Banking across borders with heterogeneous banks

• Published in: Journal of international economics Vol. 142; p. 103748
• Main Author: Niepmann, Friederike
• Format: Journal Article
• Language: English
• Published: Elsevier B.V 01.05.2023
• Subjects: Cross-border banking; Heterogeneity; Multinational banks; Trade in services; Heterogeneity; Trade in services; Cross-border banking; F21; F12; F23; G21; Multinational banks
• ISSN: 0022-1996; 1873-0353
• DOI: 10.1016/j.jinteco.2023.103748

This paper develops a model of banking across borders where banks differ in their efficiencies. Operating abroad allows the most efficient banks that have a large enough scale to overcome the associated fixed costs to increase their leverage, size and profits even more. Banking globalization increases welfare because these banks, by maximizing the return on loans and minimizing funding costs, improve the allocation of capital by channeling capital across borders. At the same time, global banking sector efficiency increases because the least efficient banks exit. Foreign exposures data for German banks deliver new model-derived stylized facts. In particular, the average efficiency of banks that operate abroad is lower for host countries that have a less efficient banking sector, are larger and feature lower impediments to foreign bank entry. •Banks are heterogeneous in their foreign operations.•More efficient banks are more likely to operate abroad with larger foreign operations.•The efficiency of banks that operate abroad increases with host banking sector efficiency and entry barriers.•A theoretical model of global banking shows that heterogeneity affects the welfare effects of financial liberalization.