Global Banks Dynamics and the International Transmission of Shocks - PowerPoint PPT Presentation

Global Banks Dynamics and the International Transmission of Shocks ∗ Jos´ e L. Fillat Stefania Garetto Martin G¨ otz Federal Reserve Bank of Boston Boston University Goethe Universit¨ at June 12, 2014 ∗ The views expressed in this paper are the authors’ only and not those of the Federal Reserve Bank of Boston or the Federal Reserve System. 1 / 26

The Boston Globe, October 26th 2013 Introduction “Spanish-based Santander (...) acquired Sovereign Bank in 2009 as the Objective Literature springboard for its US ambitions, [establishing] 700 branches and Data ATMs across nine northeastern states.” Model Calibration Conclusions “Santander is the fourth-largest bank by deposits in Massachusetts and has 1.7 million US customers. Emilio Botin, chairman of the parent company, said last week during a visit to the United States that he hopes to see profits for the American business double in three years to $2 billion.” 2 / 26

This Paper Why and how banks expand internationally? We develop a structural model of entry in the foreign banking Introduction market to understand their role in shock transmission. Objective Literature Data The model is a “good description” of the foreign banking sector in Model • the US: Calibration Conclusions assumptions motivated by institutional details of the sector; – model designed to replicate empirical patterns on the activities – of foreign banking institutions in the US: differences in presence, size and activities of the different ⊲ entry alternatives. Structural model is amenable to counterfactual analysis to study: • the risk implications of foreign banking; – the efficiency properties of regulation. – 3 / 26

Related Literature Empirical analysis of foreign banking: • Introduction Goldberg (2007, 2009), Cetorelli and Goldberg (2010, 2012 JF and Objective AER PP) Literature Data Model Models of Trade and FDI in the Banking Sector: • Calibration Conclusions Eaton (1994), De Blas and Russ (2012), Niepmann (2012, 2013), Bremus et al. (2013), To build our model: • Micro-founded Models of Banking: – Klein (1971), Monti (1972), Ivashina, Scharfstein, and Stein (2012) Models of investment under uncertainty: – Dixit (1989), Fillat and Garetto (2012) 4 / 26

Data Description and Sources Regulatory reporting data filed by US domestic banks, US • subsidiaries of foreign banks, and U.S. branches/agencies of foreign Introduction banks ( Call Reports - FFIEC 002, 031,041) Data Relevance Size Intra-firm Foreign owned institutions : • Portfolio Composition Selection U.S. branches and agencies of foreign banks, and – Summary U.S. banks of which more than 25% is owned by a foreign – Model banking organization or where the relationship is reported as Calibration Conclusions being a controlling relationship. Data on foreign parents (Europe and Asia) • SNL – Sample period: 1995-2010. • 5 / 26

How do Foreign Banks Enter the US Market? Subsidiary Banks : • 43 banks, total assets approx $1.1tn or 7% of all bank assets; – Introduction Data subject to US regulation and capital requirements; – Relevance give loans and accept both wholesale and retail deposits (with – Size Intra-firm deposit insurance); Portfolio Composition Selection arm’s length relationship with the parent. – Summary Model Branches and Agencies : • Calibration Conclusions 235 branches and agencies, total assets approx $2.4tn, or 15.3% – of all bank assets; subject to US regulation but NOT to capital requirements; – give loans and accept only wholesale deposits (they cannot – accept insured deposits); display large intrafirm flows with the foreign parent. – Other : Edge and Agreement Corporations, Representative offices • and Non-depository trusts. 6 / 26

Foreign Banking Institutions: Total Flows % of Foreign C&I Loans % of Foreign Loans Introduction 30 30 Data 25 25 Relevance Size Share Share 20 20 Intra-firm Portfolio Composition 15 15 Selection Summary 10 10 Model 1995q4 1998q4 2001q4 2004q4 2007q4 2010q4 1995q4 1998q4 2001q4 2004q4 2007q4 2010q4 Calibration Conclusions % of Foreign Total Assets % of Foreign Deposits 30 30 25 25 Share Share 20 20 15 15 10 10 1995q4 1998q4 2001q4 2004q4 2007q4 2010q4 1995q4 1998q4 2001q4 2004q4 2007q4 2010q4 [Data source: Federal Reserve Board of Governors, U.S. Share Data for U.S. 7 / 26 Offices of Foreign Banking Organizations.]

Foreign Banking Institutions: Summary Statistics Mean Std. Dev. Median N. obs. Introduction Assets Data Domestic 1,649.91 33,640.07 147.62 6934 Relevance Size Foreign Subsidiary 15,270.86 35,613.84 1,314.64 64 Intra-firm Portfolio Composition Foreign Branch 8,892.19 19,548.42 803.33 215 Selection Summary Deposits Model Domestic 1,160.49 23,003.66 123.82 6934 Calibration Foreign Subsidiary 11,006.95 26,373.87 985.61 64 Conclusions Foreign Branch 5026.401 11990.65 299.34 215 Loans Domestic 940.6878 16038.81 93.389 6934 Foreign Subsidiary 8092.347 17701.04 748.5415 64 Foreign Branch 2215.568 5411.098 345.288 215 [Numbers are in $ bn, year 2010. Data source: Federal Reserve Board of Governors, U.S. Share Data for U.S. Offices of Foreign Banking Organizations.] 8 / 26

Size Differences: Assets Average Assets Introduction 15 Data Relevance Size Intra-firm Portfolio Composition Selection 10 Summary bn $ Model Calibration Conclusions 5 0 1995q4 1997q4 1999q4 2001q4 2003q4 2005q4 2007q4 2009q4 foreign−branch foreign−branch (+due from related institutions) foreign−subsidiary domestic bank ⇒ Size distributions 9 / 26

Intra-firm Flows between Branches and Parents Introduction 5 Data Relevance Size Intra-firm Portfolio Composition Selection 0 Summary bn $ Model Calibration Conclusions −5 −10 1995q1 1998q1 2001q1 2004q1 2007q1 2010q1 2013q1 Time Net Due to Net Due From 10 / 26

Portfolio Composition: Loans-to-Assets Ratio Loans / Assets Introduction Data .6 Relevance Size Intra-firm Portfolio Composition .5 Selection Summary bn $ Model .4 Calibration Conclusions .3 .2 1995q4 1997q4 1999q4 2001q4 2003q4 2005q4 2007q4 2009q4 foreign−branch foreign−subsidiary domestic bank 11 / 26

Selection Total � Net � Loans � (MN) Total � Deposits (MN) � $1,200.00 � $1,400.00 � $1,200.00 � $1,000.00 � $1,000.00 � $800.00 � $800.00 � $600.00 � $600.00 � $400.00 � $400.00 � $200.00 � $200.00 � $ � � $ � 2007 2008 2009 2010 2011 2012 2013 2007 2008 2009 2010 2011 2012 2013 Non � parents Parents � of � US � agencies Non � parents Parents � of � US � agencies Total � Assets (MN) Net � Income (MN) � $2,500.00 � $20.00 � $2,000.00 � $15.00 � $1,500.00 � $10.00 � $1,000.00 � $5.00 � $500.00 � $ � � $ � 2007 2008 2009 2010 2011 2012 2013 2007 2008 2009 2010 2011 2012 2013 Non � parents Parents � of � US � agencies Non � parents Parents � of � US � agencies Comparison of foreign national banks vs. foreign parents of U.S.-based subsidiaries and branches. 12 / 26

Domestic vs Foreign Assets 15 Introduction Data Relevance Size Intra-firm Share of US assets 10 Portfolio Composition Selection Summary Model Calibration Conclusions 5 0 18 19 20 21 22 Ln(Total Assets) Size of Domestic versus Foreign Assets. Relathionship between the share of U.S. assets (in a parent’s total assets) versus the parent’s size. Source: SNL data for top tier parents of U.S. branches and subsidiaries from Europe, 2013. 13 / 26

Stylized Facts Foreign banking in the US is a large phenomenon. • Introduction Foreign banks are larger than domestic incumbents. • Data Relevance Global banks are larger than non-global banks: evidence of • Size Intra-firm selection . Portfolio Composition Selection Subsidiaries of foreign banks are larger than foreign branches , Summary • and more similar to the domestic incumbents in their activities. Model Calibration Foreign branches appear to be a source of funding to their Conclusions • parents during most of the sample (pre-2011) A good structural model of foreign banking must be consistent with these facts • be able to answer the question of why and how banks expand • explain what risks international expansion poses to them and the • system. allow us to run conterfactuals and help design optimal regulatory • policies 14 / 26

The Environment of the Model Two countries, Home and Foreign (denoted by ∗ ). • Introduction Time is continuous. • Data Each country is populated by a large mass of national banks: Model • Setup Why? – each bank offers one-period loans ( L ), makes investments ( I ) and Intra-temporal accepts deposits ( D ); Calibration – each bank has some market power in the loans market (start with Conclusions monopolistic competition to rule out strategic considerations). Study the decision of banks from the Home country to enter the • Foreign country: – each bank enters if it can make positive profits in the Foreign country; – the rationale for entry is given by differentiation (spatial or product); – a bank can enter a market either as a branch or as a subsidiary. 15 / 26