Powerful parents? The dark and the bright side of multinational banking Ralph De Haas EBRD

1. Powerful parents? The dark and the bright side of multinational banking • Ralph De Haas • EBRD Banca d’Italia, June 10th 2013 Lending by multinational banks and implications for financial stability and integration

2. European banking integration: view from above Source: Bankscope, bank websites

3. European banking integration: view from the ground Red dots – only domestic banks Blue dots – only foreign banks Green dots – domestic and foreign banks Source: Beck, Degryse, De Haas and Van Horen (2013)

4. Czech Republic: foreign banks rule Source: Beck, Degryse, De Haas and Van Horen (2013)

5. Poland: a more mixed picture Source: Beck, Degryse, De Haas and Van Horen (2013)

6. The bright side of multinational banking • Positive impact on banking efficiency (Fries and Taci 2005) • In the medium term, positive impact on access to finance (Giannetti and Ongena 2012) • More stable than cross-border credit (Peek and Rosengren 2000) • Parental support via internal capital markets (Cetorelli and Goldberg 2012)stabilizes economies during local banking crises (De Haas and Van Lelyveld 2006/2010)

7. The dark side of multinational banking • Exacerbates local business and credit cycles (Morgan et al. 2004) • Boom in Emerging Europe: 2004-2007 (De Haas, Korniyenko, Loukoianova, and Pivovarsky 2012) • Regional U.S. housing booms (Loutskina and Strahan 2011) • Transmits financial shocks across borders • From Japan to the U.S. (Peek and Rosengren 1997/2000) • From Western to Emerging Europe (Popov and Udell 2010; Ongena, Peydro, Van Horen 2013) • Globally: during 2008/09, MNB subs deleveraged faster than domestic banks, in particular wholesale-funded subsidiaries and subsidiaries of wholesale-funded parents (De Haas and Van Lelyveld 2013)

8. Some things we learned • Multinational banking: double-edged sword • Why? ICMs are two-way streets • Substitution and support effects • Composition debt funding matters • ‘Sticky’ (insured) retail vs. ‘flighty’ wholesale (Kamil and Rai 2011) • FX vs. LC wholesale funding: swap markets can break down(Ivashina, Scharfstein, and Stein 2013)

9. Variation across multinational banks? • Large literature on differences between domestic and foreign banks (Claessens and Van Horen 2013) • We know less about differences between and within multinational banks in terms of funding and business models • Banking Environment and Performance Survey (BEPS II) • Detailed face-to-face surveys with >600 bank CEOs across 32 EBRD countries of operation • Quantitative follow-up surveys filled out by >300 of these banks • Collection of detailed information on the geographical location of 137,575 bank branches owned by 1,840 banks

10. ICMs as two-way streets Source: De Haas and Kirschenmann, 2013

11. Powerful parents: credit-growth drivers Source: De Haas and Kirschenmann, 2013

12. Push for market share Source: De Haas and Kirschenmann, 2013

13. Use of centralised Treasuries Source: De Haas and Kirschenmann, 2013

14. Business models matter... Source: De Haas and Kirschenmann, 2013

15. Open questions • What explains variation between and within MNBs? • Business models (“the Spanish model”) vs. host-country conditions (Latin America vs. Emerging Europe)? • Role “traditional” ICM (liquidity and dividend flows) vs. economic capital allocation and credit growth/market share target-setting • Centralised vs. decentralised risk management • Homogeneous branches vs. heterogeneous subsidiaries A better understanding of this variation is particularly important for (tailor-made) supervision rather than (broad-brushed) regulation

16. Thank you