International Bank Entry Driven Factors - Coursework Example

International bank entry is driven by home country and host country factors Introduction The last decade, the internationalization of banks has been highly increased aiming to support the development of economies worldwide. In many cases, the role of international banks in the global market, has been doubted; despite the fact that the funding from international banks has been necessary in completing strategic infrastructure or business projects, still the level at which these banks can be involved in the development of governmental policies and business initiatives around the world needs to be carefully reviewed. Indeed, the bank entry in a foreign market is expected to have consequences on the economy and the political and social life of the host country; moreover, international banks are influenced by the political, legal and economic conditions of their home country. The balance among these factors is necessary in order for an international bank to survive in a foreign market; in this way also, the potential risks for the host country’s economic and social framework are minimized. The interaction between these factors – of the home and the host country – is examined in this paper using examples from similar initiatives worldwide. 2. International bank entry as influenced by home country and host country factors International banks have a significant power in the global market; in accordance with Naaborg (2007, p.57) the percentage of foreign owned banks in Central and Eastern Europe has been estimated to 80%. In a report published by the World Bank, it is noted that from 2006 onwards, the position of foreign banks in developing countries has been improved – 897 of these banks managed to take the control of the banking sector within developing countries worldwide (World Bank, 2008, p.82); This fact proves that international banks can influence the markets of countries worldwide; the dependency of these banks on their home country should be further explored; their relationship with the factors driving the host countries’ markets should be also examined. In the study of Naaborg (2007) it is noted that there are three factors that are most likely to influence the internationalization of banks: a) the foreign investments of non-financial institutions of the home country; in this case, the foreign bank entry the market on which their customers’ invested – aiming to protect the interests of its customers; the above practice is justified by Naaborg (2007) by referring to the defensive expansion theory of Grubel (1977) (Naaborg, 2007, p.58), b) the potentials for profits in a foreign market; under these terms, the decision of an international bank to enter a market worldwide is depended on the potentials for profit that this market guarantees to the foreign investors, c) another factor influencing the foreign bank entry is the institutional framework of the host market (Naaborg, 2007, p.58); the term institutional context is used in order to describe the legal, financial and cultural framework of the foreign market, for instance the laws governing the foreign investments, the expected performance of foreign banks entering the specific market and the cultural characteristics of this market – the host market. The positive role of foreign banks in the development of host market is highlighted in the study of Rajan et al. (2008); in the above study it is noted that foreign bank entry can help towards the increase of the market’s efficiency (Rajan et al., 2008, p.70), the reduction of risk (since assets are diversified) and to enhance competition in the local bank industry – a fact that could result to the improvement of services in the particular sector. It is for this reason that foreign bank entry is highly supported in emerging economies in South East Asia (Rajan et al., 2008, p.70). The limitation of barriers in foreign bank entry was also a strategy followed by countries of Latin America in the 1990s aiming to support the development of national economy (Caprio, 2005, p.49). In any case, the foreign bank entry can influence the performance of banks within the host market – referring to the local banks; in accordance with Lewis et al. (1987) a differentiation seems to exist between the local banks and the international banks regarding their potential to enter the wholesale financing and the retail market; more specifically, it is noted that local banks are likely to enter easier the retail market while the international banks can enter easier the wholesale financing (Lewis et al., 1987, p.259); the explanation for this phenomenon is the following one: customers tend to trust more the local banks and are usually suspicious for foreign banks that try to enter the retail market; on the other hand, the local banks do not have the financial background necessary in order to enter the wholesale market. Two are the factors that drive the relevant activities: the cultural characteristics of local banks are their bond with their customers in the host market; the financial status of the international banks is the factor influencing their acceptance by the foreign market. From a similar point of view, the high level of foreign bank entry in a particular market can lead to the increase of consolidation, i.e. to the increase of mergers and acquisitions within the host market – aiming to increase the competitiveness of the local banks towards their rivals (Mathieson et al., 2001, p.121). Towards this direction, Hall (2003) noted that two major risks are likely to exist in foreign bank entry: a) the activities of foreign banks focus on specific market sectors, b) foreign banks are not likely to be highly committed to the host country’s market (Hall, 2003, p.207). The above risks can be analyzed as follows: foreign banks may focus on specific aspects of retail market (supporting for instance only the firms of major industrial sectors, as for example, firms operating in the marine industry or firms in the property sector); they may provide only specific financial services, for instance, investment services; this practice is quite common in foreign banks operating in important financial markets, as the London market where many foreign banks offer only investment services targeting customers of a high financial status. As for the second risk highlighted by Hall (2003) in regard to foreign bank entry, this refers to the following characteristic of foreign banks: most commonly, foreign banks are not highly committed to the host market; of course, this trend can be justified since the foreign banks are expected to be committed to their home country; however, when the commitment of foreign banks is quite low then their practices are not expected to benefit the local market; for this reason, measures should be taken in order for the policies and practices of foreign banks within the host market to be carefully monitored as of their effects on local market; in certain cases, the prohibition of operations should be imposed on foreign banks that serve only the interests of their home country. The risks related to the foreign bank entry has been taken into consideration by regulators worldwide; an indicative example is the US market where the FDIC Improvement Act (1991) states that foreign banks can accepts deposits over $100,000 (Guzman et al., 2007, p.400); EU regulators followed a similar approach setting that those who wish to deposit money in foreign bank need to be insured by their home country – the insurance should be at least 20,000 euros (Guzman et al., 2007, p.400). It is clear that the foreign bank entry is considered to be related to potential risks for the home country. 3. Conclusion The terms under which foreign banks enter the markets of countries worldwide seem to be quite complex; the specific activity has been found as related to a series of factors – both of the home and the host country. On the other hand, the level of participation of foreign banks in markets internationally is quite high. National legislators should intervene more actively in the activities of these institutions. Of course, international banks have an important role in the funding of governmental plans and the increase of Foreign Direct Investment worldwide; however, their power within the foreign markets should be controlled; the financial institutions of the host countries should be adequately protected against the expansion of international banks. Otherwise, the control of the governments on their countries’ financial market could be set under risk – a fact highlighted also in the study of Portes et al. (1987, p.124) where the barriers of foreign bank entry in countries worldwide are related to the increase of power of international banks in the international market – a fact that could threaten the power of each government on the local financial market. References Caprio, G., Hanson, J., Litan, R. (2005) Financial crises: lessons from the past, preparation for the future.Brookings Institution Press, 2005 Demirguc-Kunt, A., Beck, T., Honohan, P. (2008) Finance for all?: policies and pitfalls in expanding access. World Bank Publications Guzman, A., Sykes, A. (2007) Research handbook in international economic law. Edward Elgar Publishing Hall, M. (2003) The international handbook on financial reform. Edward Elgar Publishing Lewis, M., Davis, K. (1987) Domestic and international banking. MIT Press Mathieson, D., Schinasi, G. (2001) International capital markets: developments, prospects, and key policy issues. International Monetary Fund Naaborg, J. (2007) Foreign bank entry and performance: with a focus on Central and Eastern Europe. Eburon Uitgeverij OECD (2002) New horizons for foreign direct investment. OECD Publishing Portes, R., Swoboda, A. (1987) Threats to international financial stability. CUP Archive Rajan, S., Rongala, S. (2008) Asia in the global economy: finance, trade and investment. World Scientific Rugman, A. (1982) New theories of the multinational enterprise. Taylor & Francis World Bank (2008) Global Development Finance 2008: Review, analysis and outlook. World Bank Publications Read More