Harry Huizinga

How Does Foreign Entry Affect the Domestic Banking Market

Banking markets are becoming increasingly international through financial liberalization and general economic integration. Using bank-level data for 80 countries for 1988-95, the authors examine the extent of foreign ownership in national banking markets. They compare net interest margins, overhead, taxes paid, and profitability of foreign and domestic banks. The comparative functions of foreign banks and domestic banks is very different in developing and industrial countries, possibly because of a different customer base, different bank procedures, and different regulatory and tax regimes. In developing countries foreign banks tend to have greater profits, higher interest margins, and higher tax payments than do domestic banks. In industrial countries it is the domestic banks that have greater profits, higher interest margins, and higher tax payments. It is common to read, in the literature on foreign banking, that the entry of foreign banks can make national banking markets more competitive, thereby forcing domestic banks to operate more efficiently. The authors show that increasing the foreign share of bank ownership does indeed reduce profitability and overhead expenses in domestically owned banks - so the general effect of foreign bank entry may be positive. Interestingly, the number of foreign entrants matters more than their market share, suggesting that they affect local bank competition more on entry rather than after gaining a substantial market share. These effects hold even when controlling for the fact that foreign banks may be attracted to markets with certain characteristics, such as low banking costs.

Bank Activity and Funding Strategies: The Impact on Risk and Returns

This paper examines the implications of bank activity and short-term funding strategies for bank risk and return using an international sample of 1,334 banks in 101 countries leading up to the 2008 financial crisis. Expansion into noninterest income-generating activities such as trading increases the rate of return on assets, and it could offer some risk diversification benefits at very low levels. Nondeposit, wholesale funding in contrast lowers the rate of return on assets, while it can offer some risk reduction at commonly observed low levels of nondeposit funding. A sizable proportion of banks, however, attract most of their short-term funding in the form of nondeposits at a cost of enhanced bank fragility. Overall, banking strategies that rely prominently on generating noninterest income or attracting nondeposit funding are very risky, consistent with the demise of the US investment banking sector.

Financial Structure and Bank Profitability

Countries differ in the extent to which their financial systems are bank-based or market-based. The financial systems of Germany and Japan, for example, are considered bank-based because banks play a leading role in mobilizing savings, allocating capital, overseeing investment decisions of corporate managers, and providing risk management vehicles. The systems of the United States, and the United Kingdom are considered more market-based. Using bank-level data for a large number of industrial and developing countries, the authors present evidence about the impact of financial development, and structure on bank performance. They measure the relative importance of bank or market finance by the relative size of stock aggregates, by relative trading or transaction volumes, and by indicators of relative efficiency. They show that in developing countries, both banks and stock markets are less developed, but financial systems tend to be more bank-based. The richer the country, the more active are all financial intermediaries. The greater the development of a countrys banks, the tougher is the competition, the greater is the efficiency, and the lower are the bank margins, and profits. The more under-developed the stock market, the greater are the bank profits. But financial structure per se does not have a significant, independent influence on bank margins, and profits.

Capital income and profit taxation with foreign ownership of firms

Abstract This paper establishes optimal rules for capital income and profits taxation in the open economy with or without foreign ownership of domestic firms. We show that if there are constraints on the feasibility of profits taxation, both saving and investment taxes generally enter the optimal tax package. If instead profits can be fully taxed, then source-based investment taxes vanish. If domestic firms are in part owned by foreigners, then source-based investment taxes can be used to shift income away from these to domestic citizens and they may even be used to finance lump sum transfers to domestic residents.

Do We Need Big Banks? Evidence on Performance, Strategy and Market Discipline

For an international sample of banks, we construct measures of a bank’s absolute size and its systemic size defined as size relative to the national economy. We then examine how a bank’s risk and return, its activity mix and funding strategy, and the extent to which it faces market discipline depend on both size measures. While absolute size presents banks with a trade-off between risk and return, systemic size is an unmitigated bad, reducing return without a reduction in risk. Despite too-big-to-fail subsidies, we find that systemically large banks are subject to greater market discipline as evidenced by a higher sensitivity of their funding costs to risk proxies, suggesting that they are often too big to save. The finding that a bank’s interest cost tends to rise with its systemic size can also in part explain why a bank’s rate of return on assets tends to decline with systemic size. Overall, our results cast doubt on the need to have systemically large banks. Bank growth has not been in the interest of bank shareholders in small countries, and it is not clear whether those in larger countries have benefited. While market discipline through increasing funding costs should keep systemic size in check, clearly it has not been effective in preventing the emergence of such banks in the first place. Inadequate corporate governance structures at banks seem to have enabled managers to pursue high-growth strategies at the expense of shareholders, providing support for greater government regulation.

U.S. Commercial Banks and the Developing Country Debt Crisis

The major theme of this paper is that the commercial banks have weathered the debt crisis, while many debtor countries remain in economic paralysis or worse. There is a growing consensus that much of the LDC debt will not be fully serviced in the future, and that consensus is reflected in at least two ways: in the discounts observed in the secondary market prices for LDC debt, and in the discounts in the stock market pricing of banks with exposure in the LDCs.(This abstract was borrowed from another version of this item.)

International market integration and union wage bargaining

(1989), in particular, examines the relationship between the number of competing union-firm bargaining units and wage demands for a fixed market size throughout. Unions and firms in Dorwick (1989) are assumed to reach efficient bargaining outcomes. This paper instead examines the case where the change in market structure is accompanied by a change in market size, and where, in the monopoly union model, the bargaining outcome is inefficient. We specifically analyze the integration of two single union-firm bargaining units into a unified market with two bargaining units. The creation of firm level competition first increases the elasticity of labor demand facing each individual union. This moderates each unions wage demand. Lower wages and increased goods market competition then lead to higher employment. The end result is that market integration can benefit firms and unions alike. With linear product demand, in particular, integration benefits both bargaining parties, if unions maximize the wage bill and firm level output competition is Cournot. The possibility that market integration benefits all parties only arises because the original pre-integration bargaining outcomes are inefficient. The main result that goods market integration can benefit firms and unionized workers has been derived

The taxation of domestic and foreign banking

Abstract Using bank level data for 80 countries in the 1988–1995 period, this paper examines taxation of domestic and foreign-owned banks. The profitability of foreign banks is found to rise relatively little with their domestic tax burden, perhaps reflecting the availability of foreign tax credits and profit shifting opportunities. The paper also examines whether domestic and foreign banks pay different amounts of domestic tax. Taxes paid by foreign banks are shown to rise relatively little with the local statutory tax. This evidence supports the hypothesis that foreign banks engage in relatively extensive profit shifting.

Are international deposits tax-driven

This paper investigates the impact of tax policy on international depositing. Non-bank international deposits are shown to be positively related to interest income and wealth taxes and to the presence of domestic bank interest reporting. This suggests that international deposits are in part intended to facilitate tax evasion. The tax sensitivity of international deposits is estimated to be higher in 1999 than before. At present, only part of international interest flow are covered by either non-resident interest withholding taxes or international exchange of information. This incomplete coverage may be a reason that these policies currently appear to have little impact on international depositing.The findings, interpretations, and conclusions expressed in this paper are entirely those of the authors. They should not be attributed to the European Commission.

Withholding taxes or information exchange: the taxation of international interest flows

Abstract This paper considers withholding taxes and information exchange as alternative means to tax international interest income. For each regime, we consider the maximum level of taxation of foreign-source income that can be sustained as the equilibrium of a repeated game. The best regime is the one that brings the level of taxation in the repeated game closest to the cooperative level of interest taxation. Sustainable levels of taxation in either regime depend on the importance of bank profits and on the marginal cost of public funds, among other things. Simulations with the model illustrate the choice between withholding taxes and information exchange. An explicit possibility is the emergence of a mixed regime, with one country imposing a withholding tax and the other country providing information. The basic model is extended to allow for size differences between the two countries and to incorporate a third, outside country.