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Global integration in the banking industry

Author

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  • Allen N. Berger
  • David C. Smith

Abstract

Lowered regulatory barriers and advances in technology have reduced the cost of supplying banking services across borders. At the same time, growth in activity by multinational corporations has increased the demand for international financial services. As a result, many observers believe that global integration is under way in the banking industry, that banks are expanding their reach across borders, and that many banking markets will therefore develop large foreign components. The authors report on a study conducted by them, along with Qinglei Dai and Steven Ongena, that examined the nationality and international reach of banks that provide short-term financial services across Europe to affiliates of multinational corporations. The present article also looks at time-series data that provide a more recent look at the progress of integration in Europe. Based on a 1996 survey of more than 2,000 affiliates, the study found that an affiliate is most likely to choose a bank headquartered in the nation in which it is operating (a host-nation bank) rather than a bank headquartered in the home country of the affiliate or in a third nation. The affiliate is also more likely to select a bank limited to local or regional operations rather than one with global reach. The findings are consistent with the proposition that affiliates most value a bank that understands the culture, business practices, and regulatory conditions of the country in which the affiliate operates, and that host-nation banks possess a competitive advantage over other banks in this regard. The time-series data--on syndicated loans, foreign bank claims, and the dispersion of consumer goods prices across Europe--are also consistent with the picture drawn from the 1996 survey. The article concludes that banking markets evidently need not become more integrated even as economic activity otherwise becomes increasingly global.

Suggested Citation

  • Allen N. Berger & David C. Smith, 2003. "Global integration in the banking industry," Federal Reserve Bulletin, Board of Governors of the Federal Reserve System (U.S.), issue Nov, pages 451-460.
  • Handle: RePEc:fip:fedgrb:y:2003:i:nov:p:451-460:n:v.89no.11
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    File URL: http://www.federalreserve.gov/pubs/bulletin/2003/1103lead.pdf
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    Cited by:

    1. Amelie Jouault & Allen M. Featherstone, 2011. "Determining the Probability of Default of Agricultural Loans in a French Bank," Journal of Applied Finance & Banking, SCIENPRESS Ltd, vol. 1(1), pages 1-1.
    2. Arribas Ivan & Perez Francisco & Tortosa-Ausina Emili, 2010. "The Determinants of International Financial Integration Revisited: The Role of Networks and Geographic Neutrality," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, vol. 15(1), pages 1-55, December.
    3. Krzysztof Opolski & Tomasz Potocki & Tomasz Świst, 2011. "Segmentation-effective Strategies-Reduction of the Risk of Losing a Wealthy Client," Ekonomia journal, Faculty of Economic Sciences, University of Warsaw, vol. 26.
    4. Donald Morgan & Bertrand Rime & Philip Strahan, 2003. "Bank Integration and State Business Cycles," NBER Working Papers 9704, National Bureau of Economic Research, Inc.
    5. Dahl, Drew & Shrieves, Ronald E. & Spivey, Michael F., 2008. "Convergence in the activities of European banks," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 18(2), pages 161-175, April.
    6. Zeynep Ozkok, 2016. "Financial Harmonization and Financial Development: An Application of Europe’s Financial Services Action Plan," Applied Economics Quarterly (formerly: Konjunkturpolitik), Duncker & Humblot GmbH, Berlin, vol. 62(1), pages 1-35.
    7. Edward I. Altman & Herbert A. Rijken, 2011. "Toward a Bottom‐Up Approach to Assessing Sovereign Default Risk," Journal of Applied Corporate Finance, Morgan Stanley, vol. 23(1), pages 20-31, January.
    8. Pérez, Francisco & Arribas, Iván & Tortosa-Ausina, Emili, 2009. "Openness and geographic neutrality: How do they contribute to international banking integration?," MPRA Paper 17211, University Library of Munich, Germany.
    9. Arribas, Iván & Pérez, Francisco & Tortosa-Ausina, Emili, 2011. "A network perspective on international banking integration," Journal of Policy Modeling, Elsevier, vol. 33(6), pages 831-851.
    10. Heuchemer, Sylvia & Kleimeier, Stefanie & Sander, Harald, 2008. "The Geography of European Cross-Border Banking: The Impact of Cultural and Political Factors," Research Memorandum 008, Maastricht University, Maastricht Research School of Economics of Technology and Organization (METEOR).

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    Keywords

    Banks and banking ; International finance;

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