Global integration in the banking industry

Federal Reserve Bulletin, Nov, 2003 by Allen N. Berger, David C. Smith, Jennifer Judge

Other affiliates might value a bank that offers "home-based" expertise--that is, an understanding of the home market of the affiliate's parent--because it is important to the affiliate to rely on a bank familiar with its home territory. (9) Perhaps the bank already serves the parent corporation in the home country. Banks headquartered in the affiliate's home country should have an advantage in offering home-based expertise. A U.S. affiliate operating in Germany that values home-based expertise might then prefer a U.S. bank because of its advantage in offering such services.

Banks from third countries (that is, from neither the host nor the home country) may not have host-based or home-based expertise, but they might competitively offer services in other dimensions valued by an affiliate. For instance, a U.S. corporate affiliate in Germany may value, say, a Dutch bank for a specialized service not offered by host- or home-nation banks.

Bank reach refers to the size and geographic scope of the bank. Some affiliates may value a large, global bank that can offer a broad range of financial services, expertise within many foreign markets, superior risk diversification, and the ability to facilitate large deals. For the affiliate operating in Germany, this choice need not depend on bank nationality because the affiliate could choose a global German bank (for example, Deutsche Bank), a global U.S. bank (for example, Citibank), of a global third-nation bank (for example, the Dutch bank ABN AMRO). A different set of affiliates may prefer the advantages of a smaller bank that offers services in only a local area because such a bank is more likely to establish a close relationship with the affiliate and provide customized services. Such an affiliate that operates in Germany might select a German bank that has a local character and operates only in Germany or maybe even in only one part of the country. Still other affiliates may prefer a bank that blends international reach with local, personalized services. Such a bank's reach may be limited to a specific region or set of countries. So, a U.S. affiliate operating in Germany that prefers a blend of the far-reaching services of a global bank and the more personalized character of a local bank might choose an institution that confines itself to operating mainly on the European continent (for example, the Nordic-based banking concern Nordea).

In the absence of barriers, the extent of integration in the banking industry will depend on how customers value different banking services and the extent to which banks of a given nationality and reach can provide those services. Importantly, if customers place a high value on global services and have little value for host-based or home-based expertise, then we might expect to see an integrated banking industry, perhaps with a few global banks dominating markets around the world. Conversely, if customers value host-based expertise and place less value on global services, then we should observe limited banking industry integration. Thus, depending on the services valued by bank customers, we could have a world with extensive integration or one with little integration.