IMPACT OF FOREIGN BANK ENTRY ON UK BANKS

Impact of Foreign Bank Entry on UK Banks

Table of Content

CHAPTER-I: INTRODUCTION3

Aims and Objectives of the Study4

Significance of the Study4

CHAPTER-II: LITERATURE REVIEW7

Theoretical Background9

Research on Strategic Groups9

Foreign Bank Entry: Competition and Consequences-An International Perspective12

General Effects of Competition in Banking15

General Empirical Studies on Banking System Performance and Structure16

Competition Testing: Theory17

Competition Testing: Empirical Results for Banking Systems19

Foreign Bank Entry U.K. Banking Markets: Impacts and Consequences20

Historical Perspective21

Changing Legislative Perspective22

Organizational Structure22

Comparative Operating Advantage Hypothesis24

Regulation Circumvention Hypothesis25

Gravitational Pull Effect26

Market Disequilibrium Hypothesis26

Financial Center Presence27

CHAPTER-III: METHODOLOGY29

Data and Methodology29

Data29

Variables Selection29

CHAPTER-IV: FINDINGS, RESULT AND DISCUSSION34

Empirical Model and Data34

Statistical Issues37

Empirical Results37

Statistical Results38

Individual Country Results41

Statistical Results Excluding Japan41

Comparison with the Literature41

CHAPTER-V: CONCLUSIONS AND POLICY IMPLICATIONS43

Policy Implications45

References47

Bibliography52

Appendix56

Data Files62

CHAPTER-I: INTRODUCTION

Foreign banks active in emerging market economies typically tend to focus their activities on large corporations. Therefore, reduced access to services as a result of foreign competition has been a concern. Experts find that foreign banks entering Argentina in the mid- 19 90s did not merely follow their clients abroad. They also exerted competitive pressure on domestic banks, especially those focused on mortgage lending or manufacturing, suggesting that foreign banks expanded especially in these sectors. Overhead, profitability, and interest margins were affected least in the domestic banks that focused on consumer lending, an area in which foreign investors showed little interest.

Experts find that a foreign presence had a positive effect on the stability of the financial sector. It is important, however, to ensure sufficient diversity in terms of the participants' country of origin to avoid the risks that a shock in a single home country would affect its bank branches abroad. Not all foreign banks are equally good; it is essential that the licensing process be transparent and includes detailed information about owners, managers, and qualifying criteria.

In most countries, regulation (rather than competition) determines the range of products and services a bank can offer, the types of assets and liabilities it can hold and issue, and the legal structure of its organization. Differences in corporate structures, however, have distinct advantages and disadvantages. Of growing importance is the global trend toward increased substitutability between various types of financial instruments. In many countries, bank deposits compete with other liabilities of financial intermediaries, such as money market funds, in the provision of liquidity and payment services. On the one hand, this competition implies that the demarcation lines between different types of financial intermediaries have become increasingly blurred from both the consumers' and the producers' points of view. On the other hand, even as these regulatory barriers have become less effective, the economic cost of maintaining them have risen.

It is useful to distinguish between two models of financial services: The first prohibits banks from engaging in any type of securities transactions or other noncredit financial service activity; the second permits banks to provide a variety of financial services, either directly or indirectly through subsidiaries. The latter is often called "universal banking." Because other aspects-such as the ownership of non-financial institutions-are often associated with universal banking, we use the term "integrated banking" to refer to ...