Where Do Banks Expand Abroad? An Empirical Analysis

Abstract

This paper investigates the determinants of the pattern of banks' foreign investment using firm-level data on foreign subsidiaries for a representative sample of 260 large banks from the OECD countries. The empirical analysis shows that measures of the potential profit opportunities in the destination markets are the key factor in determining the choice of banks on where to expand. In particular, banks are more likely to enter host countries where the expected rate of economic growth is higher and the banking system is on average less efficient. Similarly important are the regulatory environment and the characteristics of the banking sector in the country of destination of the investment: foreign banks prefer to enter in markets that are less concentrated and where regulatory restrictions on banking activities are less stringent, possibly revealing that these characteristics entail also the existence of hidden limitations to foreign entry. The degree of economic integration between countries is found instead to be relatively less important in determining banks' decisions.

Keywords: International banking, foreign direct investment

JEL Classification: E30, G21, F21, F23