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Banking across borders with heterogeneous banks

  • Friederike Niepmann

Individual banks differ substantially in their foreign operations. This paper introduces heterogeneous banks into a general equilibrium framework of banking across borders to explain the documented variation. While the model matches existing micro and macro evidence, novel and unexplored predictions of the theory are also strongly supported by the data: The efficiency of the least efficient bank active in a host country increases the greater the impediments to banking across borders and the efficiency of the banking sector in the host country. There is also evidence of a tradeoff between proximity and fixed costs in banking. Banks hold more assets and liabilities in foreign affiliates relative to cross-border positions if the target country is further away and the cost of foreign direct investment is low. These results suggest that fixed costs play a crucial role in the foreign activities of banks.

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Paper provided by Federal Reserve Bank of New York in its series Staff Reports with number 609.

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Date of creation: 2013
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Handle: RePEc:fip:fednsr:609
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  1. Claudia M. Buch & Cathérine Tahmee Koch & Michael Kötter, 2009. "Margins of International Banking: Is there a Productivity Pecking Order in Banking, too?," CESifo Working Paper Series 2891, CESifo Group Munich.
  2. Beatriz de Blas & Katheryn Niles Russ, 2010. "All Banks Great, Small, and Global: Loan pricing and foreign competition," NBER Working Papers 16029, National Bureau of Economic Research, Inc.
  3. Peter Neary & Monika Mrazova, 2011. "Selection Effects with Heterogeneous Firms," Economics Series Working Papers 588, University of Oxford, Department of Economics.
  4. Joseph F. Francois & Bernard Hoekman, 2009. "Services Trade and Policy," Economics working papers 2009-03, Department of Economics, Johannes Kepler University Linz, Austria.
  5. de Sousa, J. & Mayer, T. & Zignago, S., 2011. "Market access in global and regional trade," Working papers 358, Banque de France.
  6. Buch, Claudia M. & Koch, Cathérine T. & Koetter, Michael, 2011. "Size, productivity, and international banking," Journal of International Economics, Elsevier, vol. 85(2), pages 329-334.
  7. Degryse, H.A. & Ongena, S., 2002. "Distance, Lending Relationships and Competition," Discussion Paper 2002-16, Tilburg University, Center for Economic Research.
  8. Dario Focarelli & Alberto Franco Pozzolo, 2005. "Where Do Banks Expand Abroad? An Empirical Analysis," The Journal of Business, University of Chicago Press, vol. 78(6), pages 2435-2464, November.
  9. Niepmann, Friederike, 2013. "Banking across borders," Discussion Papers 19/2013, Deutsche Bundesbank, Research Centre.
  10. Kenneth P. Brevoort & John D. Wolken, 2008. "Does distance matter in banking?," Finance and Economics Discussion Series 2008-34, Board of Governors of the Federal Reserve System (U.S.).
  11. Huberto M. Ennis, 2001. "On the size distribution of banks," Economic Quarterly, Federal Reserve Bank of Richmond, issue Fall, pages 1-25.
  12. Buch, Claudia M. & Lipponer, Alexander, 2007. "FDI versus exports: Evidence from German banks," Journal of Banking & Finance, Elsevier, vol. 31(3), pages 805-826, March.
  13. Lehner, Maria, 2009. "Entry mode choice of multinational banks," Journal of Banking & Finance, Elsevier, vol. 33(10), pages 1781-1792, October.
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