Article Analysis: Foreign Bank Penetration to Nordic Market
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Published: Wed, 29 Nov 2017
- ABDULAZEEZ OLUWAFUNMIKE ASMAU
Journals of international financial markets, institutions and money, vol.11 (1); 53-63 by Engwals, L., Marquardt, R., Pedersen,T. and Adrian E Tschoegl (2001)‘foreign bank penetration to the newly opened market in the Nordic countries.
To explain the aims of the research and how the researcher carried out theses aims.
Critically analyse the article from a methodology perspective. (1000 WORDS)
This work is based on the research articles of Lars Engwall, Rolf Marquardt, Torben Pedersen, Adrian E Tschoegl (2001). The authors research is to determine the impact of foreign bank in the newly opened market in some Nordic countries which includes Denmark, Finland, Norway and Sweden.
The opening of foreign bank in these Nordic country provides them with the opportunity to study the analysis of the foreign bank sector in the case where the sector had a specific start date. Three hypothesis were examined and the result leads to how parent market and the difficulty facing the domestic competition is fully in agreement in the situations of Denmark, for Finland and Norway it’s mixed and indeterminate, and fully disagree in the situation of Sweden. The result were consistently with the Stiglits – Weiss argument that the foreign banks bought entry by accepting worse lending risks. (Engwals, L., Marquardt, R., Pedersen,T. and Tschoegl, A., E. 2001).
This research focuses on how foreign bank gain access to the newly opened market in some Nordic countries. Denmark in 1971 was the first to deregulate its domestic banking markets and the entry of foreign banks. Just one foreign bank entered initially and the number of foreign banks grew slowly over time. Finland opened next (1978) but no foreign banks entered until four years later when further deregulation made entry attractive. Norway (1984) and Sweden (1985) opened after Denmark in more than a decade and a number of banks all entered at once. After falling from its peaks, the number of foreign banks and their share of each country’s banking system assets are recovering. (Lars Engwall, Rolf Marquardt, Torben Pedersen, Tschoegl, A., E. 2001).
Foreign bank was developed with the evolution of an economy or a technology in the Nordic countries not until the government removed the barriers. Opening up to foreign bank in Nordic countries exist to the process of deregulation which leads to competitive turbulence. Foreign banking was welcome by the authorities for the competition and also new capabilities which they establish to the domestic market. However, the effect of the entrant on monetary policy, credit control and soundness of the existing domestic banks are the concerns of the authorities. (Engwals, L., Marquardt, R., Pedersen,T. and Adrian E Tschoegl 1999).
The objective state to examine the determinant of the evolution of the foreigner market share of the asset of the banking system as a whole, not the survival and success of the individual banks. The three hypotheses related to the determinant of foreign bank sectors was formulated, which they relates the foreign banks’ market share to a time trend, to each host country’s trade balance, and to the banking system’s loan loss experience. (Engwals, L., Marquardt, R., Pedersen,T. and A,. E,Tschoegl 2001).
The first variable captures learning and selection, the second proxies for access to business related to the foreign banks’ access to their home markets. And the last captures the effect of a possible crisis-induced lack of competitiveness of the host-country banks. The result shows that in Denmark it is fully in agreement, for Finland and Norway it’s mixed and indeterminate, and fully disagree in the case of Sweden.(Engwals, L., Marquardt, R., Pedersen,T. and Tschoegl, A., E. 2001).
Foreign direct investment in banking has drawn substantial theoretical and empirical attention over the last two decade and empirical attention. Engwals, L., Marquardt, R., Pedersen,T. and Adrian E Tschoegl(2001), Williams (1997) provides a comprehensive survey of the theoretical literature. However, the literature on the market share of the foreign banks is sparse and almost entirely cross-sectional in nature.
Some other authors like Walter (1992) argue that bank-oriented financial systems are hostile to new entry, whether that of banks or markets. In line with Walter’s argument, Steinherr and Huveneers (1994) provide evidence that foreign bank penetration of loan markets is lower in countries where a small number of domestic banks dominate the banking sector. Yafeh and Yosha (1995) propose a model in which domestic banks respond to foreign bank entry by increasing the resources that the domestic banks devote to the formation of ties with firms. (Engwals, L., Marquardt, R., Pedersen,T. and A., E, Tschoegl 2001).
The literature reviewed provides the basis for the three hypotheses about the influences of learning, access to parent-country related business, and the effect of impediments to the competitiveness of host-country banks. The foreign banks can be subject both to selection and evolutionary learning (Baldwin and Rafiquzzaman 1995). (Engwals, L., Marquardt, R., Pedersen,T. and A., E. Tschoegl 2001).
Firstly, the time trend captures a second effect that has a debateable implication for the sign of the variable. (Engwals, L., Marquardt, R., Pedersen,T. and A., E. Tschoegl 2001).
H1: The longer foreign banks have been present, the larger their market share.
Second, they expect the foreign banks’ market share of banking system assets in a country to correlate positively with imports to the country and negatively with exports (Heinkel and Levi 1992). (Engwals, L., Marquardt, R., Pedersen,T. and A., E. Tschoegl 2001)
H2: The market share of foreign banks should wax with a trade deficit and wane with a trade surplus.
Lastly, financial crises should correlate positively with an expanded role for the foreign banks. (Engwals, L., Marquardt, R., Pedersen,T. and A., E. Tschoegl 2001).
H3: The foreign banks’ market share should wax when domestic banks are facing loan losses and wane when the domestic banks are less burdened.
Methodology and Result
OLS regression was use to examine the three hypotheses with time trend, trade balance losses and the financial crisis) the three hypotheses served has an independence variances.
Their results shows that in Demark all three independent variables had the correct sign and all were statistically significant at the 5% level and beta coefficients from the regression on the standardized variables shows TIME as the most important variable and TRADE BALANCE having a larger effect than LOSSES. (Engwals, L., Marquardt, R., Pedersen,T. and Tschoegl, A., E. 2001).
In Finland country, TIME had the correct sign, but the other two variables had perverse signs. All three variables had a large impact in the sense that a one standard deviation change in the independent variable. As for Norway, TIME was the only important factor. For Sweden, TIME had a negative effect but was not an important factor. (Engwals, L., Marquardt, R., Pedersen,T. and Tschoegl, A., E. 2001).
In all four Nordic countries, the survival rate among the initial foreign entrants appears low. Absent acquisitions of domestic banks, the foreign banks have not carved out a large role in any of the four Nordic countries. The result is consistent with what they would expect from theory based on the role of relationships in banking and from Steinherr and Huveneer’s (1994) argument and empirical results. The difference is congruent with differences in the elapsed time since opening; to recapitulate, the order of opening to foreign banks was Denmark, Finland, Norway and Sweden. (Engwals, L., Marquardt, R., Pedersen,T. and A., E. Tschoegl 2001).
Word count; 1007
Engwals, L., Marquardt, R., Pedersen,T. and Adrian E Tschoegl (2001) ‘foreign bank penetration to the newly opened market in the Nordic countries, ’Journals of international financial markets, institutions and money, vol.11 (1); 53-63.
Engwals, L., Marquardt, R., Pedersen,T. and Adrian E Tschoegl (March, 1999) ‘foreign bank penetration to the newly opened market in the Nordic countries. pg. (1-38)
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