Current State of Cross-Border Banking - Vrije Universiteit Amsterdam

this paper examines the degree of internationalization of banks in the three main economic regions:
the Americas, Asia-Pacific and Europe. It is interesting to distinguish between regional expansion (e.g.
within the Americas) and global expansion of banks. The data on the Transnationality Index is
therefore broken down into activities in the home market (h), the rest of the region (r), and the rest of
the world (w).
Classifying banks
Following the geographical breakdown of activities, banks are classified as domestic, regional or
global banks in this paper. Domestic banks are defined as follows:
1) more than 50 per cent of their business is conducted in the home market ( h > 0.
5 ).
This first criterion makes a distinction between domestic and international banks. Banks that conduct
the majority of their business in their home country are regarded as domestic banks. International
banks are divided into regional and global banks. Regional banks are defined as:
1) 50 per cent or more of their business is conducted abroad ( h ≤ 0.
5 ).
r ≥ 0.
25
2) 25 per cent or more of their business is conducted within the region ( ).
The second criterion identifies regional banks among the international ones. International banks that
have a sizeable part of their business in the rest of the region (e.g. Europe) are regarded as regional
banks (“European banks”). The total business of a bank in the region is a sum of the home activities
and the activities in the rest of the region ( h + r ).
Global banks are then defined as:
1) 50 per cent or more of their business is conducted abroad ( h ≤ 0.
5 ).
r < 0.
25
2) less than 25 per cent of their business is conducted within the region ( ).
The remaining group of banks is of a global nature. These banks have no gravity of business at home
nor in the rest of the region. They operate on a truly global scale. Our classification only distinguishes
between domestic, regional and global banks. A further distinction could be made by counting the
number of countries in which international banks are operating (Sullivan, 1994). As the focus of this
paper is on domestic versus international banking, we do not include this further breakdown.
3. Data on Cross-Border Banking
Most of the empirical studies on cross-border banking find a positive relationship between the size of
banks and the degree of internationalization (e.g. Focarelli and Pozzolo, 2001). We therefore focus
our empirical study of cross-border banking on the large banks. The 60 largest banks are selected on
the basis of Tier 1 Capital (The Banker, July, 2005). As the European banks compromise about 50%
of assets of The Banker’s Top 1000 world banks, the dataset also consists of more European than
American or Asian-Pacific banks. The dataset is divided into three samples: top 15 American banks,
top 15 Asian banks and top 30 European banks.
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