Competitive Implications of Cross-Border Banking

Cross-border banking has long been an important part of the trend towards increased globalization and financial integration. In terms of this paper, cross-border banking refers to both cross-border capital flows as well crossborder entry in banking. Cross-border capital flows have been for long important drivers of financial integration. Particularly in the form of crossborder entry, cross-border banking has increased sharply in the last decade and has affected countries’financial systems in many ways and dimensions. Research has long studied the determinants and implications of cross-border capital flows and has started to analyze the determinants and cost and benefits of the recent wave of foreign entry in banking systems. In particular, a growing number of papers, using cross-country, individual and country bank evidence, have investigated the effects of foreign banks entry on local banking systems. The purpose of this paper is to review this literature, taking a broad view of cross-border banking as well as of its competitiveness implications, but focusing on the policy implications of the findings. In reviewing the literature, I focus on a number of aspects. First, are the determinants of cross-border banking. These determinants are important to identify as they point towards the countries and circumstances under which one can expect cross-border banking to occur — or the degree to which it might occur and affect the local financial systems. Many of the determinants of cross-border banking identified in the literature are as expected — countries’ creditworthiness, quality of institutional environment and growth opportunities. Furthermore, there appears to be a regional or proximity bias, including clustering, in cross-border flows and