Abstract
This article profiles the recent evolution and consequences of banking sector globalization. After presenting trends in international banking, the article overviews macroeconomic consequences of banking sector globalization, including the role of banks in the international transmission of shocks, comovements of business cycles, financial crises, and economic growth. Other consequences of banking globalization have parallels with the effects of real-side foreign direct investment, including technology transfers, productivity enhancements, and wage spillovers into the host country. Finally, the article provides arguments that banking globalizing can have important consequences for financial supervision and regulation.
This is a preview of subscription content, log in via an institution to check access.
Similar content being viewed by others
Notes
For history and context, see the Bank for International Settlements (2006).
Economist Intelligence Unit, India Finance: Foreign Banks in India, April 4, 2008.
See the Bank for International Settlements website at http://www.bis.org/.
Efficiency calculations are performed by using data on overhead costs (the ratio of bank overhead costs to bank total assets) and bank net interest margin (bank interest income minus interest expense divided by bank total assets).
Edison and others (2002) and Prasad and others (2003) provide informative surveys.
References
Arena, M., C. Reinhart, and F. Vazquez, 2006, “The Lending Channel in Emerging Economies: Are Foreign Banks Different?” NBER Working Paper No. 12340 (Cambridge, Massachusetts, National Bureau of Economic Research).
Bank for International Settlements (BIS), 2001, “The Banking Industry in the Emerging Market Economies: Competition, Consolidation, and Systemic Stability,” BIS Paper No. 4 (Basel, Bank for International Settlements, August).
Bank for International Settlements (BIS), 2006, “The Banking System in Emerging Economies: How Much Progress Has Been Made?” BIS Paper No. 28 (Basel, Bank for International Settlements, August).
Barajas, A., R. Steiner, and N. Salazar, 2000, “The Impact of Liberalization and Foreign Investment in Colombia's Financial Sector,” Journal of Development Economics, Vol. 63, No. 1, pp. 157–196.
Barth, James, Gerard Caprio, and Ross Levine, 2006, Rethinking Bank Regulation (New York, Cambridge University Press).
Bayoumi, Tamim, and Andrew Swiston, 2007, “Foreign Entanglements: Estimating the Source and Size of Spillovers Across Industrial Countries,” IMF Working Paper 07/182 (Washington, International Monetary Fund).
Beck, Thorsten, and Maria Soledad Martinez Peria, 2008, “Foreign Bank Acquisitions and Outreach: Evidence from Mexico,” World Bank Policy Research Working Paper No. 4467 (Washington, World Bank, January).
Berger, A.N., L.F. Klapper, and Greg F. Udell, 2001, “The Ability of Banks to Lend to Informationally Opaque Small Businesses,” Journal of Banking and Finance, Vol. 25, No. 12, pp. 2127–2167.
Bonin, John, and I. Abel, 2000, “Retail Banking in Hungary: A Foreign Affair?” William Davidson Institute Working Paper No. 356 (December).
Borensztein, E., J. de Gregorio, and J.W. Lee, 1998, “How Does Foreign Direct Investment Affect Economic Growth?” Journal of International Economics, Vol. 45, No. 1, pp. 115–135.
Calomiris, C., and A. Powell, 2001, “Can Emerging Market Bank Regulators Establish Credible Discipline? The Case of Argentina, 1992–1999,” in Prudential Supervision: What Works and What Doesn't, ed. by F. Mishkin (Chicago, National Bureau on Economic Research and University of Chicago Press).
Calvo, Guillermo A., and Carmen M. Reinhart, 2000, “When Capital Flows Come to a Sudden Stop: Consequences and Policy,” in Reforming the International Monetary and Financial System, ed. by Peter B. Kenen and Alexander K. Swoboda (Washington, International Monetary Fund).
Canova, Fabio, 2005, “The Transmission of U.S. Shocks to Latin-America,” Journal of Applied Econometrics, Vol. 20, No. 2, pp. 229–251.
Caprio, Gerard, Douglas Evanoff, and George Kaufman, 2006, Cross-border Banking: Regulatory Challenges, World Scientific Studies in International Economics, Vol. 1. Available via the Internet: www.worldscibooks.com/economics/6129.html.
Cetorelli, Nicola, and Linda Goldberg, 2006, “Risks in U.S. Bank International Exposures,” in Cross-border Banking: Regulatory Challenges, World Scientific Studies in International Economics, Vol. 1, ed. by Gerard Caprio, Douglas Evanoff, and George Kaufman. Available via the Internet: www.worldscibooks.com/economics/6129.html.
Cetorelli, Nicola, and Linda Goldberg, 2008, “Banking Globalization, Monetary Transmission, and the Lending Channel,” NBER Working Paper No. 14101 (Cambridge, MA, National Bureau of Economic Research).
Claessens, Stijn, 2006, “Competitive Implications of Cross-Border Banking,” in Cross-border Banking: Regulatory Challenges, World Scientific Studies in International Economics, Vol. 1, ed. by Gerard Caprio, Douglas Evanoff, and George Kaufman. Available via the Internet: www.worldscibooks.com/economics/6129.html.
Claessens, Stijn, Asli Demirguç-Kunt, and Harry Huizinga, 2001, “How does Foreign Entry Affect Domestic Banking Markets?” Journal of Banking and Finance, Vol. 25, No. 5, pp. 891–911.
Clarke, G., Robert Cull, L. D'Amato, and A. Molinari, 2000, “On the Kindness of Strangers? The Impact of Foreign Entry on Domestic Banks in Argentina,” in The Internationalization of Financial Services: Issues and Lessons for Developing Countries, ed. by S. Claessens and M. Jansen (Dordrecht, The Netherlands, Kluwer Academic).
Clarke, G., Robert Cull, and Maria S.M. Peria, 2001, “Does Foreign Bank Penetration Reduce Access to Credit in Developing Countries? Evidence from Asking Borrowers,” World Bank Policy Research Working Paper No. 2716 (Washington, World Bank, November).
Crystal, Jennifer, B.G. Dages, and L. Goldberg, 2001, “Does Foreign Ownership Contribute to Sounder Banks? The Latin American Experience,” in Open Doors: Foreign Participation in Financial Systems in Developing Countries, ed. by R. Litan and P. Masson (Washington, Brookings Institution Press).
Dages, B. Gerard, Linda Goldberg, and Daniel Kinney, 2000, “Foreign and Domestic Bank Participation in Emerging Markets: Lessons from Mexico and Argentina,” Federal Reserve Bank of New York Economic Policy Review, Vol. 6, No. 3, pp. 17–36.
Demirguç-Kunt, A., and E. Detragiache, 1998, “The Determinants of Banking Crises: Evidence from Industrial and Developing Countries,” IMF Staff Papers, Vol 45, No. 1 (Washington, International Monetary Fund).
Demirguç-Kunt, A., and E. Detragiache, 2001, “Financial Liberalization and Financial Fragility,” in Financial Liberalization: How Far, How Fast? ed. by G. Caprio, P. Honohan, and J. Stiglitz (New York, Cambridge University Press).
Demirguç-Kunt, A., R. Levine, and H.G. Min, 1998, “Opening to Foreign Banks: Issues of Stability, Efficiency, and Growth,” in The Implications of Globalization of World Financial Markets, ed. by S. Lee (Seoul, Bank of Korea).
Demirguç-Kunt, A., and V. Maksimovic, 2002, “Funding Growth in Bank-Based and Market-Based Financial Systems: Evidence from Firm Level Data,” Journal of Financial Economics, Vol. 65, No. 3, pp. 337–363.
Detragiache, Enrica, and Poonam Gupta, 2004, “Foreign Banks in Emerging Market Crises: Evidence from Malaysia,” IMF Working Paper 04/129 (Washington, International Monetary Fund).
Detragiache, Enrica, Thierry Tressel, and Poonam Gupta, 2006, “Foreign Banks in Poor Countries: Theories and Evidence,” IMF Working Paper 06/18 (Washington, International Monetary Fund).
di Giovanni, Julian, and Jay Shambaugh, 2008, “The Impact of Foreign Interest Rates on the Economy: The Role of the Exchange Rate Regime,” Journal of International Economics, Vol. 74, pp. 341–361.
Edison, Hali J., Michael W. Klein, Luca Ricci, and Torsten Sløk, 2002, “Capital Account Liberalization and Economic Performance: Survey and Synthesis,” NBER Working Paper No. 9100 (Cambridge, MA, National Bureau of Economic Research).
Frankel, Jeffrey, Sergio Schmukler, and Luis Serven, 2004, “Global Transmission of Interest Rates: Monetary Independence and the Currency Regime,” Journal of International Money and Finance, Vol. 23, No. 5, pp. 701–734.
Galindo, A., and F. Schiantarelli, 2003, Credit Constraints and Investment in Latin America (Washington, Inter-American Development Bank).
Garber, P., 2000, “What You See vs. What You Get: Derivatives in International Capital Flows,” in Managing Financial and Corporate Distress: Lessons from Asia, ed. by C. Adams, R.E. Litan, and M. Pomerleano (Washington, Brookings Institution Press).
Gelos, G., and J. Roldos, 2002, “Consolidation and Market Structure in Emerging Market Banking Systems,” IMF Working Paper 02/186 (Washington, International Monetary Fund).
Giannetti, Maria Assunta, and Steven Ongena, 2005, “Financial Integration and Entrepreneurial Activity: Evidence from Foreign Bank Entry in Emerging Markets,” ECB Working Paper No. 498 (Frankfurt, European Central Bank, June).
Goldberg, Linda, 2002, “When is Foreign Bank Lending to Emerging Markets Volatile?” in Preventing Currency Crises in Emerging Markets, ed. by S. Edwards and J. Frankel (Chicago, National Bureau of Economic Research and University of Chicago Press), pp. 171–96.
Goldberg, Linda, 2007, “Financial Sector FDI and Host Countries: New and Old Lessons,” Federal Reserve Bank of New York Economic Policy Review, Vol. 13, No. 1.
Haines, Cabray L., and Calvin T. Ho, 2007, “Global Banking and National Regulation: A Conference Summary,” Chicago Fed Letter, No. 236b (March). Available via the Internet: http://www.chicagofed.org/publications/fedletter/cflmarch2007_236b.pdf.
Hawkins, J., and D. Mihaljek, 2001, “The Banking Industry in the Emerging Market Economies: Competition, Consolidation, and Systemic Stability—An Overview,” in “The Banking Industry in the Emerging Market Economies: Competition, Consolidation, and Systemic Stability,” BIS Paper No. 4 (Basel, Bank for International Settlements, August).
Imbs, Jean, 2004, “Trade, Finance, Specialization, and Synchronization,” Review of Economics and Statistics, Vol. 86, No. 3, pp. 723–734.
Kim, Soyoung, 2001, “International Transmission of U.S. Monetary Policy Shocks: Evidence from VARs,” Journal of Monetary Economics, Vol. 48, No. 2, pp. 339–372.
Kose, M.A., E.S. Prasad, and M.E. Terrones, 2006, “How Do Trade and Financial Integration Affect the Relationship between Growth and Volatility,” Journal of International Economics, Vol. 69, No. 1, pp. 176–202.
Lane, Philip, and Gian Maria Milesi-Ferretti, 2001, “The External Wealth of Nations: Measures of Foreign Assets and Liabilities for Industrial and Developing Nations,” Journal of International Economics, Vol. 55, No. 2, pp. 263–294.
Lane, Philip, and Gian Maria Milesi-Ferretti, 2006, “The External Wealth of Nations Mark II: Revised and Extended Estimates of Foreign Assets and Liabilities, 1970–2004,” Journal of International Economics, Vol. 73, No. 2, pp. 223–250.
La Porta, R., F. López-de-Silanes, and A. Shleifer, 2002, “Government Ownership of Banks,” Journal of Finance, Vol. 57, No. 1, pp. 265–301.
Levine, Ross, 1999, “Law, Finance, and Economic Growth,” Journal of Financial Intermediation, Vol. 8, No. 1/2, pp. 8–35.
Levine, Ross, N. Loayza, and T. Beck, 2000, “Financial Intermediation and Growth: Causality and Causes,” Journal of Monetary Economics, Vol. 46, No. 1, pp. 31–77.
Masson, Paul R., 1998, “Contagion-Monsoonal Effects, Spillovers, and Jumps Between Multiple Equilibria,” IMF Working Paper 98/142 (Washington, International Monetary Fund).
Mian, Atif, 2006, “Distance Constraints: The Limits of Foreign Lending in Poor Economies,” Journal of Finance, Vol. 61, No. 3, pp. 1465–1505.
Mihaljek, D., 2006, “Privatisation, Consolidation, and the Increased Role of Foreign Banks,” in “The Banking System in Emerging Economies: How Much Progress Has Been Made?” BIS Paper No. 28 (Basel, Bank for International Settlements, August).
Mishkin, Frederic, 2005, “Is Financial Globalization Beneficial?” NBER Working Paper No. 11891 (Cambridge, Massachusetts, National Bureau of Economic Research).
Morgan, Donald, and Philip Strahan, 2004, “Foreign Bank Entry and Business Volatility: Evidence from U.S. States and Other Countries,” in Foreign Banking Market Structure and Monetary Policy, ed. by Luis Ahumada and J. Fuentes (Santiago, Central Bank of Chile).
Morgan, Donald, Philip Strahan, and Bertrand Rime, 2004, “Bank Integration and State Business Cycles,” Quarterly Journal of Economics, Vol. 119, No. 4, pp. 1555–1585.
Moskow, Michael, 2006, “Cross-border Banking: Forces Driving Change and Resulting Regulatory Challenges,” in Cross-border Banking: Regulatory Challenges, World Scientific Studies in International Economics, ed. by Gerard Caprio, Douglas Evanoff, and George Kaufman. Available via the Internet: www.worldscibooks.com/economics/6129.html.
Neumeyer, Paolo, and Fabrizio Perri, 2005, “Business Cycles in Emerging Economies: The Role of Interest Rates,” Journal of Monetary Economics, Vol. 52, No. 2, pp. 345–380.
Obstfeld, Maurice, Jay Shambaugh, and Alan Taylor, 2005, “The Trilemma in History: Tradeoffs among Exchange Rates, Monetary Policies, and Capital Mobility,” Review of Economics and Statistics, Vol. 3 (December), pp. 423–438.
Obstfeld, Maurice, and Alan M. Taylor, 2004, Global Capital Markets Integration, Crisis, and Growth (Cambridge, United Kingdom, Cambridge University).
Peek, Joe, and Eric Rosengren, 1997, “The International Transmission of Financial Shocks: The Case of Japan,” American Economic Review, Vol. 87, No. 4, pp. 495–505.
Peek, Joe, and Eric Rosengren, 2000, “Collateral Damage: Effects of the Japanese Bank Crisis on Real Activity in the United States,” The American Economic Review, Vol. 90, No. 1, pp. 30–45.
Peria, M.S.M., and S. Schmukler, 1999, “Do Depositors Punish Banks for ‘Bad’ Behavior? Market Discipline in Argentina, Chile, and Mexico,” World Bank Policy Research Working Paper No. 2058 (February).
Prasad, Eswar, Kenneth Rogoff, Shang-Jin Wei, and M. Ayhan Kose, 2003, Effects of Financial Globalization on Developing Countries: Some Empirical Evidence, IMF Occasional Paper No. 220 (Washington, International Monetary Fund).
Rajan, R.G., and L. Zingales, 1998, “Financial Dependence and Growth,” American Economic Review, Vol. 88, No. 3, pp. 559–586.
Romer, P., 1993, “Idea Gaps and Object Gaps in Economic Development,” Journal of Monetary Economics, Vol. 32, No. 3, pp. 543–573.
Sapienza, P., 2004, “The Effects of Government Ownership on Bank Lending,” Journal of Financial Economics, Vol. 72, No. 2, pp. 357–384.
Soussa, F., 2003, “A Note on Banking FDI in Emerging Markets: Literature Review and Evidence from M&A Data,” Bank of England paper submitted to the Committee on the Global Financial System Working Group on Foreign Direct Investment in the Financial Sectors of Emerging Market Economies. Available via the Internet: www.bis.org/publ/cgfs22gb.pdf.
Turner, P., 2006, “The Banking System in Emerging Economies: How Much Progress Has Been Made?” in The Banking System in Emerging Economies: How Much Progress Has Been Made? BIS Paper No. 28 (Basel, Bank for International Settlements, August). Available via the Internet: www.bis.org/publ/bppdf/bispap28a.pdf.
Unite, A., and M. Sullivan, 2001, “The Impact of Liberalization of Foreign Bank Entry on the Philippine Domestic Banking Market,” Philippine Institute for Development Studies, PASCN Discussion Paper No. 2001–08 (December).
Van Rijckeghem, C., and B. Weder, 2003, “Spillovers through Banking Centers: A Panel Data Analysis of Bank Flows,” Journal of International Money and Finance, Vol. 22, No. 4, pp. 483–509.
Additional information
*Linda S. Goldberg is a Vice President at the Federal Reserve Bank of New York.