International Banking and Liquidity Allocation: Cross-Border Financial Services Versus Multinational Banking

Abstract

This paper explores the comparative advantage of multinational banking over cross-border financial services in terms of capitalizing on a global access to funding sources. We argue that this advantage depends on the benefit and the cost of multinational banks’ intimacy with local markets. The benefit is that it allows multinational banks to create more liquidity. The cost is that it causes inefficiencies in internal capital markets, on which a bank relies to allocate liquidity across countries. We analyze the conditions under which multinational banking is then likely to arise and show that capital requirements have an effect as they influence the degree of inefficiency in internal capital markets for alternative organization structures differently.

Keywords: Financial integration, International banking, Capital regulation, Foreign direct investment, Incomplete contracts

JEL Classification: G21, G28, F36, F23