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    Cross-Border Banking and Retail Integration: Discussion: Pierre Monnin Swiss National Bank

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    Avinash Napte
    - The document discusses factors that influence whether banks establish cross-border operations as subsidiaries or branches, and how banks mitigate the trade-offs between these forms. It also examines how banks' internal capital markets and common exposure to shocks have increased as cross-border banking has expanded. - Empirical evidence shows that while subsidiaries are theoretically better able to isolate economic losses, banks in practice support their subsidiaries similarly to branches. - A study finds that interest rate differences across countries can be explained by product and bank characteristics, and banks' international presence plays a role in reducing these differences. Macroeconomic and credit risks are at least partially priced into markets.

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    Cross-Border Banking and Retail Integration: Discussion: Pierre Monnin Swiss National Bank

    Uploaded by

    Avinash Napte
    19 views15 pages
    - The document discusses factors that influence whether banks establish cross-border operations as subsidiaries or branches, and how banks mitigate the trade-offs between these forms. It also examines how banks' internal capital markets and common exposure to shocks have increased as cross-border banking has expanded. - Empirical evidence shows that while subsidiaries are theoretically better able to isolate economic losses, banks in practice support their subsidiaries similarly to branches. - A study finds that interest rate differences across countries can be explained by product and bank characteristics, and banks' international presence plays a role in reducing these differences. Macroeconomic and credit risks are at least partially priced into markets.

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    - The document discusses factors that influence whether banks establish cross-border operations as subsidiaries or branches, and how banks mitigate the trade-offs between these forms. It also examines how banks' internal capital markets and common exposure to shocks have increased as cross-border banking has expanded. - Empirical evidence shows that while subsidiaries are theoretically better able to isolate economic losses, banks in practice support their subsidiaries similarly to branches. - A study finds that interest rate differences across countries can be explained by product and bank characteristics, and banks' international presence plays a role in reducing these differences. Macroeconomic and credit risks are at least partially priced into markets.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as PPT, PDF, TXT or read online from Scribd
    Flag for inappropriate content
    Download as ppt, pdf, or txt
    19 views15 pages

    Cross-Border Banking and Retail Integration: Discussion: Pierre Monnin Swiss National Bank

    Uploaded by

    Avinash Napte
    - The document discusses factors that influence whether banks establish cross-border operations as subsidiaries or branches, and how banks mitigate the trade-offs between these forms. It also examines how banks' internal capital markets and common exposure to shocks have increased as cross-border banking has expanded. - Empirical evidence shows that while subsidiaries are theoretically better able to isolate economic losses, banks in practice support their subsidiaries similarly to branches. - A study finds that interest rate differences across countries can be explained by product and bank characteristics, and banks' international presence plays a role in reducing these differences. Macroeconomic and credit risks are at least partially priced into markets.

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    of 15

    Cross-Border Banking and

    Retail Integration: Discussion


    Pierre Monnin
    Swiss National Bank
    tail Integration: Discussion
    oss-Border Banking and
    Risk and the Organization of Bank
    Foreign Affiliates
    Giovanni Dell’Ariccia and Robert Marquez
    tail Integration: Discussion
    oss-Border Banking and
    Subsidiary or branch?

    • Economic risk ⇒ Subsidiary (isolated loss)


    • Political risk ⇒ Branch (no expropriation possible)
    • Mitigation of trade-off:
    tail Integration: Discussion

    – Correlation between countries (no diversification gain)


    oss-Border Banking and

    – Endogenous rate on deposits (Modiglani-Miller)


    Subsidiary or branch?

    • Economic risk ⇒ Subsidiary (isolated loss)


    • Political risk ⇒ Branch (no expropriation possible)
    • Mitigation of trade-off:
    tail Integration: Discussion

    – Correlation between countries (no diversification gain)


    oss-Border Banking and

    – Endogenous rate on deposits (Modiglani-Miller)


    – Endogenous cost of equity (premium for political risk)
    – Foreign loans financed with home deposit
    – Moral hazard from parent bank (treat branch like subsid.)
    • Basel II ⇒ Branch (lower capital requirement)
    Internal Capital Markets and Lending
    by Multinational Bank Subsidiaries
    Iman van Lelyveld and Ralph de Haas
    tail Integration: Discussion
    oss-Border Banking and
    Empirical behavior of subsidiaries

    • With macroeconomic/credit risk only,


    subsidiaries is the best option.
    tail Integration: Discussion

    • Reason: they operate on a stand alone basis


    oss-Border Banking and

    ⇒ home bank do not need to support them in


    case of difficulties (no contagion of losses).

    • Do banks really use this strategy?


    Empirical behavior of subsidiaries

    • Empirical results show clear signs of


    support effect
    tail Integration: Discussion
    oss-Border Banking and

    ⇒ Subidiaries do not operate on a stand-


    alone basis

    • Banks have a subsidiary structure but act


    like a branch structure!
    Subsidiary or branch?

    • Economic risk ⇒ Subsidiary (isolated loss)


    • Political risk ⇒ Branch (no expropriation possible)
    • Mitigation of trade-off:
    tail Integration: Discussion
    oss-Border Banking and

    …
    – Reputation risk for in home country (or in other countries)
    – Business continuity
    Common exposure to shocks
    • Evidence of substitution effect ⇒ Banks do use
    internal capital market to better allocate their capital
    tail Integration: Discussion

    • Diversification through internal capital market reduces


    oss-Border Banking and

    bank’s exposure to idiosyncratic (country) shocks ⇒


    total exposure decreases.

    • All banks face systematic risk only ⇒ banks’ common


    exposure to shocks increase.
    Common exposure to shocks
    Average correlation between banks' Asset-to-Debt ratios
    World (1992-2006, 27 banks)
    .36

    .32
    tail Integration: Discussion

    .28
    oss-Border Banking and

    .24

    .20

    .16

    .12

    .08
    92 93 94 95 96 97 98 99 00 01 02 03 04 05
    Does the Law of One Price Hold in
    the Retail Banking?
    Massimiliano Affinito and Fabio Farabullini
    tail Integration: Discussion
    oss-Border Banking and
    Authors’ conclusion
    • Once interest rates have been « cleaned »
    of difference in product and difference in
    bank structure, the law of one prices holds.
    tail Integration: Discussion
    oss-Border Banking and

    • What can we say about role of cross-border


    banking in this result?
    Technical concerns

    ri ,t = α 't Ti ,t + β 'i Di ,t + γ' X i ,t + θ ' Z t ,i + εi ,t


    tail Integration: Discussion

    • This is a panel-data analysis ⇒ error term structure is


    oss-Border Banking and

    central. Explicit assumptions and tests would be


    appreciated…

    • Sample ranges over 2 years. Some explanatory variables


    might be very close to be constant (e.g. international
    presence) ⇒ Could this bias the results on the country effect
    significance?
    Technical concerns
    • Distinction between « Demand side / Supply side »
    variables, but should it not be between « Product
    characteristics / Market structure »?
    tail Integration: Discussion
    oss-Border Banking and

    • Alternative test to what reduces the interest rate


    differencial

    i, j i, j i, j i, j i, j i, j
    δt = ω + α 't Tt + γ' ΔX t + θ ' ΔZ t +ε t
    Own conclusions
    • Interest rate differences between countries
    are explainable.
    tail Integration: Discussion
    oss-Border Banking and

    • Banks’ international presence do play a role


    in this explanation.

    • Macroeconomic / Credit risk is (at least


    partially) priced by market

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