international banking by Rients Galema, Michael Koetter and - - PowerPoint PPT Presentation

Cost leadership at home and abroad in international banking

by Rients Galema, Michael Koetter and Caroline Liesegang Discussion by Hans Degryse

KU Leuven and CEPR

DNB-IMF conference June 12, 2014

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Issue

• Foreign banks are important players in several banking

markets

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Issue

• Relative importance of foreign banks in several banking

markets (source: Claessens and van Horen (JMCB2014)

• Why: Cost leadership at home? Cost leadership abroad?

Bank characteristics? Differences in regulation? Differences in bailout expectations?

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Comments (1)

• How does Germany compare relative to other countries?

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Comments (2)

• How does Germany compare to rest of world? Are drivers

similar or different?

• Produce similar stats for Germany and different banking

groups

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Findings and Contribution

• Employing an “international trade” approach and using

a unique micro data set on German banks’ cross-border activities, the authors show that the likelihood of

• perating in a host country is larger when
• The bank has a domestic cost advantage
• The bank has a foreign cost advantage
• The bank is less profitable, more risky and larger
• The host country attracts more German FDI
• The host country imposes less activity restrictions
• These associations are less strong for branches than for

subsidiaries

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Comments (3)

• Entry barriers may play a role: why not use the Barth

et al. time series information on entry barriers?

• Subsidiaries

versus branches: Dell’Ariccia and Marquez (JF2010)

– Economic risk leads to use of subsidiaries – Expropriation risk leads to use of branches – Greater correlation among economic risks reduces the differences between branches and subsidiaries

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Comments (4)

• Difference in “Banking Structure” and “regulation of home and host

banking system” may trigger likelihood and depth of foreign banking

• Degree of “overbankedness” : difference between German overbankedness

and host-country overbankedness

• Banking assets in Germany around 300% of GDP (compared to about 200% for

high income countries (Barth et al (2001,2013)

• Difference in regulation may determine likelihood and depth of foreign

banking (see e.g. Popov, Ongena and Udell (JFE2013)

• Banks’ business models:
• Theoretical and empirical model starts from “financial intermediation” with a

bank being active on both sides of the balance sheet

• Other business models
• Follow the customer (Berger et al. (2003) (you capture this by German FDI)
• Only attracting savings (e.g., ING Direct, Icelandic banks)

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Comments (5)

• Multinational banks may “diversify” or “increase risk taking” –

could add a business cycle synchronicity indicator

• Relates to literature on whether multinational banks increase or decrease

business cycles (Morgan, Rime and Strahan (QJE2004; Kalemli-Ozcan et al (JF2013)

• Increase stemming from more integration as productivity shocks imply capital

may flow from slumping economy to booming economies

• Decreasing as it dampens bank loan supply shocks
• More synchronicity should remove differences between branches and

subsidiaries (Dell’Ariccia and Marquez JF2010)

• Predictions on differences of coefficients between subsidiaries and branches

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Comments (6)

• Marginal costs are estimated from translog cost

function

– results are (surprisingly?) similar across banking groups in Germany – Role of TBTF in marginal costs and resulting expansion strategy

• Coefficients change quite a bit across specs
• Static versus dynamic effects
• Policy implications

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Conclusions

• Paper addresses an important question: why do

banks reach out to other countries?

• Our understanding is still limited and this paper

highlights some interesting country and bank- specific drivers

• How representative is Germany? Can we extend

results to other countries?

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