Multinational Banking 9789814376013

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I5EA5 Institute of Southeast Asian Studies The Institute of Southeast Asian Studies was established as an autonomous organization in May 1968. It is a regional research centre for scholars and other specialists concerned with modern Southeast Asia. The Institute's research interest is focused on the many-faceted problems of development and modernization, and political and social change in Southeast Asia. The Institute is governed by a twenty-two-member Board of Trustees on which are representatives from the National University of Singapore, appointees from the government, as well as representatives from a broad range of professional and civic organizations and groups. A ten-man Executive Committee oversees day-to-day operations; it is chaired by the Director, the Institute's chief academic and administrative officer. The responsibility for facts and opinions expressed in this publication rests exclusively with the author and his interpretations do not necessarily reflect the views or the policy of the Institute or its supporters.

MULTINATIONAL BANKING

by

Herbert G. Grubel

Research Notes and Discussions Paper No. 56 INSTITUTE OF SOUTHEAST ASIAN STUDIES ASEAN Economic Research Unit 1985

Pub I I shed by Institute of Southeast Asian Studies Heng Mul Keng Terrace Paslr Panjang Singapore 0511 AI I rights reserved. No part of this pub! !cation may be reproduced, stored In a retrieval system, or transmitted In any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior permission of the Institute of Southeast Asian Studies. ~

1985 Institute of Southeast Asian Studies

ISSN 0129-8828 ISBN 9971-988-17-8

CONTENTS

Page INTRODUCTION

1

SOME FACTS ABOUT MULTINATIONAL BANKING

3

I I I RETAIL AND SERVICE BANKING Some Facts about Multinational Banking Multinational Service Banking

7

ll

IV

TAX EVASION, GLOBAL MONEY, AND CAPITAL MARKET BANKING Euro and Asian Currency Markets Deregulation Money Market Operations Other Economic Causes

10

v

WELFARE EFFECTS

16

VI

IMPLICATIONS FOR PUBLIC POLICY

19 21

BIBLIOGRAPHY

(i i i )

INTRODUCTION

Banks have always engaged in international business. They have dealt in foreign exchange, extended credit in connection with foreign trade, traded and held foreign assets, and provided travellers with letters of credit. All this and some other types of business the banks historically have carried out from their domestic locations. There was no need for a physical presence abroad. Business that could not be carried out by mail or telecommunications was handled by correspondent banks abroad. Some banks began to establish a physical presence abroad in the late 19th and early 20th century. This move abroad mostly was part of colonialism. Under the umbrella of the home country's colonial government, banks from Britain opened branches in the Indian subcontinent, Africa, Hong Kong, and Singapore; European and North American banks moved into the Caribbean and Latin America. These banks provided modern banking services to economies which previously had no or only a relatively rudimentary financial industry. Multinational, also sometimes called transnational, banking is of relatively recent origin. Its development coincided and accelerated with the technological improvements and cost-reductions in international travel and communications in the post-war period. This type of banking involves the physical presence of a bank abroad. The most prevalent and versatile legal form of this presence is a branch, which uses the home-country bank's name and organization. It is usually an independent corporate entity with limited liabi1ities, whose shares are owned by the parent. Other legal forms used in foreign physical presence are agencies and representative offices, which have limited legal operational authority but also limited liabilities. Subsidiaries are used if ownership is shared with other firms or individuals, mostly resi1

dents of the country hosting the foreign bank. These subsidiaries are mostly corporations with limited liability. In addition, of course, banks have maintained networks of correspondent banks for doing business in locations where they have no physical presence. The theory of multinational banking explains why these banks find it profitable to have a physical presence abroad. The theory takes as given the most fundamental and important reason for any foreign investment: it raises the risk-adjusted rate of return to capital invested in the firm. The theory then develops explanations of the sources of comparative advantage, which allows a bank abroad to compete effectively with domestic banks. These domestic banks would be expected to be more familiar with 1oca 1 customs. laws, governments, and business firms, and to have other cost advantages. For example, their managers are locals who do not have to be paid a premium salary to persuade them to work in a foreign and sometimes relatively unpleasant environment. They do not have to co-ordinate business across borders and spend extra money on legal, translation, and communication services. The theory of multinational banking addresses the same question as the theory of multinational enterprise generally. It is therefore no surprise to find that there is much overlap between the two theories. Both rest on the proposition that modern business generates certain assets for which there is no market except inside the firm. To exploit the value of these assets, therefore, the firm must operate abroad once it has expanded to the fullest extent domestically. Through these foreign operations it increases the return to its domestic capital above what it would have been without this move abroad. Assets giving rise to this motive are marketing and managerial know-how and information about home-country multinational manufacturing firms and tourists. Other important motives for multinational banking are the avoidance or evasion of nation a 1 taxation by customers and the escape from regulation and taxation by the banks themselves. There are also certain technical scale economies and benefits from the international diversification of business and portfolios. In the following I discuss these motives for banking in greater detail and then use the ideas about the welfare effects it has had. But before I topics, I present some empirical data about the multinational banking.

2

international to speculate turn to these magnitude of

II

SOME FACTS ABOUT MULTINATIONAL BANKING

Table 1 contains some information about the number of branches and representative offices which banks from different countries have maintained in other countries and regions of the world in 1983. These data are presented in an analytical table here for the first time. They were obtai ned from the country pages of the Bankers Almanac and Yearbook. The vertical list of countries is virtually complete in show1ng the countries of the world that have a foreign presence. The horizontal groupings were chosen in order to keep the size of the matrix manageable without loss of insights about the extent to which the world's banks have interpenetrated each others' territories. The data show that all of the industrial countries have large numbers of branches and representative offices in other industrial countries, as well as in developing countries and the two major communist countries, the USSR and China. However, i t is also noteworthy that the developing countries have banking presences in most of the industrial countries. In addition, they have networks within regions of developing countries, as in Latin America. The United Kingdom is the home of the largest number of foreign banks, most of which are located in Africa. The United States is home to the second largest number of banks, followed by France. The latter country has a remarkably small number of foreign banks in its territory, given that it has such a large presence abroad. The Caribbean hosts the largest number of foreign banks, except for Africa, whereas the United States and the United Kingdom host a very large number of foreign banks. Remarkably large for the size of the territory and populations are the number of banks in Belgium/Luxembourg, Hongkong, and Singapore. The growth of multinational banking may be judged by the fact that in 1968 the number of the same type of foreign banks was reported to have been 2,744 (Lees 1974). Since, according to 3

TABLE 1

The World Matrix of Multinational Banks In 1983 Country Of" Region of Foreign Presence

Country of

CANADA

U.S.A. CARIBBN LATN