Are Multinational Banks Different?
Discussion of Navaretti et al 2010
by
Dalia Marin
University of Munich
for
51st Economic Policy Panel, April 2010, Madrid
1. Why look at Multinational Banks?
Since 1990 most countries undertook financial integration by reducing impediments to crossborder financial transactions and an increased participation of foreign banks in the local
banking system. This trend was particularly pronounced for Eastern Europe and the New
Member States (NMS) where foreign multinational banks have become the dominant players
in the local banking system in these markets. So the question arises whether the participation
of multinational banks has been good or bad. This is a timely paper of high policy relevance.
In their paper the authors ask two questions: First, do foreign banks behave differently than
domestic banks? Second, do multinational banks (MNBs) amplify or stabilise external
financial shocks? What is their role in the financial crisis? I want to comment on these two
questions and add some evidence on Austrian and German multinational banks in Eastern
Europe. Let me start with the first question.
2. Do MNBs behave different?
The authors argue yes. MNBs behave differently, because they have an internal capital market
(ICM). Why should the availability of an ICM make a difference? MNBs with an ICM can
support affiliates in distress with liquidity or they may reallocate resources away from
affiliates creating distress. This way ICMs may stabilize or destabilize local banking systems.
2.1 A Feldstein-Horioka Approach
In their empirical analysis the authors do not provide direct evidence on ICM. Rather they
pursue an approach similar to that used by Feldstein and Horioka (1980) in their famous
saving-investment puzzle. Feldstein and Horioka demonstrated that across OECD countries
long period averages of national saving rates are highly correlated with similar averages of
domestic investment rates. A cross-section regression of investment on saving covering 1960
through the mid 1970s yielded slope coefficients near unity. Later studies for the 1990s found
similar but somewhat smaller coefficients. Surprisingly in highly integrated financial markets
domestic investment is predominantly financed out of national savings. Thus, the high
correlation between investment and saving across countries suggests a small role for
international capital flows.
Similar to Feldstein and Horioka, the authors test with a large panel of bank firm level data of
5500 European banks whether or not the bank specific correlation between the rate of growth
of bank lending and of local bank deposits is lower for multinational affiliate banks compared
to stand alone banks. A low correlation between bank lending and local deposits indicates that
multinational affiliates are getting capital inflows from parent firms while stand alone banks
base their lending mainly on the availability of local deposits. The authors indeed find that the
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correlation between lending and deposits is lower in foreign affiliates of multinational banks
in particular within the EMU and the EU15. In order to avoid endogeneity issues, the authors
proceed to estimate whether the correlation between the growth rate of lending with the
growth rate of deposits as the dependent variable is indeed lower for affiliates of banks in
particular within the EU15 after controlling for a number a of bank and country
characteristics. They indeed find this. They also find that affiliates that are operating in
geographically closer countries and in countries with less synchronised business cycles can
count on more liquidity from parent firms enabling them to provide lending beyond available
local deposits. The authors conclude from this evidence that affiliate banks have been a
source of financial stability in host countries.
2.2 Direct Evidence on Internal Capital Markets (ICM)
I want to turn now to some direct evidence on internal capital markets of Austrian and
German multinational banks in Eastern Europe based on original firm level survey data of
2200 direct investments in Eastern Europe of the Chair of International Economics of the
University of Munich.1The data are a full population survey of Austrian and German foreign
direct investment in Eastern Europe in the period 1990 to 2001. Austrian and German affiliate
banks accounts for more than 50 percent of all banks in some of the NMS. Does the direct
evidence on ICM support the author’s stability enhancing view of MNBs?
From Table 1 we can see that the internal capital market is by far the most important source of
finance of Austrian and German multinational banks investing in Eastern Europe. On the side
of parent banks in Austria and Germany, 87 percent of the parent banks said that they
financed the investment of the affiliate bank in Eastern Europe internally rather than
externally or in a mixed finance package. External financing is practically zero. Among the
internal types of finance by far the most important source of finance is out of cash flow and
profits (72 percent), while funds out of intra-firm reallocation from other units account for 28
percent of the bank investments in Eastern Europe. These numbers suggest that parent banks
in Austria and Germany do from time to time reallocate funds away from some units in order
to finance other (in this case Eastern European) units.
On the side of affiliate banks in Eastern Europe, the picture looks somewhat differently. 50
percent of affiliate banks said that they finance their activity internally out of cash flow, while
the other 50 percent come from external financing out of loans by other local banks, by
raising capital through the issuing of stocks in either the parent or the host country.
Surprisingly, however, the financing pattern of multinational non-banks does appear not to be
that much different from that of multinationals banks. Both - bank as well as non-bank
affiliates - rely heavily on internal cash flow and loans raised from local banks.2
These numbers suggest that affiliate banks in Eastern Europe, once they are established,
function autonomous and do not depend on parent banks to provide liquidity. Their activity is
financed out of cash flow or by raising capital mostly locally. Taken together these data
suggest that affiliate banks do not appear to be supported by an internal capital market of
parent banks, while their original establishment is almost exclusively financed by internal
funds of parent bank firms.3
1
For more details on the data see Marin 2010.
See also Marin et al 2003, and Marin and Schnitzer 2006
3
The data are consistent with the findings of Goldberg 2005 who shows that international activities of foreign
banks headquartered in the US are not influenced by host country economic conditions.
2
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3. Multinational Banks and the Financial Crisis
I turn now to the second question raised by the authors on the role of MNBs in the recent
financial crisis. Financial integration has been the subject of much debate following the
emerging market crisis in the late 1990s with different opinions about capital account
liberalization policies. The current global financial crisis poses similar questions in face of
international financial volatility. Therefore, it is important to understand whether foreign
banks contribute or not to credit volatility in host countries. Foreign banks may play a
stabilizing role by being better able to diversify risk and by being able to rely on parental
liquidity when a host country shock hits. But at the same time foreign banks may act as a
transmission mechanism of parent country shocks on host country lending.
Similar to de Haase and van Lelyveld (2006) this paper shows that the ICM has been used in
the current financial crisis to stabilize financial markets in host countries. In order to test this,
the authors do not look directly at how the ICM works in times of distress but rather they
estimate a regression of the ratio of claims to liabilities in local currency of foreign affiliates
in a panel of 49 developed and developing countries for the period between 1999 and 2009.
They find that on average the ratio of local claims to local liabilities has increased since 1999
and has accelerated in the post-crisis period. They also show that this ratio has increased in all
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geographic regions in particular in the NMS. They also run a regression on the bank specific
ratio of loans to deposits to investigate whether this ratio has changed significantly during the
crisis and in particular for foreign affiliates in different European regions such as EU15 and
the NMS. They find that foreign affiliates did not have a destabilizing role, since their loandeposit ratio has remained constant. In sum, they find that foreign affiliate banks have been
essentially behaving like national banks in all regions with the exception of the NMS in
Eastern Europe where foreign banks had a stabilizing effect.
At a closer look at the direct evidence on ICM for Eastern Europe given in Table 1 I find the
results of the authors for the NMS somewhat surprising. Clearly, affiliate banks in Eastern
Europe do not rely on parental liquidity to finance their host activities. Therefore, the fall in
cash flow in parent banks appears to have only an effect on new foreign investment activity in
the banking sector rather than on already established affiliates in Eastern Europe. This way,
the financial crisis in parent countries is less likely to have been translated to host countries.
So far so good. But the financial crisis also led to a drop in profits in affiliate banks in
Eastern Europe and this should have clearly have shown up in the results of the empirical
analysis. One caveat is that the data of Table 1 are from the pre-crisis period and the
behaviour of parent and affiliate banks may have changed during the crisis. Another is that the
Vienna Initiative, a forum which was created in early 2009 to coordinate the responses of
major stakeholders to the financial crisis has shown already an effect in the empirical analysis.
References:
De Haas, R. and van Lelyveld, I. 2006. Foreign Banks and Credit Stability in Central and
Eastern Europe: A Panel Data Analysis. Journal of Banking and Finance. Vol 30: 1927-52.
Feldstein, M. and I.Horioka. 1980. Domestic Savings and International Capital Flows.
Economic Journal 90: 314-29.
Goldberg, L. 2005. The International Exposure of US Banks, NBER Working Paper 11365,
May.
Marin, D. 2010. The Opening Up of Eastern Europe at 20: Jobs, Skills, and ‘Reverse
Maquilladoras’ in Austria and Germany, in M. Jovanovic (Ed.) Handbook of Economic
Integration, Edward Elgar, forthcoming.
Marin, D, A. Lorentovich, A. Raubold. 2003. Ownership, Captial or Outsourcing: What
Drives German Investment to Eastern Europe, in Hermann H. and R. Lipsey (Eds). Foreign
Direct Inverstment in the Real and Financial Sector in Industrialized Countries. Springer
Verlag, Berlin
Marin, D. and M. Schnitzer. 2006. When is FDI a Capital Flow? CEPR Discussion Paper No
6540.