Banking - International expansion of commercial banks - Essay Example

However, despite the benefits associated with this trend of internationalization such as the availability of funds, risk diversification and enhancement of efficiency in the local banking sector, it also has the demerit of causing financial shocks to an economy as observed in the recent financial crisis. Considering the increased expansion and growth of international trade and business networks, internationalization of banking sector has become very important to our current global economy. This is because through international banks access to funds has been eased especially to credit-constrained firms and households; in addition, this has introduced competition in the local banking sector that has led to increase of consumer surplus due to decreased rates of borrowing and increase on interest rates paid on deposits.

Furthermore, this competition has led to local banks being more efficient and as a result enhancing economic stability Internationalization of the banking sector has the benefit of facilitating capital flows especially from the economies rich in capital to the poor ones where the returns are perceived to be higher (Mullineux & Murinde 4). This in turn enhances the growth of the poor economies by boosting their savings and investments as well as reducing their capital costs. In addition to this, internationalization leads to the stability of the highly volatile interest rates owing to the convergence of local interest rates with those in international markets.

However, this benefit has been doubtful and elusive following the recent financial crisis. On the other hand, despite the increased numbers of banks turning international, those that have successfully turned their exploits to profitability have been very few owing to the risks associated with the venture. Capital flow despite being a benefit of commercial bank internationalization, it is also one of the leading causes of the liquidity risks in an economy associated with internationalization. This is usually associated with the cross-border outflow of capital that greatly influences and affects the economic stability of a country.

Moreover, considering there is interest rates differences amongst countries capital will flow to those economies where there are high returns expected and those whose central banks have low mandatory deposits with commercial banks. In addition, due to the capital inflow from these foreign banks increases liquidity in a country this may negatively affect the monetary measures undertaken by central banks in combating economic and monetary issues in the given economy. This implies that as a result of commercial bank internationalization has led to lack of autonomy in the application of monetary measures and policies in a given economy that has international banks.

Furthermore, the entry of foreign banks may bring about equity problems hampering the local completion to the disadvantage of the local or domestic banks that cannot access equity as easily as the foreign banks. Moreover, despite the allure that banks find when internationalizing often comes with the disadvantage of exposing themselves to uncertain political and economic risks associated with different economies country risks (Schoenmaker 35). This is because the process of internationalization exposes a bank to an economy’s market specific and inherent factors for instance regulatory frameworks, unfamiliar