Edited by Thorsten Beck - Vox

VOX Research-based policy analysis and commentary from leading economists
their foreign network in order to service their domestic customers abroad. 1 Finally, a
substantial number of emerging-market banks are no strangers to setting up branches or
subsidiaries in other countries. In fact, in 2009 close to 30% of the foreign banks were
owned by emerging-market banks. 2 This shows that these banks do have the knowledge
and expertise to undertake and manage overseas operations.
Staying close to home
Taking stock, it is to be expected that in the coming years emerging-market banks
not only will grow in their domestic market but also will expand their global reach.
However, this expansion is likely to be confined to the geographical region of the
bank’s headquarters. Research has shown that closeness to their clients makes it easier
for banks to do business. 3 So profit margins are likely relatively high for emergingmarket
banks in other emerging markets. Indeed, if we look at the previous expansion
of emerging-market banks, 70% of their investments tend to be in countries within
their own geographical region. 4 Furthermore, with a fully developed banking system,
sovereign debt problems, and low expected economic growth, profits are unlikely to
be reaped in advanced countries, providing another reason why investments in other
emerging markets are more likely. In addition, the regulatory crackdown in advanced
countries, caused by some cross-border bank failures, might make it hard for emergingmarket
banks to set up a branch or subsidiary in these countries.
With advanced-country banks trying to adjust to the new rules of the game, it is
unlikely that many of these banks will remain active investors in the near future. Banks
from emerging markets, being in a much better financial position, are likely to step
1 It has long been established that banks tend to follow their customers abroad (see, among others, Grosse and Goldberg
1991 and Brealey and Kaplanis 1996.)
2 Source: Foreign banking database (Claessens and van Horen 2011).
3 A number of studies show that banks tend to invest in countries that are geographically, legally and/or institutionally
close (Galindo et al 2003, Focarelli and Pozzolo 2005). In addition, De Haas and Van Horen (2011) provide evidence that
closeness is an important determinant of cross-border lending stability in times of crises.
4 Source: Foreign banking database (Claessens and van Horen 2011).
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