2. Internationalization of Banking
• Banking sector illustrates both the potential benefits and perils of deeper
international integration.
• International banking activities may bring much-needed capital, expertise,
and new technologies, thereby leading to more competitive banking
systems.
• By enabling risk sharing and diversification, they smoothen the effects of
domestic shocks.
• Risk sharing will inevitably expose host countries to systemic risks from
time to time.
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3. Internationalization of Banking Contd.
• International banks have been criticized for playing a role in the
transmission of shocks across borders during the global financial crisis
• International banking may promote destabilizing boom-bust cycles in
poor institutional environments.
• In the wake of the global financial crisis, the globalization trend has
been partially reversed.
• Banks have scaled back their international operations, coinciding with
a general backlash against globalization.
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4. The Impact of Global and Regional Banking (Survey Result)
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11. Share of Developing Countries with Restrictions on Foreign Bank Entry
through Alternative Modes
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12. Share of Home and Host Countries That Tightened Macroprudential Policies,
2005–13
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13. Major Trends After 2008 Financial Crisis
• Three focus areas that are important in international banking and their
policy implications:
1. The rise of South–South banking
2. The shift toward alternative sources of funding
3. The emergence of fintech
• The focus on these areas reflects the importance of these new trends for
policy, as they present challenges and opportunities.
• These are also areas where research is new and limited.
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14. The Rise of South-South Banking
• Greater South– South banking is likely to increase local competition and financial
development.
• A South–South banks invest in countries within their region and tend to be more
familiar with the cultural, linguistic, legal, and institutional environment of the
host country.
• However, regionalization may also have costs. Example:
1. This may constrain both the adoption of globally best banking technology and
skills across countries and the most efficient allocation of capital.
2. Limits risk sharing and implies a larger exposure of an economy to shocks
originating within the region
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15. Shift Toward Alternate Sources of Funding
• In high-income and developing countries, firms with access to capital
markets moved to bond markets
• In developing countries, these firms also switched to domestic banks and
away from international banks.
• Due to these switches, global financial activity during the crisis declined
less than the collapse in cross-border loans.
• These changes in debt composition continued during the postcrisis period.
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16. The Rise of Fintech
• Technology driven new companies providing financial services outside the
traditional financial sector can reshape competition among financial
providers
• It can improve the delivery of financial services and increase access.
• For example, Blockchain makes lightning-fast transactions possible
compared with traditional bank transfers or settlements of securities
trades.
• Fintech is likely to facilitate the provision of financial services and affect
how banks compete with each other
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18. Trends in the Last Two Decades
• The decade before the 2007–09 global financial crisis was
characterized by a significant increase in financial globalization,
particularly for banking institutions.
• This globalization trend has been partially reversed by a recent
retrenchment of international banks that are headquartered in high-
income countries.
• Many developing country banks have expanded internationally, in
part to fill the gaps left by high-income country international banks
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19. Measuring Internationalization
• Internationalization is measured in two ways:
1. By the share of a bank’s overall assets owned by its foreign
subsidiaries, or
2. By the number of foreign host countries where the bank operates
with at least one subsidiary.
• The sample of banks contains 2,793 banks in total, of which 325
banks are international with at least one foreign subsidiary.
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20. Performance Difference
• The average asset growth rate of international banks has generally been
higher than for domestic banks during the 2000-2015 period, especially in
the case of international banks headquartered in developing countries.
• Internationalization generally has been associated with lower bank
valuation as measured by Tobin’s Q and the market-to-book value of equity
for the 2000-2013 period.
• Internationalizing banks from developing countries have done better, were
valued more highly, were less risky and enjoyed higher returns.
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21. Performance Difference Contd.
• International banks fund themselves to a lesser extent with customer
deposits, they accumulate relatively few off-balance sheet exposures, and
they receive relatively little non-interest income.
• The net effect of these differences between international and domestic
banks on financial fragility is unclear.
• A lower deposit funding could increase bank riskiness, while lower off-
balance sheet exposures could reduce riskiness.
• A lower share of non-interest income could reduce risk.
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22. Performance Difference Contd.
• Following the financial crisis, the performance of international banks
improved relative to domestic banks, as reflected in higher market
valuations, a lower nonperforming loans ratio, and a higher return on
assets.
• The relative performance of international banks improved especially for
international banks with higher deposit funding and lower non-deposit
short-term funding.
• It reflects the importance of relying on stable funding sources.
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23. Performance Difference Contd.
• Bank internationalization reduces the cyclicality of domestic credit growth with respect to
domestic GDP growth due to repatriation of funding during economic downturns to be able to
continue lending domestically.
• This stabilizing effect is particularly strong for international banks headquartered in developing
countries.
• Developing country lending of international banks headquartered in high-income countries is
relatively procyclical suggesting that high-income international bank operations can be potentially
destabilizing.
• However, this is not true for developing country international banks doing business in other
developing countries.
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24. Growth rate of total assets for international and domestic banks
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