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Being a Foreigner among Domestic Banks: Asset or Liability?

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  • Stijn Claessens
  • Neeltje van Horen

Abstract

Do foreign banks have an advantage operating abroad? The existing literature has come up with different answers. Studying the performance of foreign banks relative to domestic banks in a large number of countries between 1999 and 2006, we find that the answer importantly depends on a number of factors. Specifically, foreign banks tend to perform better when from a high income country and when competition in the host country is limited. They also perform better when they are large and rely more on deposits for funding. Foreign banks improve their performance over time, possibly as they adapt to the local institutional environment. Foreign banks from home countries geographical or cultural close to the host country perform better than distant foreign banks. Institutional familiarity, however, does not help (improve) foreign banks' performance. These findings show that it is important to control for heterogeneity among foreign banks when studying their performance and help reconcile some contradictory results found in the literature.

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Bibliographic Info

Paper provided by Netherlands Central Bank, Research Department in its series DNB Working Papers with number 224.

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Date of creation: Nov 2009
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Handle: RePEc:dnb:dnbwpp:224

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Keywords: foreign direct investment; international banking; information; institutions.;

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Citations

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Cited by:
  1. Huizinga, H.P. & Voget, J. & Wagner, W.B., 2011. "International Taxation and Cross-Border Banking," Discussion Paper 2011-066, Tilburg University, Center for Economic Research.
  2. Clarke, George R.G. & Cull, Robert & Kisunko, Gregory, 2012. "External finance and firm survival in the aftermath of the crisis : evidence from Eastern Europe and Central Asia," Policy Research Working Paper Series 6050, The World Bank.
  3. Cihak, Martin & Demirguc-Kunt, Asli & Feyen, Erik & Levine, Ross, 2012. "Benchmarking financial systems around the world," Policy Research Working Paper Series 6175, The World Bank.
  4. Cull, Robert & Xu, L. Colin, 2011. "Job growth and finance : are some financial institutions better suited to early stages of development than others?," Policy Research Working Paper Series 5880, The World Bank.
  5. Kiyota, Hiroyuki, 2011. "Efficiency of Commercial Banks in Sub-Saharan Africa: A Comparative Analysis of Domestic and Foreign Banks," Working Papers UNU-WIDER Research Paper , World Institute for Development Economic Research (UNU-WIDER).
  6. Hryckiewicz, Aneta & Kowalewski, Oskar, 2010. "Economic determinates, financial crisis and entry modes of foreign banks into emerging markets," Emerging Markets Review, Elsevier, vol. 11(3), pages 205-228, September.
  7. Jan-Egbert Sturm & Barry Williams, 2005. "What Determines Differences in Foreign Bank Efficiency? Australian Evidence," CESifo Working Paper Series 1587, CESifo Group Munich.
  8. Chen, Sheng-Hung & Liao, Chien-Chang, 2011. "Are foreign banks more profitable than domestic banks? Home- and host-country effects of banking market structure, governance, and supervision," Journal of Banking & Finance, Elsevier, vol. 35(4), pages 819-839, April.

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