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Location Decisions of Foreign Banks and Institutional Competitive Advantage - page 9 / 33





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entered. In terms of asset shares, the increase in foreign bank presence has been the largest in the upper-middle income group. This group includes many of the countries where today foreign banks constitute the majority of the banking system, such as Hungary, Mexico and Poland.

There have been increases in foreign bank presence for all regions. In asset shares, the regions with the largest increases in relative foreign bank presence were Non- OECD, Latin America and Caribbean, and Europe and Central Asia. Latin America and Caribbean, and Europe and Central Asia still remain the regions with the highest share of foreign assets, 39 and 37 percent respectively. In terms of numbers, the regions with the largest increases in relative foreign bank presence were Europe and Central Asia, followed by Non-OECD, Middle-East and Northern Africa, Latin America and Caribbean, and Sub-Saharan Africa. Albeit increasing, South Asia still has the lowest share of foreign banks in numbers as well as asset shares. Numbers for OECD-countries do not reflect all foreign bank presence, since we did not cover all small banks in these countries (we do cover at least 75% of banking system assets).

There are some trends in the number and type of countries exporting banking services and in the countries in which these banks invest. The number of developing countries that had their banks enter other countries increased from 43 in 1995 to 58 in 2006. And, while in 1995 developing countries’ foreign banks were active in 58 countries, in 2006 this rose to 83. Consequently, there has been a substantial increase in the importance of foreign banks from developing countries in host countries’ banking sectors. While in 1995 these foreign banks accounted (in terms of number of banks) for more than 10 percent of the banking sector in 54 percent of the countries, by 2006 this percentage increased to 69 percent. This broadening of foreign bank presence is reflected in the mix of source and host countries. In general, banks tend to invest in countries with similar or lower income levels. This is especially so for low-income countries: in 2006, some 72 percent of banks from low-income countries invested in other low-income countries, the highest intra-group investment share. The fact that we observe a broadening pattern of foreign bank investments and more investment among low-income countries hints at the importance of relative institutional similarities driving investment decisions.


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