INTERNATIONAL BANKING

INTRODUCTION
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Integration of world economy Multinationalization has picked up speed in recent years Aided by financial liberalization and deregulation In countries like Latin America and the former transition economies in central and eastern Europe FDI has gone up to more than 50% Multinational banks were traced in middle ages, by Italian bankers Government in need of effect of foreign bank on Indian market

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Provides capital to all sectors of economy o Is both a fear and hope for government of host country o Provisioning for informationally opaque market segments o Relevant issues arrived were why, when, and how banks go abroad?
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DEFINITION:
Banking transactions crossing national boundaries o All claims of domestic banks offices on foreign residents o Claims of foreign bank offices on local residents o Claims of domestic bank offices on domestic residents in foreign currency

EUROCURRENCY DEPOSITS
o placed

with

banks outside the country whose currency the deposits are denominated in

KEY FEATURES OF INTERNATIONAL BANKING:

Competition for market share among banks o Importance of international interbank market (IIBM) o Currency risk and complexity of credit risk
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HISTORICAL EVOLUTION:
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Origin in renaissance Active international lending and bond market in the 19th century (also trade financing) Decline in 20s & 30s as international trade was restricted by government Wave of international expansion of U.S banks in the 1960s & 1970s, namely search for cheap sources of refinancing for home market financing activities

IMPORTANT QUESTIONS:
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What are the motives of banks for expanding internationally? which banks become multinational players? which markets attract multinational banks? how do entry and market strategies of multinational banks look like? how successful are multinational banks operating in foreign markets? what are the effects of multinational bank entry on the host country?

ENTRY MOTIVES OF MULTINATIONAL BANKS:

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Firm growth/ empire building Restrictions due to anti trust considerations Risk diversification to prevent liquidation Profit maximization motives Economies of scale To win new customers/follow your customer abroad or to keep existing domestic customers

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defensive expansion approach It can be profitable too Cheap source of refinancing activity regulation Q enacted by Glass Steagall in 1933 in U.S

WHICH BANKS BECOME MULTINATIONAL ? FIRM & HOME COUNTRY CHARACTERISTICS:

Inherent

advantage over foreign banks due to intimate knowledge about customers Foreign bank can be successful if it has some advantages such as managerial skill, enhanced risk management & IT systems or the ability to refinance at low rates etc.. More the profitable were German banks, more were they active internationally

 Larger

the size & scope might enable institutions to bear larger risks Banks with more non-interest income are found to be more globalized Endogenous process e.g. Japanese crisis in 1990, Riegle-Neal act in U.S in 1994 Large markets bread larger banks It leads to more efficient working of host country banks, also restricting abnormal profits Saturation of domestic market e.g. Latin American expansion by Spanish bank

WHICH MARKETS ATTRACT MULTINATIONAL BANKS?

Characteristics

of an attractive host country as stand alone & bilateral host home country Higher the GDP more is demand for sophisticated, high-margin banking services Inflation is found to reduce the attractiveness of the market Harsher the activity restrictions for multinational banks, the level of concentration of MBs & the cost efficiency of incumbent banks the less bank FDI the respective country will attract for undeveloped countries

 Where

more the size of banking market, more will be MBs Common language, low distance & a common legal system influence positively

HOW DO THE ENTRY & MARKET STRATEGIES OF MULTINATIONAL BANKS LOOK LIKE?
This

can be in form like establishing corresponding banking (low level of involvement) By opening a representative office or agency (low level of involvement)
1.
By

Restricted activities for deposit taking & direct lending

establishing branches or subsidiaries where branch is not legally independent unlike subsidiary

 Branches

are established step-by-step and set up via GREENFIELD INVESTMENT while subsidiaries via Greenfield investment or acquisitions Greenfield investment are more integrated to parent organization than other ones They have the risk of opaque loan takers

HOW SUCCESSFUL ARE MULTINATIONAL BANKS OPERATING IN FOREIGN MARKETS?

The

authors, using a large sample of 7900 bank observations from 80 countries, find evidence that foreign banks are more profitable than domestic banks in undeveloped countries Unlike in developing countries, exception being Spain viewed by Bertrand competition-point of view

 Advanced

estimation were done using banking cost function & further break down the analysis Countries focused were France, Germany, Spain, U.K & United States Study of relative efficiency of banks in Central & eastern Europe in the period 1993-2004 Greenfield investments proved more profitable than subsidiaries resulting from the acquisition of domestic banks

WHAT ARE THE EFFECTS OF MULTINATIONAL BANK ENTRY ON THE HOST COUNTRY?
Depend

on relative efficiency of entrant, the product/segment strategy & what kind of entry mode they choose Varying effects on incumbent banks banksefficiency & technology vise Proves costly for incumbent banks Spillover of banking technologies Shifts incumbent banks towards more informationally opaque borrowers Benefits informationally opaque segment

 Higher

market share by foreign bank increases cost for domestic banks Reduces bank lending rates if more of Greenfield investments occur Leads to cost efficiency Not the market share but number of foreign banks makes a great impact on domestic banks

INTERNATIONAL BANKING OPERATIONS:

Facilitates

movement of goods across the political boundary of countries Acts as financial intermediation in the international level, thus gave rise to international banking business From movement of gold and silver across country borders to currencies of sovereign countries

 Causative

factors to IB is multinational corporations, proximity to customers abroad, better IT advantages etc.. Based on international trade, international transfer of capital & money Assuming no specific restrictions are imposed on the operation of foreign banks, it is directly proportional to IB Banking has a positive income elasticity, where degree to which it effects varies

 Many

countries do not allow foreign country to keep deposit base, as the latter is perceived to help the foreign bank to mount an attack on the domestic currency, though its crucial for increase in business Creating deposit base increases cost of foreign banks Deposit base influences deposit mobilization and helps in building asset portfolio

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Exchange

rate changes affect the activities of the foreign banks Balance sheet of the foreign banks is in the head office in their mother currency

ADVANTAGES OF IB
Can

shelter money from mother country, which doesn't necessarily mean tax evasion Can invest in the economies of booming countries Wealthy individuals keep their wealth in offshore banks & other entities to keep it safe from lawsuits IB are less affected by domestic rate fluctuations Much better interest rates

 Helps

doing business around world Doesnt have to set up million different bank accounts around the world, then wait to receive money while banks deal with one another Services like letters of credit, financing services for exports & imports etc are provided

HAZARDS TO IB:

HAZARDS OF IB:
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Performance of bank in market Is bank smart investor Change in currency Account-holders are advised to keep their money in interest bearing accounts & other investments The federal deposit insurance corporation (FDIC) does not insure foreign banks

CASE STUDY OF SUCCESSFUL MULTINATIONALISATION: BANK OF AUSTRIA CREDITANSTALT IN CENTRAL AND EASTERN EUROPE

Introduction Central and eastern European (CEE) countries as hot spots of evolution of multinational banks Bank Austria Creditanstalt (BA) as one of the leading bank among multinational banks in CEE

BANK AUSTRIA CREDITANSTALT : AN OVERVIEW

HISTORY

BA was founded in 1991 In 1997 bank Austria took over the Austrian governments shares in Creditanstalt into the Creditanstalt group in 1999 This integration was a success Two main reasons were independent goodwill of both Economies of scale

IN 2000 MERGED WITH HYPO VEREINSBANK (HVB) AND BECAME

COMPETENCE CENTRE FOR CEE BUSINESS OF THE

GROUP

Concentrated fully on 11 selected countries

Stand-alone was too small for expansion in European countries Managing HVB operations too

Basic reason for this success are:

Since November 2005 BA became part of UNI CREDIT hence becoming primary holding and operation centre for the groups CEE business

ENTRY MOTIVES FOR BA IN CEE REGION

Home country push factors To grow its profit fast Indirect follow your customer consideration Not only Austrian clients but also a variety of multinational firms from other home countries Vienna functions as a management platform for multinational firms operating in the CEE region e.g., Mc-Donalds eastern European operation centre is located in Vienna Snowball- effect stemmed Macroeconomic indicators such as GDP, GDP growth and population etc

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Appetite for entry such that bank Austria stems from a relatively small home market with population very less unlike in case of countries like Germany According to Mr. Gerhard Smoley, head of investor relations of the bank Austria group, in case of BA, distance was simply negatively correlated with the amount of activity of business abroad Further reasons are lead by general strategic set up of bank Austria as well as changing landscape in the financial sector in CEE

THESE ARE:
General strategy was Greenfield investment 1. Mainly as investment banking In 1990s focused mainly on commercial wholesale segment Saved from disadvantages of retail segment Indeed only requirement for wholesale business was to establish a handful of regional headquarters in big cities Later with increase in margin pressures, retail banking was also taken into consideration It took majority shares in polish bank in 1997

However, bank Austria was not able to grow its business via acquisition strongly This is how strategic choice in one market is influenced by an institutions business development in other markets Involvement in majority in Russia during Ruble crisis in 1998 left a great impact Loss restricted possibilities of growth Advantages taken by its main Austrian competitor in Eastern Europe, ERSTE Bank AG Bank Austria focusing main on Greenfield investment, focused on acquisitions too but acquiring only healthy banks on high prices unlike others

Strong existing bank-client relationships and therefore a general lack of customer mobility in the retail segment are some major merits of retail banking Besides retail and commercial banking, bank Austria has a well positioned investment and refinancing banking activities

HEADQUARTER AT VIENNA

IN WARSAW:

BANK AUSTRIA NATIONAL BANK

BANK ERSTE HEADQUARTER IN VIENNA

THANKS