Contents
Sources: Claessens and Van Horen 2015; Bankscope.
Note: Darker lines indicate stronger ties.
In a recent paper (Feyen et al. 2020), we analyze post-GFC trends in bank activities of financial groups headquartered in 46 EMDEs, as well as the ownership structure of 51 prominent EMDE groups. Our analysis shows that EMDE groups have grown in size, geographical reach, range of activities in the financial and real sectors, and group complexity (table 1).
Table 1: Banking activities of groups headquartered in EMDEs
1. Data for 2013 are from Claessens and Van Horen (2015); Bankscope.
2. Data for 2017Q1 are from Bank for International Settlements; team calculations.
Note: Locational bank claims from EMDE groups headquartered in Brazil, Chile, South Africa, Mexico, Panama, the Republic of Korea, and Turkey.
Furthermore, data from the sample of 51 prominent EMDE groups from 27 countries show that each EMDE group had, on average, majority ownership of 30 foreign subsidiaries, of which 17 are located in EMDE host countries and 13 of these foreign subsidiaries are in the real sector. Subsidiaries were in some cases majority-owned up to the sixth level down the ownership chain, suggesting that these groups are complex in terms of size, geographical reach, range of activities in the financial and real sectors, and group morphology (table 2).
Table 2: Key statistics for the EMDE groups (September 2017)
Source: Orbis Bank Focus.
Note: The figures cover the financial and real sector of majority-owned subsidiaries only.
We employ cross-sectional regression analysis to document the relationship between the international activities of these EMDE groups and various group-level banking outcomes and funding strategies. The results indicate that some aspects of internationalization are associated with adverse outcomes, such as lower returns on assets (particularly if subsidiaries are in developing countries), higher risk, and lower market capitalization. Internationalization is also associated with a change in funding strategy toward using fewer deposits and more short-term funding for the banks with developed/non-regional country presence. This suggests that some groups could be more vulnerable to a large financial shock such as the COVID-19 crisis.
As such, building accurate risk profiles for EMDE groups by supervisors and the groups themselves is critical yet particularly challenging for groups operating across borders. The expansion of cross-border banking groups presents a complex set of challenges for regulators in the home and host jurisdictions; institutional capacity is a key constraint in practice for all involved parties in many EMDEs. The following (non-exhaustive) lessons for the EMDEs have been distilled from a large policy literature:
- Consolidated supervision: Legal and regulatory deficiencies impede effective supervision at the group-wide level. Effectively enforced regulation that targets capital, liquidity, risk management, and corporate governance at the group level is also missing in many EMDEs. A framework to ensure adequate on-site supervision of overseas subsidiaries is often absent or in need of improvement. Accounting for financial linkages across sectors, markets, and within and between groups can improve supervisory stress-testing practices.
- Cross-border regulatory cooperation and harmonization: Enhanced regional coordination and regulatory harmonization between home and host countries can address regulatory arbitrage and the buildup of cross-border risks. Prime candidates for harmonization include the definition and calculation of capital and liquidity, corporate governance, bank licensing criteria, accounting and audit standards, limits on large exposures and related-party lending, and fitness and propriety of directors, managers, and major shareholders. Such harmonization levels the playing field for EMDE groups vis-à-vis domestic banks and enhances financial deepening and competition.
- Cross-border crisis management and resolution: EMDE groups have become potential conduits for shocks as they have grown systemically important in home (e.g., Morocco) and/or host (e.g., El Salvador) jurisdictions. A failure of such a group could reverse the accrued socioeconomic benefits of financial integration, yet most EMDEs are not fully equipped to deal with the more complex case of a systemic bank failure across borders. Incentive conflicts between the home and host supervisor may further exacerbate a cross-border crisis (D’Hulster 2012). Crisis management groups, which bring together home and host supervisors to coordinate recovery and resolution planning of systemically important groups, should ameliorate these challenges, but they largely remain in their infancy.
- Corporate governance and risk management frameworks: EMDE groups have become more difficult to manage, as they have grown more complex and need to navigate jurisdictions with differences in key areas, such as the economic cycle, country risk, supervision and regulation, and accounting. It is therefore crucial that groups themselves implement effective frameworks for group-wide, cross-border corporate governance, capital and liquidity planning, and risk management (including intra-group transactions and exposures).
References
Claessens, S. (2016). “Global Banking: Recent Developments and Insights from Research.” Review of Finance.
Claessens, S., and N. Van Horen (2015). “The Impact of the Global Financial Crisis on Banking Globalization.” IMF Economic Review, 63(4), 868–918.
Cull, R., and M. Martinez Peria (2010). “Foreign Bank Participation in Developing Countries: What Do We Know about the Drivers and Consequences of This Phenomenon?” World Bank Policy Research Working Paper 5398.
D’Hulster, K. (2012). “Cross-Border Banking Supervision: Incentive Conflicts in Supervisory Information Sharing between Home and Host Supervisors.” Journal of Banking Regulation, 13(4), 300–319.
Feyen, E., N. Fiess, A. C. Bertay, and I. Zuccardi Huertas (2020). “Cross-Border Banking in EMDEs: Trends, Scale, and Policy Implications.”
World Bank (2018). Global Financial Development Report 2017/2018 Bankers without Borders. Washington, DC: World Bank Group.
Source : blogs.worldbank.org
