During the last few decades, internationalisation of banks has been increased. It often occurs in developing countries, where foreign banks enter their market. As a foreign bank, they have to overcome many problems when planning to establish their presence across border. Among them choosing a market is a finical job, where they have to bother about factors like culture, language and domestic bank regulations in the host countries and regulations differ significantly across countries.
The banking regulations of host country that effect the location decision can be of Regulations on bank activities and banking-commerce links. Regulations on entry of domestic and foreign banks. Regulations on capital adequacy. Deposit insurance design. Supervision. Regulations on easing private-sector monitoring of banks. Government ownership of banks. (James R. Barth, Gerard Caprio, Jr. and Ross Levine) During 19th century, there were many barriers by the nations towards the foreign banks. These barriers can be broadly classified as explicit barriers and implicit barriers. Explicit barriers may be the rules and regulations limiting entry of foreign banks, their behaviour. Treating foreign banks differently from domestic banks is an explicit barrier. Prevention of the entry and expansion of foreign banks by the government in favour of the local or domestic banks is a type of implicit barrier. By the middle of 19th century, there appeared a trend of lowering the barriers over time, which helps the banks to go global. It’s found to be a lower penetration rate of foreign banks, about 10% in developed countries, whereas a much higher level is in developing countries, about 50%. A higher trend towards lowering both barriers over time was appeared in developing countries governments which results in a higher foreign bank penetration rate. Considering ‘New Europe’ consisting developing countries like Poland, Hungary reduced ownership of state banks along with implicit and explicit barriers towards the entry of foreign banks and allows them to control most of their banking assets (Allen N. Berger).This happens mainly because of their transition from socialism. More over in some cases such as Estonia, Czech Republic the foreign banks takes over 90% of market shares. Some nations have explicit rules that limit the behaviour and expansion of foreign banks even after entry. For example, in India, “foreign banks that purchase shares of local Indian banks are restricted to a maximum of 10 percent of voting rights and also face explicit additional capital requirements and permission for branch expansion” (Berger, Klapper, Martinez-Peria and Zaidi, 2005). Similarly limits on financial ratios and minority ownership in china acts as barriers for foreign banks According to Bath, Caprio and Levine 2001, Developing countries set more restrictions on foreign bank entry and taking ownership of domestic banks, branching. In addition these countries have a stronger legal system and offshore financial centres. The lack of handling hard-information lending technologies rather than soft-information lending is also a barrier for foreign banks. The action of government officials, trying to prevent foreign entry and expansion in favour of domestically based institutions acts as a problem. This may include delaying foreign bank acquisitions. Apart from European and Asian countries the developing countries from Latin America has a very high rate of foreign bank penetration. But the reason for foreign presence in Latin America and Eastern Europe differs. Much of the foreign ownership in Latin America arises from liberalization and financial crisis. Another contributing factor is the small role for state owned banks. On the other hand, forces behind the foreign ownership in eastern Europe was combined of privatization of state owned institutions and dearth of private, domestic banks with expertise to take over these institutions. In case of developed countries referred here as ‘Old Europe’ consisting Germany, Italy, France and USA removes most of their explicit barriers towards foreign banks. In addition, nations of ‘Old Europe’ designed Single Market Program (SMP) which allows them to share a single banking market and banking license. So this helps their banks to cross border easily. Along with this, technological advances such as advances in information processing, financial technologies attracted foreign banks. The shorter distances between the countries were an advantage. Here also there are barriers for foreign penetration. Whenever a new market opens up, the first one to take advantage are the banks in order to increase their profits. “The Basle Committee on Bank Supervision has developed an extensive list of “best practices” for the regulation and supervision of banks, which is promoted by the International Monetary Fund and the World Bank. There is a strong sense that if only policymakers in countries around the world would implement particular regulatory and supervisory practices, then bank “safety and soundness” would improve, thereby promoting growth and stability” (James R. Barth, Gerard Caprio, Jr. and Ross Levine). One of the reasons for the less penetration of foreign bank penetration in developed countries is the preventive regulation and protective regulation. Preventive regulations include market entry, capital adequacy, liquidity control, permissible business activities, foreign currency exposure, loan concentration and country risk. Protective regulations include deposit insurance and lender of last resort and emergency control.(Richard Dale). For example, to boost the economic growth, Individual states within the United States created a more competitive (and diversified) banking sector by liberalizing their branching restrictions. “The regulatory response of the US banking crises of the 1930s was the creation of the deposit insurance system”(Alfred Lewis and Gioia Pescetto). Banks from developed countries are likely to be more efficient and so have advantage over their competitors in host market. More regulations that affect the location can be economic integration, institutional characteristics and profit opportunities. (Dario Focarelli). The utmost percentage ownership of a bank’s capital is higher among higher income countries than lower ones. The stringency of capital requirements is lower for lower income countries than for upper income countries. There is a clear trend for the restrictiveness of bank activities to decline as one move from the lower income countries to the higher income countries.
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Summarising the above data, changes in banking regulations during the 19th century makes the globalization of banks possible. The penetration in developed countries seems to be least as compared to developing countries. Lower income countries as a group are no more restrictive to foreign banks than upper income countries.
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