1

Fifth BIS Annual Conference Fifth BIS Annual Conference BrunnenBrunnen, June 2006, June 2006

A HostA Host--Country Country PerspectivePerspective

Guillermo OrtizGuillermo Ortiz

Global Banking: Global Banking: Trends and Policy issuesTrends and Policy issues

2

Banks are specialBanks are special::

They are the central nervous system of the They are the central nervous system of the economy.economy.They provide access to the payments systems.They provide access to the payments systems.They are prone to systemic risks.They are prone to systemic risks.They have access to the safety net: Deposit They have access to the safety net: Deposit insurance, liquidity assistance.insurance, liquidity assistance.

HostHost--country authorities are responsible for country authorities are responsible for locally incorporated bankslocally incorporated banks: : taxpayer moneytaxpayer money..

IntroductionIntroduction

3

ContentContentImpacts of foreign bank entry on: Impacts of foreign bank entry on:

I Efficiency and competitionI Efficiency and competition

II SubsidiariesII Subsidiaries’’ ability to stand alone ability to stand alone and market disciplineand market discipline

IIIIII Policy optionsPolicy options

4

Efficiency and CompetitionEfficiency and CompetitionGlobal banks need depositorGlobal banks need depositor’’s bases to reach the s bases to reach the household sector. household sector.

Their expansion Their expansion overseas is taking overseas is taking place through the place through the acquisition of existing acquisition of existing retail banks retail banks

This situation leaves This situation leaves hosthost--country market country market structures unchanged. structures unchanged.

5

CreditCredit toto householdshouseholds((percentagepercentage of total of total creditcredit toto privateprivate sector)sector)

-

10

20

30

40

50

Mexico Poland CzechRep.

Hungary

19992004

Source: BIS

5Source: BIS Source: FMI, Global Financial Stability Report

19992004

0

1

2

3

4

5

6

Mexico Poland CzechRep.

Hungary

19992005

0

5

10

15

20

25

30

Mexico Poland CzechRep.

Hungary

Efficiency gains often result in higher profits and Efficiency gains often result in higher profits and not in consumer benefits. not in consumer benefits.

Efficiency and CompetitionEfficiency and Competition

OperatingOperating ExpensesExpenses(as a (as a percentagepercentage of total of total assetsassets))

ROEROE((ProfitsProfits afterafter taxestaxes as a as a percentagepercentage of of equityequity))

6

Efficiency and CompetitionEfficiency and CompetitionInterest rate margins are often much higher in Interest rate margins are often much higher in host countries host countries

Net Net interestinterest marginmargin((percentagepercentage of of assetsassets))

0

1

2

3

4

5

MEX HUN POL SLVK CZK CAN SPA

HostHost--countrycountryMexicoMexico

0

20

40

60

80

HSBC BBVA Santander Citibank Scotiabank

CreditCredit CardsCards APR* APR* ((ComparisonComparison betweenbetween creditcredit cardscards withwith similar similar

characteristicscharacteristics))

HomeHome--countrycountry%%

* APR was calculated usig the methodology of the U.K. Consumer Credit Act 1974. It includes Annual Fees.Source: National central banks and supervisors.

7

Measures taken by Banco de MMeasures taken by Banco de Mééxicoxico

Require banks to publish annual interest rates (APR)Require banks to publish annual interest rates (APR)

Require banks to disclose fees and commissions Require banks to disclose fees and commissions

Eliminate commissions on interEliminate commissions on inter--bank transfersbank transfers

Central bank website provides a mortgage simulator Central bank website provides a mortgage simulator allowing users to compare APRs among banksallowing users to compare APRs among banks

Efforts to reduce banksEfforts to reduce banks’’ interchange and discount interchange and discount fees associated with credit and debit cardsfees associated with credit and debit cards

Efficiency and Competition Efficiency and Competition

8

ContentContentImpacts of foreign bank entry on: Impacts of foreign bank entry on:

I Efficiency and competitionI Efficiency and competition

II SubsidiariesII Subsidiaries’’ ability to stand alone ability to stand alone and market disciplineand market discipline

IIIIII Policy optionsPolicy options

9

Parent banks and subsidiaries are different legal entities.Parent banks and subsidiaries are different legal entities.

Subsidiaries are managed as branches, but legal Subsidiaries are managed as branches, but legal responsibilities are limited to capital invested.responsibilities are limited to capital invested.

The division is uneven between decisionThe division is uneven between decision--making powers making powers and responsibilities.and responsibilities.

“The formal legal distinctions and separation [between parent and subsidiary] are not matched by a similar economic separation”

Charles Goodhart

“The formal legal distinctions and separation [between parent and subsidiary] are not matched by a similar economic separation”

Charles Goodhart

Ability to Stand Alone Ability to Stand Alone

10

Parent banks maximize riskParent banks maximize risk--adjusted returns on a adjusted returns on a globalglobal--portfolio basis.portfolio basis.

They book operations where funding and regulatory They book operations where funding and regulatory costs are lower, and not where business is costs are lower, and not where business is originated. originated.

Decisions that maximize parentDecisions that maximize parent--bank benefits are not bank benefits are not necessarily positive for the subsidiary. These necessarily positive for the subsidiary. These practices shift income away from subsidiaries.practices shift income away from subsidiaries.

Matrix reporting arrangements.Matrix reporting arrangements.

Weaken accountability of local CEOWeaken accountability of local CEO’’s and boards.s and boards.

Ability to Stand Alone Ability to Stand Alone

11

The degree of control a parent bank has is related to The degree of control a parent bank has is related to the subsidiariesthe subsidiaries’’ ownership structure.ownership structure.

Widely held ownership structures are important for Widely held ownership structures are important for large banks.large banks.

Subsidiaries do not reap the benefits of having widely Subsidiaries do not reap the benefits of having widely held parent banks: they are different legal entities.held parent banks: they are different legal entities.

Ability to Stand Alone Ability to Stand Alone

12

Subsidiaries are deSubsidiaries are de--listed from local stock exchangeslisted from local stock exchanges

Outstanding subordinated debt has declined rapidlyOutstanding subordinated debt has declined rapidly

Mexican BanksMexican Banks(% of total assets)(% of total assets)

19981998 20052005

Listed13%

Not Listed87%

Not Listed27%

Listed73%

0

5

10

15

20

25

30

35

19981998 20002000 20022002 20042004

Market Discipline Market Discipline

Subordinated debtSubordinated debt(billions of pesos)(billions of pesos)

Source: Banco de Mexico

13

ContentContentImpacts of foreign bank entry on: Impacts of foreign bank entry on:

I Efficiency and competitionI Efficiency and competition

II SubsidiariesII Subsidiaries’’ ability to stand alone ability to stand alone and market disciplineand market discipline

IIIIII Policy optionsPolicy options

14

How can we put in place the right incentives to entice How can we put in place the right incentives to entice managers to put the subsidiariesmanagers to put the subsidiaries’’ interests first?interests first?

Strengthen corporate governanceStrengthen corporate governance

Issuance of subordinated debtIssuance of subordinated debt

Widen subsidiariesWiden subsidiaries’’ ownership structure: ownership structure: minority shareholdersminority shareholders

Policy OptionsPolicy Options

15

ConclusionsConclusionsForeign bank entry brings many benefits, but also Foreign bank entry brings many benefits, but also challenges.challenges.

For host countries is important to For host countries is important to put in place the put in place the right incentivesright incentives to enhance market discipline and to enhance market discipline and the standthe stand--alone ability of foreignalone ability of foreign--owned large owned large subsidiaries: minority shareholders.subsidiaries: minority shareholders.

Speed up efforts for convergence of home countries Speed up efforts for convergence of home countries (G(G--10) regulations.10) regulations.

Establish close cooperation of Establish close cooperation of central bankscentral banks and and supervisory authorities to deal with crisis situationssupervisory authorities to deal with crisis situations

Create a CGFS working group on crossCreate a CGFS working group on cross--border border crisis management by central banks?crisis management by central banks?