.4 20.3 72.2 7.6
Small banking sector: Sweden 106 109 85.3 9.2 5.5 11.0 79.8 9.2
Small banking sector: Norway 95 83 74.7 15.7 9.6 10.8 80.7 8.4
Small banking sector: Portugal 89 54 51.9 20.4 27.8 27.8 29.6 42.6
Small banking sector: Finland 88 48 77.1 12.5 10.4 16.7 68.8 14.6
Small banking sector: Denmark 75 100 85.0 7.0 8.0 12.0 79.0 9.0
Small banking sector: Greece 47 40 40.0 20.0 40.0 45.0 32.5 22.5
Small banking sector: I reland 26 73 56.2 19.2 24.7 21.9 74.0 4.1
Small banking sector: Luxembourg 13 40 15.0 17.5 67.5 27.5 57.5 15.0
Small banking sector: Total 1,224 776 67.0 14.8 18.2 21.9 67.7 10.4
Former Eastern bloc:
Czech Republic 43 49 28.6 28.6 42.9 42.9 28.6 28.6
Former Eastern bloc: Poland 36 60 28.3 26.7 45.0 50.0 21.7 28.3
Former Eastern bloc: Hungary 16 32 18.8 43.8 37.5 40.6 40.6 18.8
Former Eastern bloc: Total 96 141 26.2 31.2 42.6 45.4 28.4 26.2
NOTE. Banks are those chosen by affiliates of multinational corporations
operating in twenty European countries and surveyed in 1996. The banks
provide short-term banking services to the affiliates that selected them.
Components may not sum to totals because of rounding.
1. A host-nation bank is headquartered in the nation in which the affiliate
operates.
2. A home-nation bank is headquartered in the same nation in which the
affiliate's parent is headquartered.
3. A third-nation bank is headquartered in neither the host nation nor the
home nation.
4. A global bank provides services to the affiliates in at least nine of the
twenty European nations and had at least $100 billion in worldwide assets as of
year-end 1995.
5. A regional bank is neither global (is in too few nations or is too small) nor
local (is in too many nations or is too large).
6. A local bank provides services to the affiliates only in the European nation
of the bank's headquarters and had worldwide assets of less than $100 billion as
of year-end 1995.
SOURCE. Berger, Dai, Ongena, and Smith, ''To What Extent Will the Bank-
ing I ndustry Be Globalized?'' table 2, p. 392.
This pattern suggests that preferences for host-based
expertise are strong and tend to dominate bank selec-
tions. This finding also contrasts with the perception
in much of the academic literature that foreign affili-
ates favor their home-nation banks.
[note: 13]. For example, see Larry G. Goldberg and Anthony Saunders,
''The Determinants of Foreign Bank Activity in the U.S.,'' Journal
of Banking and Finance, vol. 15 (March 1981), pp. 17-32; and
E.C. Kaplanis and Richard A. Brealey, ''The Determination of For-
eign Bank Location,'' Journal of International Money and Finance,
vol. 15 (August 1996), pp. 577-97. [end of note.]
With respect to bank reach, about 35 percent of the
affiliates choose global banks, 53 percent choose
regional banks, and 12 percent choose local banks.
These data suggest that while a vast majority of the
foreign affiliates of multinational corporations prefer
banks that span multiple nations (that is, global or
regional banks), only about one-third choose global
banks.
We also examine the distribution of bank national-
ity and reach within each of the twenty host coun-
tries, sorted by the total size of the nation's banking
sector and grouped into one of three categories: large-
banking-sector nation, small-banking-sector nation,
or former Eastern-bloc nation (table 2). The data
show that bank nationality choice can differ greatly
across industrialized host nations, particularly among
small-banking-sector countries. For instance, only
15 percent of the affiliates operating in Luxembourg
use a host-nation bank, whereas about 85 percent of
those in Sweden do so. We separately consider the
banking systems of the former Eastern-bloc nations
because they tend to have legal and financial systems
that are relatively new compared with those of west-
ern Europe.
[note: 14]. The former Eastern-bloc countries in the sample are the Czech
Republic, Hungary, and Poland. [end of note.]
Only 26 percent of the affiliates operat-
ing in the former Eastern-bloc nations use a host
bank; about 43 percent select a bank from a third
nation. Thus, use of host-nation banks in the former
Eastern-bloc nations is much less frequent than in the
industrialized nations of western Europe.
The data on bank reach also show considerable
variation across host nations. Global banks are cho-
sen relatively more frequently in large-banking-sector
nations (43 percent) and in former Eastern-bloc
nations (45 percent) than in small-banking-sector
nations (22 percent). This observed pattern seems to
indicate that global banks prosper best in markets
open to bank competition (large-banking-sector
nations) and in markets with less-established
banking systems (former Eastern-bloc nations). Also
notable is the variation in reach among the large-
banking-sector nations. For example, about two-
thirds of the affiliates operating in France use a global
bank; more than two-thirds of the affiliates operating
in Switzerland and the United Kingdom use regional
banks; and more than one-fourth of the affiliates
operating in Italy use local banks.
We also examine the distribution of bank
nationality and reach according to the home nation
of the affiliate, including countries outside the twenty
host European nations (table 3). Of the foreign affili-
ates with corporate headquarters in European coun-
tries with both large and small banking sectors,
70 percent select a host-nation bank and only about
11 percent opt for a home-nation bank. This result is
surprising, given that many of the European corpo-
rations have large home-nation banks close by from
which to choose. In fact, the only outlier home nation
is the United States. Of the affiliates whose parents
are headquartered in the United States, 42 percent
choose home-nation banks, a rate much higher than
that for affiliates from other countries. This finding
could reflect the ability of U.S.-owned banks to oper-
ate relatively efficiently in foreign countries, consis-
tent with the academic literature.
[note: 15]. See Allen N. Berger, Robert DeYoung, Hesna Genay, and
Gregory F. Udell, ''Globalization of Financial Institutions: Evidence
from Cross-Border Banking Performance,'' in Robert E. Litan and
Anthony Santomero, eds., Brookings—Wharton Papers on Financial
Services (Washington: Brookings Institution Press, 2000), pp. 23-158.
[end of note.]
Table 3. Distribution of bank nationality and bank reach, by home nation, 1996
Percent except as noted
Home nation
Total bank
assets of nation
(billions of
dollars,
year-end 1995)
Number of
affiliates
Bank Nationality:
Host
Bank Nationality:
Home
Bank Nationality:
Third
Bank Reach:
Global
Bank Reach:
Regional
Bank Reach:
Local
All 22,151 2,118 65.5 17.7 16.9 35.1 52.8 12.0
Large banking sector:
Germany 3,041 177 76.8 7.9 15.3 31.6 55.4 13.0
Large banking sector: France 1,527 50 60.0 26.0 14.0 32.0 54.0 14.0
Large banking sector: United Ki ngdom 1,278 364 79.1 6.3 14.6 30.5 57.1 12.4
Large banking sector: Italy 831 84 54.8 9.5 35.7 36.9 51.2 11.9
Large banking sector: Switzerland 557 84 63.1 3.6 33.3 48.8 40.5 10.7
Large banking sector: Spain 552 12 66.7 25.0 8.3 41.7 25.0 33.3
Large banking sector: Netherlands 457 121 47.1 26.4 26.4 48.8 45.5 5.8
Large banking sector: Total 8,241 892 69.3 10.8 20.0 35.8 52.5 11.8
Small banking sector:
Belgium 389 4 100.0 .0 .0 .0 100.0 .0
Small banking sector: Austria 297 39 64.1 28.2 7.7 17.9 51.3 30.8
Small banking sector: Sweden 106 164 73.8 12.8 13.4 21.3 67.7 11.0
Small banking sector: Norway 95 65 63.1 7.7 29.2 23.1 63.1 13.8
Small banking sector: Portugal 89 12 25.0 25.0 50.0 58.3 33.3 8.3
Small banking sector: Finland 88 177 83.1 4.5 12.4 21.5 63.8 14.7
Small banking sector: Denmark 75 134 70.1 17.9 11.9 17.2 62.7 20.1
Small banking sector: Greece 47 5 40.0 20.0 40.0 80.0 20.0 .0
Small banking sector: I reland 26 100 58.0 9.0 33.0 43.0 47.0 10.0
Small banking sector: Luxembourg 13 16 81.3 .0 18.8 18.8 62.5 18.8
Small banking sector: Total 1,224 716 70.9 11.5 17.6 24.4 60.8 14.8
Former Eastern bloc:
Czech Republic 43 2 100.0 .0 .0 .0 50.0 50.0
Former Eastern bloc: Poland 36 2 100.0 .0 .0 50.0 .0 50.0
Former Eastern bloc: Hungary 16 0 n.a. n.a. n.a. n.a. n.a. n.a.
Former Eastern bloc: Total 96 4 100.0 .0 .0 25.0 25.0 50.0
Other:
J apan 6,746 9 77.8 .0 22.2 33.3 44.4 22.2
Other: United States 5,012 470 49.1 41.7 9.1 51.1 41.7 7.2
Other: Canada 408 22 72.7 .0 27.3 18.2 59.1 22.7
Other: Other 422 5 60.0 .0 40.0 40.0 40.0 20.0
Other: Total 12,588 506 50.8 38.7 10.5 49.2 42.5 8.3
NOTE. See notes to table 2. n.a. Not applicable.
Although bank nationality and reach are two dis-
tinct concepts, they can be related. For instance, we
have already seen that banks with local reach have,
by definition, host-nation nationality. Other depen-
dencies may result from how banks with a given
reach are distributed across countries. For example,
some countries do not have a global bank headquar-
tered within their borders. Banks in these countries
cannot offer both host-based expertise and global
services to affiliates that value such a combination.
Likewise, banks from these countries cannot jointly
offer home-based and global services to affiliates of
native corporations operating abroad. Finally, some
banking systems may be too new or undeveloped to
offer competitive banking services at even a local
level.
We study potential dependencies between bank
nationality and reach by assuming that bank reach
depends first on the selection of bank nationality. We
reason that, in the absence of barriers to integration, a
bank's reach will be limited by the extent to which
customers value cross-border banking relations. For
example, in the extreme case that all bank customers
selected host-nation banks for all of their services,
there would be no need for banks with global reach.
A two-stage decision tree illustrates our framework
(diagram 1). In the first stage, an affiliate decides on
bank nationality; in the second stage, it chooses bank
reach. Note that by definition, a local bank does not
arise as a second-stage choice when an affiliate
chooses a home-nation or third-nation bank in the
first stage. At the nodes of the top branches of the
tree, we report the sample frequencies for selecting
a host-nation, home-nation, and third-nation bank,
while at the bottom branch nodes, we report the
sample frequencies for selecting a global, regional,
and local bank given the prior choice of bank
nationality.
Diagram 1. Distribution of bank nationality and bank reach in a two-stage decision tree
[at the top is the Total Sample: 2118 affiliates in twenty European nations.
The three branches below are in the Bank Nationality section and they are: Host 65.5% (1387 affiliates),
Home 17.7% (374 affiliates), and Third 16.8% (357 affiliates).
The branches below them are in the Bank Reach section. Host has three branches: Global 20.5% (285 affiliates),
Regional 61.1% (847 affiliates), and Local 18.4% (255 affiliates). Home has two branches: Global 62.3%
(233 affiliates) and Regional 37.7% (141 affiliates). Third has two branches: Global 63.3% (266 affiliates) and
Regional 36.7% (131 affiliates).]
NOTE. See notes to table 2. By definition, a local bank does not arise as a
second-stage choice when an affiliate chooses a home-nation or third-nation
bank.
As shown earlier, almost two-thirds of the affiliates
use host-nation banks over home- and third-nation
banks (table 2), a pattern consistent with strong host-
based expertise. Affiliates' choices for bank reach
differ greatly, depending on bank nationality (dia-
gram 1). After selecting a host-nation bank, about
21 percent of the affiliates use a global bank. By
comparison, of affiliates that select either a home-
nation or third-nation bank, about 63 percent use
a global bank. In other words, affiliates tend to use
banks with global reach once they choose a home-
nation or third-nation bank, but they tend to use a
regional or local bank once they choose a host-nation
bank.
One aspect of the data that could be driving these
patterns is that, as of 1996, only three host nations—
France, Germany, and the Netherlands—had a global
bank headquartered within their borders. That is,
affiliates choosing a host-nation bank in any of the
other seventeen nations in our sample could not also
select a global bank. This limitation could simply
reflect an equilibrium outcome—that is, the demand
for global services within these countries is not great
enough to induce a host-nation bank to expand its
reach globally or to induce an existing global bank
to move its headquarters to one of these countries.
Alternatively, this outcome could reflect supply con-
ditions in the host nation.
We look more closely at Germany to gain some
insight into how the distribution of bank choices
might differ in a market in which all types of banks
are available (diagram 2). Germany not only has a
host-nation bank that is global (Deutsche Bank), but
it also has three strong nationwide systems of local
and regional commercial banks from which affili-
ates may choose: the Landesbanken (state banks),
Sparkassen (savings banks), and Hypothekbanken
(building societies).
Diagram2. Distribution of bank nationality and bank reach in Germany in a two-stage decision tree
[at the top is the Total Sample: 240 affiliates in Germany.
The three branches below are in the Bank Nationality section and they are: Host 73.3% (176 affiliates),
Home 14.2% (34 affiliates), and Third 12.5% (30 affiliates).
The branches below them are in the Bank Reach section. Host has three branches: Global 34.1% (60 affiliates),
Regional 14.8% (26 affiliates), and Local 51.1% (90 affiliates). Home has two branches: Global 55.9%
(19 affiliates) and Regional 44.1% (15 affiliates). Third has two branches: Global 56.7% (17 affiliates) and
Regional 43.3% (13 affiliates).]
The German data in diagram 2 suggest that the
supply conditions alone do not create the patterns
shown in diagram 1. A substantial proportion of the
foreign affiliates operating in Germany still select a
host-nation (that is, German) bank for their banking
services. More important, if they choose a German
bank, affiliates choose a regional or local bank over a
global bank by a two-to-one margin; whereas, if they
choose a home-nation or third-nation bank, most
affiliates then choose a global bank.
The cross-country variation in bank nationality and
reach was analyzed more formally using a regression
model that attempted to control for the demand and
supply factors within host nations, the geographic,
cultural, and financial differences between host and
home nations, and the attributes of a foreign affili-
ate's parent corporation.
[note: 16]. Berger, Dai, Ongena, and Smith, ''To What Extent Will the
Banking Industry Be Globalized?'' [end of note.]
The regression analysis
confirmed the importance of host-nation-based exper-
tise in the choice of bank. An additional finding was
that host-nation banks are less likely to be chosen in
the former Eastern-bloc countries, and home-nation
banks typically fill the void left by the host-nation
banks in these countries. We speculate that the bank-
ing systems within these countries are not yet
developed enough to offer competitive host-based
expertise.
One limitation of the 1996 survey evidence is that
it offers only a ''snapshot'' of the provision of bank-
ing services rather than a picture of the evolution of
banking markets over time. Moreover, the snapshot
was seven years ago; significant integration could
have occurred since that time.
A LOOK AT THE TIME-SERIES DATA.
We begin our time-series analysis with two measures
of banking industry integration for the period from
1992 to 2002. The first measure is the proportion of
syndicated loans that host-nation banks provide to
European affiliates of multinational corporations.
That is, we start with the same types of affiliates as
examined in the previous section, but we now track
the nationality of those banks that provide syndicated
loans to the affiliates.
The syndicated loan market is a popular mecha-
nism for extending loans to medium-sized and large
borrowers and is often thought to be the most glo-
bally integrated sector of the banking industry. Our
measure is constructed fromLoanware, a database
that tracks syndicated loan agreements from around
the world.
[note: 17]. Loanware is a product of Dealogic, Ltd. A syndicated loan
agreement is a loan contract between a borrower and a group ofbanks,
typically headed by a ''lead'' or ''arranging'' bank or group of banks. [end of note.]
For the 1992-2002 period, we review
1,556 syndicated loans to foreign affiliates of multi-
national corporations operating in Europe.
The degree of integration as measured by the pro-
portion of syndicated loans financed by host-nation
banks did not increase over the past decade (chart 1).
In 1992, host-nation banks financed 35 percent of the
syndicated loans; in 2002, they financed the same
proportion. Since 1996, the proportion of host-nation
banks financing syndicated loans has fluctuated
between 39 percent and 21 percent. Thus, the syndi-
cated loan data provide no evidence to suggest that
the level of bank integration has changed much since
the 1996 survey.
Chart 1. I ndicators of banking market integration in Europe,
1992-2002
[This chart has two graphs: Share of syndicated loans provided by host
nation banks, and Share of total bank claims that are domestic.
Top panel: share of syndicated loans provided by host-nation banks.
The graph starts 1992 at about 36%, then goes down to about 27% in
1997. In 1998 it is up to about 40%, then down to about 20% by 2001.
it ends 2002 at about 36%. Bottompanel: share of total bank claims that are domestic. It starts 1992
at about 78% and slopes down through the graph to about 70% in 2002.]
SOURCE. For top panel, seetext note 17; for bottompanel, seetext note 18.
The syndicated loan data suffer from a potential
drawback. If the syndicated loan market was already
fully integrated in 1992, then one might not expect
it to change much over the decade. Indeed, we see
that by 1992 foreign banks (home- and third-nation
banks) already covered roughly two-thirds of the
loans provided to foreign affiliates (chart 1, top
panel), which might be close to full integration.
Another measure of integration that provides a
more general assessment of changes through time is
the share of total private bank debt claims (domestic
and foreign) that are claims on domestic customers.
This measure is calculated for banks residing in
twelve countries in western Europe (Austria, Bel-
gium, Denmark, France, Germany, Ireland, Italy,
the Netherlands, Spain, Sweden, Switzerland, and
the United Kingdom), plus Canada, J apan, and the
United States.
[note: 18]. ''Claims'' refer to loans, notes, and equity claims that banks
hold against customers. Foreign claims refer to claims on customers
outside of a bank's resident country. Foreign claims are obtained from
the Bank for International Settlements' locational statistiscs through
www.bis.org. To avoid the double counting of claims against subsidi-
aries, we subtract local office claims fromtotal foreign bank claims.
Private domestic bank claims are fromthe International Monetary
Fund's International Financial Statistics. [end of note.]
We interpret a decline in the share of domestic
bank claims to total bank claims as an increase in the
level of integration. The proportion has fallen some-
what over the past decade (chart 1, bottom panel). It
hovered around 78 percent from 1992 through 1995
and then began to decline slowly. By 2002, the pro-
portion had fallen to 70 percent. This decrease indi-
cates that banks have increased their foreign claims
over the past decade slightly faster than the rate at
which they expanded their domestic claims.
We provide one more piece of time-series evidence
on the progress of integration, and that is the pace of
price convergence across countries. J ohn Rogers uses
a comprehensive and detailed set of prices for 139
nonfinancial consumer goods in twenty-five Euro-
pean cities from 1990 to 2001 to measure the speed at
which prices converged as barriers to cross-border
trade were diminished within Europe.
[note: 19]. J ohn H. Rogers, ''Monetary Union, Price Level Convergence,
and Inflation: How Close is Europe to the United States?'' Interna-
tional Finance Discussion Papers 740 (Board of Governors of the
Federal Reserve System, 2002). [end of note.]
Rogers com-
pares the dispersion of prices in European cities,
including a subset of cities within the eleven original
countries of the EMU, to the dispersion of prices for
a similar set of goods across cities within the United
States.
[note: 20]. Price dispersion is defined as the cross-city standard deviation
of a product's price (calculated after normalizing the price by the
average price of the product). [end of note.]
By 1996, the dispersion in prices across
the European countries had narrowed significantly
(chart 2). In fact, prices within the EMU countries
had converged to a degree comparable to that
observed in the United States. Most of the conver-
gence occurred in the earlier part of the period, with
little or no further convergence occurring after 1996.
In sum, the various sets of time-series data exam-
ined here suggest that little further integration has
occurred in Europe since our sample was collected
in 1996, although the BIS banks claims statistics
suggest that banks have expanded somewhat across
borders since 1999.
Chart 2. Price dispersion for traded goods in Europe and the
United States, 1990-2001
[graph plotting three lines: selected european countries,
EMU-11, and United States.
Selected European Countries starts 1990 at about 22%,
then goes down until 1993 where it its about 14% where
it stays until 1994, then it goes up to about 16% in 1995,
then down to about 12% in 1998 and stays around there
until 2001. EMU-11 starts 1990 at about 17%, then goes down to about
9% in 1993, then up to about 11% in 1995, then down to
about 7.5% in 2002. United States starts 1990 at about 7%, then slowly tends
upwards reaching about 9% in 2001.]
NOTE. The EMU-11 consists of Austria, Belgium, Finland, France,
Germany, Ireland, Italy, Luxembourg, the Netherlands, Portugal, and Spain.
The selected European countries are the EMU-11, the United Kingdom,
Sweden, and Switzerland. For definition of price dispersion, seetext note 20.
SOURCE. J ohn H. Rogers, "Monetary Union, Price Level Convergence, and
Inflation: How Close Is Europe to the United States?" International Finance
Discussion Papers 740 (Board of Governors of the Federal Reserve System,
2002).
SUMMARY.
The barriers to global integration in the banking
industry have been significantly reduced over the past
two decades. Among the contributing factors have
been the lifting of regulatory restrictions on cross-
border banking, technological advances that allow for
better management of financial institutions across
borders, and increases in nonfinancial activities that
create demands for international banking services.
Despite these reduced barriers, the integration of the
banking industry in most developed countries has
fallen far short of the expectations of many observers.
Some potentially powerful market forces based on
the competitive advantages of domestic and foreign
banks may help explain the lack of an advance in
global banking. We argue that foreign banking orga-
nizations may be at significant competitive dis-
advantages in providing the price, quality, and mix of
services that best suit bank customers, and that such
disadvantages may limit the integration of the bank-
ing industry.
Our main findings, which are based on a 1996
cross-section of European affiliates of multinational
corporations, suggest that almost two-thirds of these
affiliates receive short-term banking services from a
bank headquartered in the affiliate's host nation. This
result is consistent with a strong host-based-expertise
effect, in which host-nation banks have significant
competitive advantages in understanding the culture,
business practices, and regulatory conditions of the
host nation. However, in the former Eastern-bloc
nations, the data suggest that only about one-fourth
of these same types of affiliates are served by host-
nation banks. This finding is consistent with the
possibility that host-nation banks in these nations
are not equipped to provide the package of banking
services that would give them an advantage over
foreign institutions.
We also examine three sets of time-series data on
the progress of integration in Europe from 1992 to
2002. The main purpose is to explore the possibility
that our '' snapshot'' of banking as of 1996 might
have predated significant advances in the integration
of the European banking industry. We show data on
the changes in (1) the proportions of the syndicated
loan market that are underwritten by domestic banks,
(2) the changes in the proportions of total bank
claims that are held by domestic banks, and (3) the
convergence of prices of consumer goods across
Europe. These data suggest that, if anything, most
of the effects of the reduced barriers had already
occurred by 1996.
Overall, the findings suggest that domestic banks
possess some competitive advantages that may sig-
nificantly limit the global integration of the banking
industry. In industrialized nations, domestically based
institutions appear likely to retain significant market
shares for some financial services that could poten-
tially be provided by foreign institutions, even when
the barriers to bank integration have declined dra-
matically. In contrast, foreign banks may obtain much
higher shares in some less-industrialized nations
because of competitive advantages over domestic
institutions that are less well developed.
doc_396404768.pdf