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Foreign ownership of banks can have both strengths and weaknesses that depend on factors like the level of shareholding, stability of future ownership, and impact of global and local regulatory issues. The document examines foreign ownership trends in different regions and types of foreign investors in banks, including commercial banks, private equity funds, and specialist banks. It also discusses regulatory issues, capital adequacy rules, liquidity regulations, and questions around the effective lender of last resort for foreign-owned subsidiaries.
Foreign ownership of banks can have both strengths and weaknesses that depend on factors like the level of shareholding, stability of future ownership, and impact of global and local regulatory issues. The document examines foreign ownership trends in different regions and types of foreign investors in banks, including commercial banks, private equity funds, and specialist banks. It also discusses regulatory issues, capital adequacy rules, liquidity regulations, and questions around the effective lender of last resort for foreign-owned subsidiaries.
Foreign ownership of banks can have both strengths and weaknesses that depend on factors like the level of shareholding, stability of future ownership, and impact of global and local regulatory issues. The document examines foreign ownership trends in different regions and types of foreign investors in banks, including commercial banks, private equity funds, and specialist banks. It also discusses regulatory issues, capital adequacy rules, liquidity regulations, and questions around the effective lender of last resort for foreign-owned subsidiaries.
sub-set of their parent or as separate entities? How large is the shareholding? Difference between 100%, majority and minority. Need to consider stability of future ownership. Do not assume that shareholder structure will not change in the future. Consider impact of global macro-economic trends and developments on shareholder structure. Do local regulatory & legal issues change your perception? Central & Eastern Europe Foreign banks set up subsidiaries from 1990 onwards. Foreign banks began to buy locally owned banks from about 1998 onwards. Many countries are now dominated by foreign owned banks. Remaining regional banks now expanding cross border. OTP in particular.
Share of banking sector assets
controlled by foreign banks in the new member states 2003 (%) Source: ECB Latin America Mexico most receptive to foreign ownership. Most large Mexican banks now foreign owned. Penetration of foreign ownership in Mexico resembles that in Central & Eastern Europe. Foreign banks involved in privatization. e.g. regional state banks in Brazil. Asia Least receptive region to foreign ownership. Most foreign ownership developments were in response to 1997 Asian crisis. Often foreign banks were limited to taking a minority stake in a major bank, often as part of a rescue bid. China being forced to open up market to foreign ownership as part of WTO membership. Japan still essentially closed to foreign ownership. South Korea is gradually accepting more foreign banks as key shareholders of mid to large sized banks. Types of Investor I Commercial Banks The most strategic of possible investor. Does their investment represent part of a strategic, regional development? e.g. Scandinavian banks in Baltic States Greek banks in Balkans Austrian banks in Central Europe HSBC in China How good is the cultural fit? e.g. BSCH/BBVA from Spain have expanded into Latin America. Good historic/cultural fit. Types of Investor II Private Equity Funds/Hedge Funds Never strategic. How long is their investment horizon? Possibly more interested in buying portfolios of bad loans than whole banks. Might buy bad bank, turn it around and resell. Success of strategy depends on buying bank at suitably deep discount. Strategy works best if local regulator provides a put option/guarantee for bad loans to be removed when recognised. Often there is little true transfer of risk to this type of investor, although the perception might be that they are taking considerable risk. Example: Shinsei Bank, Japan I Originally Long Term Credit Bank of Japan LTCB failed in October 1998 Height of post bubble economic downturn. LTCB was not house bank to any large corporate. Tended to be lender to syndications organised by other banks. Usually only 3rd or 4th largest lender to any given corporate. Example: Shinsei Bank, Japan II LTCB nationalized October 1998. Capital injection of Yen 3.6 trillion. Problem loans of Yen 4.2 trillion removed. March 2000 bank re-privatized. Equity investors led by Ripplewood LLC. American private equity vehicle led by Christopher Flowers, ex- Goldman Sachs banker. Other shareholders included: Mellon Bank, UBS Painewebber, GE Capital, ABN Amro & Deutsche Bank. This investor group was never a long term strategic shareholder. Government provided a limited term put option for problem assets. Example: Shinsei Bank, Japan III Exit Strategy IPO Planned For Early 2003. IPO Delayed, but Executed in February 2004. Privatization investors booked huge profits. Original investor retain 64% of common equity, which will be sold in future. Bank repositioned in retail and SME market. Management accused of aggressive work out of problem loans. Experienced international (mainly US) manager bought in to turn bank around. Securitization (CDO) techniques used to reshape balance sheet. Strong, young Japanese graduates hired. New risk management processes introduced. Example: Korea Post Asia Crisis I
After 1997, troubled banks nationalised and then
sold to US based private equity funds. In 2004 funds started to sell out: Newbridge Capital sells 51% stake in Korea First Bank to Standard Chartered (now 100% owner). Carlyle sells minority stake in Korea American Bank to Citibank, which merges bank with Citibank Korea. Lone Star still to sell 50.53% stake in Korea Exchange Bank. Lock in period ends October 2005. Example: Korea Post Asia Crisis II
May 2005 Bank of Korea think-tank (Institute for
Monetary & Economic Research) tells government not to sell any more banks to private equity funds. With particular reference to states 80% stake in Woori Bank (Koreas 3rd largest lender) due for sale later in 2005. Finds that efficiency has improved more at locally owned banks in recent years. Considers private equity funds help short term financial stability, but do not contribute to longer term efficiency gains. Types of Investor III Specialist Banks Micro-Finance Relatively new area. Major international banks have limited expertise. Pro Credit network now dominates this sector in many emerging markets and is experienced in using IFI funds. Consumer Credit/Credit Cards Bring expertise in markets where this product is underdeveloped. US/UK firms probably have most expertise. Investors are often risk averse and will not enter markets until they are certain that they are ready for development of this product. Initial development of joint ventures in this product area likely. Banks may also buy non banks in this sector. e.g. Bank interest shown when significant stake in Japans Takefuji consumer credit company was sold in 2004. Types of Investor IV Non Bank Financial Institutions Large conglomerates with financial interests GE Capital Typically interested in leasing, consumer finance, credit cards. Banks in CEE, such as Budapest Bank, were first universal banks to be owned by GE. GMAC Aside from car loans, significant mortgage lender, usually more in the sub-prime area of the market. Major activity in UK mortgage market. Expected to seek further international expansion. Car Manufacturers Specialist auto finance banks. Likely to be a trigger for securitization in many of the markets in which they operate. Regulatory Issues I If looking at an international subsidiary, always be careful to work out who the responsible regulator is. Under current rules, main regulator for capital adequacy is usually the HOST regulator. HOST regulator will usually seek some form of comfort letter regarding adequate capitalization of the subsidiary by the parent. Comfort letters usually have no legal standing. Moral obligation/Reputational Risk usually more important. Regulatory Issues II Basel 2 introduces new regime to reduce regulatory burden on large multi-national groups. HOME country regulator will become responsible for all capital adequacy issues. HOME country capital rules will apply to all subsidiaries in the group. Result of this calculation will be reported to HOST country regulators, but they cannot set their own requirements in addition. Could undermine regimes stricter than the international minimum. e.g. Albania requires 12% minimum capital adequacy ratio, but has mainly foreign owned banks who will see this ratio fall to 8% post Basel 2. Regulatory Issues III Market related issues must remain the responsibility of the country in which the market is based. In particular LIQUIDITY must remain regulated by the HOST country regulator. However, foreign owned banks might have access to stronger liquidity from the centralized treasury desk of their group. This could provide some morale hazard to HOST country regulator. In a crisis can the requirements of the IMF override the requirements of the HOST country bank regulator. IMF might over-rule regulatory decisions about which banks should be supported. Lender of Last Resort Who is the effective lender of last resort? For most banks it is their national government, working through the Central Bank. Is the government allowed to support the bank? Could IMF or EU state aid rules prevent this happening? For foreign owned banks, the main international shareholder is another key provider of capital support. How important is the local subsidiary to the global operations of the parent bank? Would there be any reputational risk of the parent not supporting the subsidiary? Are there any legal issues which the parent could hide behind to not support the subsidiary? e.g. Argentina. Impact of Home Country Issues on Host Country Subsidiary
Home country issues could result in an international
bank changing its strategy for its subsidiaries. Economic problems in home country might force banks to sell profitable subsidiaries abroad to support their capital position in their home markets. Pressure from shareholders to boost returns might lead to the sale of underperforming international banking subsidiaries. Volatility from international investments might un-nerve shareholders of the group. Possible risk for Spanish banks who have invested heavily in Latin America. Advantages I Funding. Centralized treasury desks can on-lend cheaper funds within the group. Group expertise might help subsidiary banks take advantage of securitization markets. In a crisis, foreign owned banks tend to benefit from flight to quality effects. Risk Management. Parent bank usually develops risk management expertise at subsidiary banks. Risk management improvements at foreign owned banks can lead to overall improvement in risk management throughout the market. Advantages II Product Development. Product development usually accelerates after arrival of foreign bank as a shareholder. Some products designed by the group can be offered directly in international markets, removing local product development costs. Other products may need some adaptation to each market, which requires some local product development spend, but these will be lower than designing the entire product. Information Technology & Outsourcing. Economies of scale when large international groups buy new hardware and software. Development costs can be shared through the entire group. Some processing can be centralized cross border in one location. Other. Training can be centralized. Disadvantages Risk Management. International techniques may result in an unnecessarily risk averse business approach in some emerging markets. International risk management may place too much emphasis on market liquidity and collateral valuations which do not apply in all markets. Product Development. Over-reliance on the shareholders off-the-shelf product may mean that local banks miss some profitable opportunities which require more customized products. Marginalisation. Could the local bank become marginalized in its own country, as its management are less in touch with local market needs, as they constantly try to please head office? Cultural Differences. A successful management team is likely to blend local and international expertise. Too much reliance on local management might lead to misunderstanding with the shareholder. Conclusion Given advantages & disadvantages to foreign ownership of banks: Ideal situation is mixed ownership: Some subsidiaries of foreign banks, some banks with minority foreign ownership and some locally owned. Care must be taken to structure limits within international banking groups accordingly. For longer dated exposures, do not automatically assume that ownership of the subsidiary will not change.