How Banks Go Abroad: Branches or Subsidiaries?

34 Pages Posted: 10 Nov 2005

See all articles by Eugenio Cerutti

Eugenio Cerutti

International Monetary Fund (IMF); Johns Hopkins University

Maria Soledad Martinez Peria

International Monetary Fund (IMF)

Giovanni Dell'Ariccia

International Monetary Fund (IMF) - Research Department; Centre for Economic Policy Research (CEPR)

Date Written: October 2005

Abstract

The authors examine the factors that influence banks' type of organizational form when operating in foreign markets using an original database of the branches and subsidiaries in Latin America and Eastern Europe of the top 100 international banks. They find that regulation, taxation, the degree of desired penetration in the local market, and host-country economic and political risks matter. Banks are more likely to operate as branches in countries that have higher corporate taxes and when they face lower regulatory restrictions on bank entry, in general, and on foreign branches, in particular. Subsidiaries are the preferred organizational form by banks that seek to penetrate the local market establishing large and mostly retail operations. Finally, there is evidence that economic and political risks have opposite effects on the type of organizational form, suggesting that legal differences in the degree of parent bank responsibility vis-a-vis branches and subsidiaries under different risk scenarios play an important role in the kind of operations international banks maintain overseas.

Keywords: foreign banks, organizational choice

JEL Classification: F23, G21

Suggested Citation

Cerutti, Eugenio and Martinez Peria, Maria Soledad and Dell'Ariccia, Giovanni, How Banks Go Abroad: Branches or Subsidiaries? (October 2005). World Bank Policy Research Working Paper No. 3753. Available at SSRN: https://ssrn.com/abstract=844766

Eugenio Cerutti (Contact Author)

International Monetary Fund (IMF) ( email )

700 19th Street N.W.
Washington, DC 20431
United States

Johns Hopkins University ( email )

Baltimore, MD 21218
United States

Maria Soledad Martinez Peria

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Giovanni Dell'Ariccia

International Monetary Fund (IMF) - Research Department ( email )

700 19th Street NW
Washington, DC 20431
United States
202-623-8135 (Phone)
202-623-4352 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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