Are International Banks Different? Evidence on Bank Performance and Strategy

Alade (2014) reports that by the end of 2008 more than half of domestically owned Nigerian banks owned at least one foreign subsidiary – mostly in Africa – compared to two in 2002.

Bonfim and Costa (2017) show that the lending by international banks in Portugal is positively related to the state of the business cycle in their home countries.

Claessens and Van Horen (2015) show that OECD banks reduced their foreign banking presence since the crisis, while non-OECD banks more than doubled their presence in foreign countries.

See Cull and Martinez Peria (2010) for a survey of the literature on the drivers and consequences of foreign bank participation in developing countries.

Other papers focus on analyzing international banks from individual countries. Using U.S. data, Berger et al. (2016) find that international banks tend to be riskier – confirming findings by Gulamhussen et al. (2014) using international data. Frame et al. (2020) find that US Bank Holding Companies (BHCs) are more likely to operate subsidiaries in countries with weak regulation and supervision, which increases BHC risk. Buch et al. (2011, 2014) analyze the drivers of German banks’ internationalization, showing the importance of bank characteristics such as productivity and risk aversion. Using the same German data, Buch et al. (2013) show that higher internationalization at the extensive margin (asset holdings in more countries) is associated with lower domestic market power, whereas higher internationalization at the intensive margin (a higher foreign assets share) is positively associated with market power. Galema et al. (2013) conclude that cost advantages are driving bank internationalization through foreign branches, but not in the case of foreign subsidiaries. Peek and Rosengren (2000) find that the Japanese banking crisis reduced lending by Japanese banks in the US with real effects on US construction activity.

Their data set contains 48 large multinational banking groups almost entirely from high-income countries (there are only two developing country banks from Brazil).

Bankscope data does not incorporate information regarding foreign branches, and hence we focus solely on foreign subsidiary investments of parent banks. The literature suggests, on average, subsidiaries have a higher weight, especially in emerging market and developing countries. Using the 2002 data, Cerutti et al. (2007) find that for Latin America and Eastern Europe foreign bank subsidiaries make up 65% and 82% of foreign affiliates.

Subsidiary bank loan growth at the unconsolidated level should be a relatively good measure of loan growth in the host country.

Bertay, Demirgüç-Kunt, and Huizinga (2015) find that the credit growth of foreign subsidiaries is more procyclical with local GDP growth than the credit growth of domestic banks. Giannetti and Laeven (2012) show that a higher proportion of loans supplied by foreign banks is associated with a higher volatility of credit around its trend in the host countries.

The hypothesis of equal coefficients is not rejected.