Date of Award

4-2012

Degree Name

Doctor of Philosophy

Department

Economics

First Advisor

Dr. Michael Ryan

Second Advisor

Dr. Donald Meyer

Third Advisor

Dr. C. James Hueng

Fourth Advisor

Dr. Kevin Corder

Keywords

foreign banks, foreign direct investment, three-way ECM, bank risk, foreign banks' impact, panel data analysis

Abstract

This dissertation investigates three aspects of banking foreign direct investment (BFDI). One striking development in the banking sector over the past two decades is the significant increase in BFDI. Multinational banks are now major players in the global financial system in terms of their asset positions, loan amounts, and operational scales. Despite this significant trend in BFDI, few empirical studies exist explaining observed international BFDI trends.

The first essay investigates the factors determining a bank’s decision to invest abroad. I first develop a two-asset portfolio selection model to identify determinant factors, and then employ a three-way error component model for estimation. The results based on data from 20 source countries and 108 host countries over 2000 – 2008 suggest banks prefer countries that have low bank-capital-to-asset ratios and better telecommunications infrastructure measured by internet service quality. Bank size and profit margin also influence the investment decision. Internet service does not matter for North-North BFDI, while it does for North-South BFDI.

The second essay investigates the factors determining foreign and domestic banks’ risk-taking behavior. Specifically it examines if there is asymmetric risk-taking reaction by these two groups in response to banking activities and host’s inflation rate. I consider five alternative measures of bank risk that are based on banks’ accounting data. Using bank-level data from the G-8 countries over the period 2001 – 2009, the results suggest banks tend to react significantly in response to bank regulation, types of banking activities and inflation rates. I find that foreign and domestic bank risk-taking behavior to differ in response to types of banking activities and host countries’ inflation.

The last essay explores the impact of foreign banks’ presence on host country’s economy. The last essay investigates three channels (growth-, credit-, and spillover-channels) through which foreign banks’ participation can affect a host country’s economy. Using data on 11 OECD member countries from 1979-2007, I find foreign banks’ participation positively impacts a host economy’s growth and provides spillover effects on domestic banks’ activities. I also find that foreign banks’ participation has negative effect on host country’s credit supply.

Access Setting

Dissertation-Open Access

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