Powerful parents? The dark and the bright side of multinational banking

Ralph De Haas

EBRD

Banca d’Italia, June 10th 2013

LENDING BY MULTINATIONAL BANKS AND IMPLICATIONS FOR FINANCIAL STABILITY AND INTEGRATION

Source: Bankscope, bank websites

European banking integration: view from above

Source: Beck, Degryse, De Haas and Van Horen (2013)

Red dots – only domestic banksBlue dots – only foreign banks Green dots – domestic and foreign banks

European banking integration: view from the ground

Czech Republic: foreign banks rule

Source: Beck, Degryse, De Haas and Van Horen (2013)

Poland: a more mixed picture

Source: Beck, Degryse, De Haas and Van Horen (2013)

The bright side of multinational banking

1. Positive impact on banking efficiency (Fries and Taci 2005)

2. In the medium term, positive impact on access to finance (Giannetti and Ongena 2012)

3. More stable than cross-border credit (Peek and Rosengren 2000)

4. Parental support via internal capital markets (Cetorelli and Goldberg 2012) stabilizes economies during local banking crises (De Haas and Van Lelyveld 2006/2010)

1. Exacerbates local business and credit cycles (Morgan et al. 2004)

• Boom in Emerging Europe: 2004-2007 (De Haas, Korniyenko, Loukoianova, and Pivovarsky 2012)

• Regional U.S. housing booms (Loutskina and Strahan 2011)

2. Transmits financial shocks across borders• From Japan to the U.S. (Peek and Rosengren 1997/2000)

• From Western to Emerging Europe (Popov and Udell 2010; Ongena, Peydro, Van Horen 2013)

• Globally: during 2008/09, MNB subs deleveraged faster than domestic banks, in particular wholesale-funded subsidiaries and subsidiaries of wholesale-funded parents (De Haas and Van Lelyveld 2013)

The dark side of multinational banking

Some things we learned

1. Multinational banking: double-edged sword

• Why? ICMs are two-way streets

• Substitution and support effects

2. Composition debt funding matters• ‘Sticky’ (insured) retail vs. ‘flighty’ wholesale (Kamil and Rai 2011)

• FX vs. LC wholesale funding: swap markets can break down (Ivashina, Scharfstein, and Stein 2013)

Variation across multinational banks?

• Large literature on differences between domestic and foreign banks (Claessens and Van Horen 2013)

• We know less about differences between and within multinational banks in terms of funding and business models

• Banking Environment and Performance Survey (BEPS II)

1. Detailed face-to-face surveys with >600 bank CEOs across 32 EBRD countries of operation

2. Quantitative follow-up surveys filled out by >300 of these banks3. Collection of detailed information on the geographical location of

137,575 bank branches owned by 1,840 banks

0.2

.4.6

.81

CEB SEE

Fund flows between parents and subsidiariesduring the years 2007-2012 by region

Credit/Liquidity to subsidiary Credit/Liquidity to parentDividend to parent

0.2

.4.6

.81

CEB SEE

Fund flows between Italian parents and their subsidiariesduring the years 2007-2012

Credit/Liquidity to subsidiary Credit/Liquidity to parentDividend to parent

ICMs as two-way streets

Source: De Haas and Kirschenmann, 2013

Powerful parents: credit-growth drivers

28%

73%

7%

93%

CEB SEE

No Yes

Graphs by region

Does your parent set annual targetsfor you in terms of credit growth?

Source: De Haas and Kirschenmann, 2013

Push for market share

68%

33%

49%51%

CEB SEE

No Yes

Graphs by region

Does your parent set annual targetsfor you in terms of market share?

Source: De Haas and Kirschenmann, 2013

Use of centralised Treasuries

Source: De Haas and Kirschenmann, 2013

Business models matter...

050

010

0015

00

20012003

20052007

20092011

Centralized treasuryNo centralized treasuryLocal banks

Source: De Haas and Kirschenmann, 2013

Open questions

What explains variation between and within MNBs?

1. Business models (“the Spanish model”) vs. host-country conditions (Latin America vs. Emerging Europe)?

2. Role “traditional” ICM (liquidity and dividend flows) vs. economic capital allocation and credit growth/market share target-setting

3. Centralised vs. decentralised risk management

4. Homogeneous branches vs. heterogeneous subsidiaries

A better understanding of this variation is particularly important for (tailor-made) supervision rather than (broad-brushed) regulation

Thank you