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B R I C K - A N D - M O R TA R O P E R AT I O N S O F I N T E R N AT I O N A L B A N K S
GLOBAL FINANCIAL DEVELOPMENT REPORT 2017/2018
deficits, can be too big to save and therefore are subject to more intense market discipline (Demirgüç-Kunt and Huizinga 2013). Financial safety nets, and more specifically the incentive for national authorities to bail out a bank in trouble, can also be related to bank internationalization because crossborder resolution proved to be problematic during the recent crisis period. Beck and others (2013) develop a model that they then test in the data, highlighting the incentives that national authorities have to intervene in a troubled cross-border bank. Because intervention is costly and national supervisors are mainly interested in protecting domestic stakeholders, the incentives for intervention are stronger if the share of domestic assets and deposits is high. Likewise, if the share of domestic bank equity is high, the incentives to intervene will be low because the national authorities will align with the interests of domestic shareholders, who will prefer to let the bank continue operating and avoid the costs of bank failure. In line with the financial safety net and distorted incentives of national authorities’ arguments, Bertay, Demirgüç-Kunt, and Huizinga (2016) show that internationalizing banks face greater market
discipline via increased funding costs—a result that is especially driven by banks in countries with large public deficits.
BOX 2.3
Conditions That Mitigate Asymmetries of Information Geographical, cultural, and institutional distances are important determinants of banks’ entry decisions because they affect information asymmetries. Buch (2003) reveals how information costs, proxied by geographical distance and cultural and legal system similarities, drive the international investment decisions of banks.5 Moreover, van Horen (2007) suggests that developing country foreign banks are more likely than their developed country counterparts to invest in small developing countries with weak institutions, suggesting a role for institutional proximity.6 These results may help shed light on the recent trends in international banking, where the entry of foreign banks from developing countries into other developing economies has been steadily increasing. One example, outlined in box 2.3, is Ecobank, an African bank that has expanded its operations across more than 30 countries in Africa.
Foreign Banks in Africa: The Case of Ecobank
The banking industry in Africa has traditionally been dominated by European banks because of its economic and legal legacies. Over the last decade, the rise of South–South banking has gained importance globally, and it has significantly affected fi nance in Sub-Saharan Africa (Beck, Fuchs, and others 2014). Compared with developing countries elsewhere, Sub-Saharan economies tend to be characterized by shallower and less efficient fi nancial systems (Honohan and Beck 2007) that offer relatively limited basic services (Beck and Cull 2013). Based on common fi nancial access and depth measures, access to traditional banking services in West and East Africa is
among the lowest globally (Nyantakyi and Sy 2015). Meanwhile, the synergy of fi nancial liberalization and postcrisis retrenchment of European banks have induced the international expansion of Sub-Saharan banks within the region (Honohan and Beck 2007; Moyo and others 2014). Such developments have opened up possibilities for enhancing banking sector competition, deepening fi nancial systems, and widening fi nancial access. Ecobank Transnational Incorporated, or Ecobank, is an example of regionalization by an African bank during the last two decades, highlighting both the opportunities and risks related to South–South bank-
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