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Few Large with Many Small: Banks Size Distribution and Cross-Border Financial Linkages

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Abstract

We estimate the effect of the distribution of banks by asset size on a country’s propensity to engage in cross-border banking. Countries where the distribution of banks by asset size is more skewed to the right (with few large and many small banks) lend more abroad and are recipients of more funds from foreign banks. This is consistent with the fact that large banks, with easier access to the international financial markets, act as a hub for smaller banks and at the same time stand out as safer too-big-to fail counterparts for foreign partners.

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Notes

  1. see, for example, Buch et al. (2014b) and Amiti et al. (2017).

  2. These include the volume of bilateral phone traffic, the bilateral trade in newspapers, and bilateral migration flows.

  3. Lending countries are Australia, Austria, Belgium, Brazil, Canada, Chile, Chinese Taipei, Denmark, Finland, France, Germany, Greece, Hong Kong SAR, India, Ireland, Italy, Japan, Korea, Luxembourg, Mexico, Netherlands, Panama, Portugal, Singapore, Spain, Sweden, Switzerland, Turkey, United Kingdom, United States.

  4. See Avdjiev et al. (2015) for an accurate and updated description of the BIS CBS database.

  5. Although the BIS Consolidated banking statistics database (CBS) suffers from number of structural breaks, in our sample their size is never larger than 2% of the total value of total claims, with the only exception of the first quarter of 2009, when it reaches 4%.

  6. We thank an anonymous referee for suggesting this check.

  7. For example, in 2010 the ratio the sum of total assets of individual banks reported in Bankscope to that in the IMF database ranges from a bit less than 60% in Bosnia Herzegovina, to 77% in Russia, 90% in the United Kingdom, 100% in Turkey and in the Czech Republic, to values larger than 100% in other countries.

  8. Our results are confirmed when the analysis is conducted on the full sample of countries and on a sample of countries for which at least 25 banks are present.

  9. In unreported regressions, available upon request, we have verified that we obtain similar results measuring competition with the Lerner index produced by the World Bank.

  10. Unfortunately, the ratio of total assets of foreign banks to total bank assets is available only for a smaller subset of countries in our sample; however, for these countries the correlation between these two measures is positive and highly statistically significant.

  11. Reassuringly, the coefficients obtained from estimates on the whole sample from the first and second stage regressions are very similar.

  12. Although Barba Navaretti et al. (2010) provide evidence that at the aggregate local claims in foreign currency of foreign affiliates are of very limited relevance, this may not be the case for some emerging and developing countries like Ecuador, El Salvador and Panama, that are fully dollarized, or others where the levels of foreign-currency denominated domestic loans is very high, such as Bolivia, Peru, Uruguay, Bulgaria and Hungary. To check that our results are not affected by the role of local claims in foreign currencies, we have estimated our model excluding all the countries listed above. Reassuringly, the results are broadly unchanged. We thank an anonymous reviewer for pointing out this potentially very relevant issue.

  13. Affinito and Pozzolo (2017) provide some evidence confirming that banks more active in the international markets are also more interconnected within the domestic interbank market.

  14. Results are broadly identical extending the subsamples to include the crisis period, considering the years 2000-2007 and 2008-2013.

  15. We thank an anonymous reviewer also for this interesting suggestion.

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Acknowledgments

We would like to thank the lead guest editor, Warren Bailey, and an anonymous reviewer for excellent comments, and also Rebel Cole (discussant), Travis Selmier II (discussant), Olivier De Jonghe, and seminar participants at the Portsmouth-Fordham Conference on Banking & Finance, 24–25 September 2016, at the Rome International Conference on Money Banking and Finance, 1–2 December 2016, and at the 2016 World Finance and Banking Symposium in Dubai, 15–16 December 2016. Giorgio Barba Navaretti acknowledges funding by the Centro Studi Luca d’Agliano within the project “Banks heterogeneity and capital flows”. The usual disclaimers apply.

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Authors and Affiliations

  1. Dipartimento di Economia, Management e Metodi Quantitativi, University of Milan, Centro Studi Luca D’Agliano, Via Conservatorio, 7, 20122, Milan, Italy

    Giorgio Barba Navaretti & Maria Teresa Trentinaglia de Daverio

  2. Department of Economics, European Univeristy Institute, Centro Studi Luca d’Agliano, CEPR, Villa La Fonte, Via delle Fontanelle 18, 50014, San Domenico di Fiesole, Italy

    Giacomo Calzolari

  3. Department of Law, Roma Tre University, Centro Studi Luca dAgliano, via Ostiense 163, 00154, Rome, Italy

    Alberto Franco Pozzolo

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  1. Giorgio Barba Navaretti
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  2. Giacomo Calzolari
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  3. Alberto Franco Pozzolo
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  4. Maria Teresa Trentinaglia de Daverio
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Correspondence to Alberto Franco Pozzolo.

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Navaretti, G.B., Calzolari, G., Pozzolo, A.F. et al. Few Large with Many Small: Banks Size Distribution and Cross-Border Financial Linkages. J Financ Serv Res 56, 229–258 (2019). https://doi.org/10.1007/s10693-019-00325-5

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