Introduction
During thelastdecadeforeign bankshaveentered severalEastEuropean (EE)transition countries,though to differentdegrees. According to thereview by Narodowy Bank Polski (NationalBank ofPoland)severalcountriesregarded foreign strategicinvestorsin theirbanking system asameansto improveboth thequantity and quality offinancialintermediation. Some- timestheseadvancesresulted in higherrisksforthestability ofthefinancialsystem,emphasising thedangerofamorevolatilecreditsupply. Although research hasbeen donefortheother areas―whereforeign bank penetration ishigh aswell―theempiricalresearch to dateon the roleofforeign banksasregardscreditstability in across-section ofEE countriesisrather limited. Severalauthorsdivideforeign banksinto greenfieldsand takeovers,so asto differen- tiatebetween modesofentry,and investigatewhetherthefinancialhealth oftheparentbank influencesitsEE-subsidiaries(Voinea,2008;DeHaan,2004). They suggested thatextentto which foreign bank subsidiariesdifferfrom domesticbankswillalso depend on theirlevelof involvmentin themultinationalbanking organisation they arepartof.
ChrisCzerkawski
(Received on May 11,2009)
Abstract
Advanced internationalization ofEastEuropean economiesin thefirstdecadeof2000s resulted in increased foreign presenceand in severalcountriescreditmarketsaredominated by foreign-owned banks. Thispaperanalysesthedevelopmentforforeign ownership and its impacton financialmarketsin Eastern Europe. Structuraland dynamicaspectsofforeign banking aswellasstatisticalresultsarepresented. Costsand benefitsofforeign banksentry in thesecountriesarediscussed and areperceived to beoneofthemostimportantfactorsinfluencing theshapeofbanking sectorsin EastEuropean economies. Although theiractionstend to focus mostly on corporateservices,theperceived need forsupportoftheclientbaseisalso themost importantreason fortheirgrowth. Itcan also beargued thatthedirectbenefitsfrom entry are limited and theindirectonesarequiteevident,mainly in theareasofcorporatefinancesand foreign trade.
Key Words:Internationalfinance,banking,EastEuropean banking
Theimpactofgreenfieldsand takeoverson hosteconomy may differbecausethey reflect differing entry strategiesoftheparentbank. A foreign bank unfamiliarwith acountry to which itswantsto expand may firstestablish agreenfield to “testthewaters”. Buying an existing bank may on theotherhand reflectalonger-term ormoredefinitecommitment. Someparent banksestablish greenfieldsbecausethey wantto controlallaspectsofthenew affiliateright from thebeginning. Otherfinancialinstitutionsputmoreemphasison theneed to beareal localbank,and arethusmorein favouroftaking overan existing bank. Usually,theorganisa- tionaland corporategovernancelinksbetween aparentbank and atakeoverareusually looser than thosebetween aparentbank and thegreenfieldsienew subsidiariesoraffiliated banks.
Thispaperisstructured asfollows. In thefollowing section abriefoverview oftheliterature on foreign banksand financialstability willbepresented,afterwhich recentdevelopmentsin internationalization ofEE banking and conclusionswillfollow.
Banking globalization ―sometheoreticalconsiderations
Theanalyticaland empiricalstudiesofforeign banking expansion havebeen attempted from variousconceptualangles. Two ofthem areextensively developed asthey providehelpful insightinto themechanism and operation ofWestern banksin Eastern Europe. Firstisthetheory ofmultinationalfirm (Hymer,1960;Grubbel,1977;Rugman,1981;DeYoung and Nolle,1996) and theotheristheheterodox theory ofinternationaltradeknown also astheeclecticparadigm theory (Dunning,1977;Cantwelland Narula,2003). According to thefirstapproach banks enterforeign marketsbased on such fundamentalsasbank size,bank rateofreturn and the globalization strategy. Themorerecentstudieshoweveraremorein linewith theheterodox theory asthisapproach emphasizesthelocation and integration factorsratherthan on company’s motivation forexpansion. Thisapproach seemsalso morein linewith therecentglobalization trendsin world financialmarketsand fitsmorewith thecurrentownership-location-globalization characteristicsofworld economy in particularwith theintegration offinancialmarketswithin European Community.
Among thefactorsthatimpactcompany’sdecision to enterforeign marketscertain groups offactorsareregarded moreimportantthan others. Thefirstgroup isthe“follow the customer”strategieswhich includesforeign directinvestmentand bilateraltrade. According to thisview banksfollow theircustomersto utilizetheirdatabaseand to servicethem in foreign markets. Thisstrategy isalso known as“defensiveexpansion”and isrepresented by several
empiricalstudies(Grubbel,1977;Wiliams,2002;Goldberg and Johnson,1990;Millerand Parkhe, 1998). Literaturethatsupportsthisapproach with regard to foreign tradeincludesGlosseand Goldberg,1991;Yamori,1998;Buch,2000.
The“pecking ordertheory”emphasizesthestructureofcapitalflowsasthefoundation of banking expansion. Internationalcapitalflowsinfluenced by information costswillpredictthe following orderofforeign capitalinflows:foreign directinvestment(FDI)willcausebank lending willcauseportfolio investment. FDIwillalso initiatetheprocessasitlowershigh costof information required forinitialentry into foreign marketand astheeconomy advancesand complies with internationalnorms,information costswillbefurtherreduced and morecapitalinflow will follow.
Theothergroup offactorsrelatesto marketcomplementarity. Including GDP,sizeand distance,financialstructuredevelopmentand prospectsforfutureprofitability and many studies found outthatthesedo haveasignificantexplanatory value. On theotherhand,somestudies (Wezel,2004;Sagari,1992)found thatGDP isnotasignificantfactorin externalexpansion.
Financialmarketdevelopmentwasgenerally found to besignificantbutnotin acapital-scarce economy asbanking capitalgoeswherebusinessopportunitiesarehigher. Studiesthatsupport thisview includeBlealey and Kaplanis,1996.
Theothergroup offactorsisrelated to variouskind ofrisk (political,banking,currency and institutionalfactorsareplaced in thecategory ofmarketrisk becausethey influencemarket attractiveness). Hence,underdeveloped institutionsareassociated with pooreconomic performance,and such factorsascorruption,speculation,grey economy would increasetransaction costs. SeePapaioannou,2005 and Bol,2002 who emphasizetheroleofinstitutionalreform and regulationsin explaining theflow ofbanking capital. In thisgroup onemay also placethe proponentsofso called “Lucasparadox”,which explainswhy capitalwould notflow from rich to pooreconomies. Ineffectiveregulations,corruption,lack oftransparency arethemain factors thatexplain asymmetry in thebanking capitalexpansion (Alfaro,2003 and Bevan,Estrin and Meyer,2004).
Theexpansion offoreign banksinto less-developed banking systemsisrepresented by severalstudies. Themajority ofthisliteraturefocuseson theinfluenceofforeign bankson the efficiency ofdomesticeconomy banking systems. Such studiesgenerally find thatforeign bank entry haspositiveefficiency effects(e.g.Claessensetal.,2001;Lensink and Hermes, 2003). However,efficiency gainsmay be(partly)offsetifasufficientdegreeoftradeoff between banking efficiency and banking stability ispresent.
