Globalization's Effect on the Banking Sector

COMMERCE

Financial services liberalisation is characterised by an increase in the number of international banks operating in a country. This study examines the impact of globalisation on bank profitability and cost efficiency using data from 169 countries between 1998 and 2013. Using both fixed-effects and GMM estimations, as well as accounting for banking-industry and macroeconomic controls, I find that greater globalisation of the banking sector reduces profits and cost inefficiency. This reflects increased competitiveness and informational asymmetries in host markets, as well as assimilation of better technology and management practises by domestic banks. For nations in different phases of economic development and with differing levels of foreign bank engagement, the results are examined. Developing markets and nations with a banking sector dominated by foreign banks stand to gain the most from increased globalisation of the banking industry. The findings suggest that banking regulators should establish strategies to alleviate host market knowledge asymmetries.

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