International Bank Entry Driven Home Host Country Factors Finance Essay

Many international banks were under funding stress due to financial crisis. Some funding strains led international banks to put greater emphasis on home office funding needs and on funding foreign credit extension in local markets. In recent year, financial services have become increasingly important. From many surveys done by (Gray & Gray, 1981) (Dunning, 1977) etc it was found that many banking institutions are becoming international. In last few decades it has been seen that many foreign banks are entering markets, especially in developing countries, to provide a broad range of financial services locally. This has been driven by domestic deregulation, e.g., the removal of entry barriers, technological advances, increased financial integration and more generally heightened globalization. [i] Now with increasing technological advances and good communications, banks are now increasingly able to provide many types of financial services across borders to non-financial firms’ foreign affiliates without needing to establish affiliates in foreign markets. It won’t be wrong to say that banks follows their customers to provide them with financial services abroad, especially trade and project finance, and thereby increase their businesses and profitability. Bank profitability is mainly affected by domestic and foreign economic activity. In the period to early 1994, the declining interest rates, which made the possibility of higher rates of return in emerging markets attractive or the technological advances and innovations in financial instruments have made it easier to buy into emerging markets. [ii] According to Cerutti, Dell’Ariccia, & Maria Soledad Martı´nez Perı´a, Among the host country factors, they consider important factors like legal restrictions, entry requirements, and corporate taxes on foreign bank operations. In addition, they also examined about what responsibilities of parent banks have vis-à-vis the liabilities of their branches and subsidiaries, by looking at the impact of measures of host country economic and political risks. Moreover the national governance or legal environment is also somewhat responsible for the banks’ profitability. As described in Anon., (2005), a foreign bank can enter a given market in one of the following four organizational forms: representative offices, agencies, branches and subsidiaries. [iii] According to the survey on global industry profit conducted by The McKinsey Company in 2006 (see Figure 1), Dietz et al. (2008) indicates that the revenues and profits in the banking industry amounted to 788 billion that is the highest in comparison to other industry. As Figure——shown, it is noted that from 2000 to 2006 developing countries grew significantly faster profits than those in the world. This can be easily proved from question no.1; the above table shows that developing countries were making more profit than developed countries this proves that banking sector was growing vigorously. This also indicates that the banks were taking interest in setting up there branches in developing countries. [iv] Claessens and Horen developed a measure of competitive advantage for each source-host country pair based on assessments of countries’ institutional environments. They used difference-in-difference model to explain bilateral banking FDI and controlling for other factors, after that they found that in driving foreign banks location decision especially for mergers and acquisitions institutional competitive was one of the important and advantageous factor. Basically the important factors which attracts the bank to go international are The ownership advantages which not only involves asset advantage but transaction advantage of a bank The locational advantages of a market which involves the attractiveness of the host country – market seeking and host country competition. The firm’s internalisation advantages i.e. the benefits which are generated due to the reduction of the transaction cost. the host country regulation (regulatory barriers, government attitude and politics, information cost and institutions) Liquidity Management: The management of cash flows across an institution’s balance sheet (and possibly across counterparties and locations) can be known as liquidity management. It involves the control of maturity/currency mismatches and the management of liquid asset holdings. Funding: The sourcing of liabilities can also be known as funding. The funding strategy is used to know how a bank intends to remain fully funded at minimum cost consistent with its risk appetite. Such a strategy is not used for balance cost efficiency and stability but is also used to target a broader funding which provides more stability & reliable funding. Internal determinants: Internal determinants are factors that are mainly changed by a bank’s management decision and policy destination. Such profitability determinants are related to the level of liquidity, provisioning policy, bank size, capital adequacy and expenses management. External determinants: On the other hand, the external determinants, both industry-related and macroeconomic, are factors reflecting the legal environment and economic where the financial institutions operate. The micro economic factors relative to the target bank in the host country (efficiency and profitability). BLOMSTERMO, A., SHAMA, D. D. & SALLIS, J., (2006) provide the definitions on the high and the low control entry modes. They specify that for high control entry modes (e.g. wholly owned subsidiary, majority owned subsidiary, etc.) there is a need of more resource commitment in the host country, and the company investing abroad are insecure. The low control modes (e.g. licensing, different types of contractual relationships, etc.) employ a reduced volume of resources, thereby reducing the risk the investing company is facing. On one hand, the high control entry mode provide high integration and control, while on the other hand, the low control entry mode, give low control and intergration (i.e. cooperative agreements), reduced risk. Foreign-owned banks located in developing countries tend to be more profitable as predicted by skilled management, but less profitable compared with domestic banks. Even though GDP at host country have significantly negative effect on NIM (net interest margin), foreign banks show extremely profitable in comparison to domestic ones. In addition, host country with higher inflation level would largely increase bank NIM (net interest margin). [v]

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