Current State of Cross-Border Banking - Vrije Universiteit Amsterdam

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Looking at the names of the banks in tables 1 to 3, it is clear that The Banker’s Top 1000 is a ranking of the world’s commercial banks, which have a significant retail base. 3 Retail business is often combined with investment banking (e.g. Citigroup, HSBC, JP Morgan Chase & Co, Barclays). Fully fledged investment banks, like Merrill Lynch, Goldman Sachs and Morgan Stanley, are not included in The Banker’s Top 1000. These investment banks would be classified as global banks, as investment banking is a global business. To calculate the Transnationality Index, data are gathered from the consolidated income statements and balance sheets of the 60 largest commercial banks (see the Appendix for a description of the data analysis). The results are reported in tables 1 to 3. At the bottom of the tables, the weighted average of the Transnationality Index for each region is calculated. To test whether there is a statistically significant trend (downwards or upwards) in the data, a statistical test proposed by Lehmann (1975) will be applied. 4 However, we should be careful with interpreting trends as we have only data for a six year period. Insert table 1. Index for the Cross-Border Business of Top 15 American Banking Groups American commercial banks have a strong domestic orientation with a domestic component of about 77% in table 1. The regional component is rather small (around 8%), while the global component is slightly larger (13 to 16%). While there is no clear up- or downward trend in the regional component, there is a statistically significant downtrend trend in the global component at the 10% level (p = 0.0514) over the 2000-2006 period. Insert table 2. Index for the Cross-Border Business of Top 15 Asian-Pacific Banking Groups Asian-Pacific banks also have a strong domestic orientation within the range from 80 to 87% in table 2. Regional business is very minor (around 5%) and global business somewhat larger (10 to 15%). The trend has a particular shape. International business decreased up to 2003 and has been slowly increasing since 2004. One explanation is that international business is squeezed in the aftermath of the severe recession in the nineties in Japan (the infamous decade of lost growth). When banks face difficulties and make losses, they tend to reduce foreign business first (even when investment opportunities abroad are more favourable than at home). 5 Now that the Japanese economy is growing, banks are slowly expanding their foreign business. Over the full 2000-2005 period, the overall 3 Under the catchy title ‘Bring me your consumers, your unbanked mass’, The Banker (June, 2006) talks of a retail banking revolution whereby large parts of the world’s population, previously unbanked, are entering a new world of available financial services. The Banker considers retail as the next frontier of cross-border expansion, both in developed and in emerging markets. Retail banking offers sustainable revenues at a low risk. In contrast, wholesale banking generates more volatile revenues. n 4 2 This test statistic is D = ∑ ( Ti − i) , where i indicates the year and i is the rank of the score of year i . i= 1 T 5 Internationalization can thus be explained by the capital strength of a bank. When profits are accumulating and capital is increasing through retained earnings, banks use the extra capital to expand internationally. When the capital base is eroding through losses, banks first cut their foreign business. This is a free interpretation of the capital crunch. See Peek and Rosengren (1995) on the general working of the capital crunch. 5
downward trend of international (regional and global) business is statistically significant at the 5% level (p = 0.0292). Insert table 3. Index for the Cross-Border Business of Top 30 European Banking Groups European banks have a far smaller domestic orientation with a domestic component of about 54% in table 3. Both regional business (20 to 23%) and global business (about 25%) is rather large. While there is no clear up- or downtrend in the domestic component, there is a clear increase in regional business at the expense of global business. The increase of regional business in Europe from 20% in 2000 to 23% in 2005 is statistically significant at the 1% level (p = 0.0014). The decrease of global business is statistically significant at the 10% level (p = 0.0875). It is remarkable that regional business has been growing over the last 6 years, while most European countries have experienced a recession during this period (with the exception of Spain and the UK which have had a major economic expansion during this period). Aggregating the data on bank level (Tables 1, 2 and 3) to their home countries provides us with an interesting view of the global financial landscape. Graph 1 illustrates the international component (both regional and global) in 2005 and the change of the international component over 6 years (from 2000 to 2005) of the countries individually. The size of the circles represents the total bank assets of the top banks in that country. Note that only the top 60 world wide banks are included in our sample. Graph 1. The degree and trend of cross-border banking of 15 countries over 2000-2005. Growth 2000-2005 ( inpercentage points) 15% 10% 5% 0% -5% -10% -15% S-Korea China USA Japan France Australia Italy Canada UK Germany Belgium Spain Netherlands Switzerland Sweden 0% 10% 20% 30% 40% 50% 60% 70% 80% Internationalization 2005 Source: Tables 1,2, 3 and own calculations. Notes: The circles, degree of internationalization (x-axis) and growth-trend (y-axis) represent the sixty banks aggregated on country level. The aggregates are weighted-averages to total assets of the banks. The degree of internationalization represents the international business (both regional and global) of banks head-quartered in the respective countries in 2005. The growth trend represents the growth in internationalization from 2000 to 2005. 6
Page 1 and 2: Current State of Cross-Border Banki
Page 3 and 4: The observed cross-border banking p
Page 5: this paper examines the degree of i
Page 9 and 10: Earlier this year, Citigroup’s CE
Page 11 and 12: Graph 3. Geographical segmentation
Page 13 and 14: In Europe, cross-border banking is
Page 15 and 16: For policy purposes, it would be us
Page 17 and 18: the Board in Washington DC will usu
Page 19 and 20: Building on European and Trans-Tasm
Page 21 and 22: References Barth, James, Dan Brumba
Page 23 and 24: Appendix: Data on Cross-Border Bank
Page 25 and 26: 7. Industrial and Commercial Bank o
Page 27 and 28: Table 2. Index for the Cross-Border
Page 29 and 30: Table 3. Continued 2000 2001 2002 2
Page 31: Table 5. Sensitivity analysis Conti

Current State of Cross-Border Banking - Vrije Universiteit Amsterdam

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