Local versus International Crises and Bank Stability: does bank foreign expansion make a difference?

ABSTRACT

We investigate the impact of global and local crises on bank stability in the MENA region and examine the effect of owning bank subsidiaries in other countries. We consider banks that experienced both types of crises during our sample period. Our findings highlight a negative impact of the Global Financial Crisis of 2007–2008 on bank stability but, on the whole, no negative impact of the local crisis. A deeper investigation shows that owning bank subsidiaries outside the home country is a source of increased fragility during normal times, yet a source of higher stability during the local crisis but not during the international crisis. Moreover, owning foreign subsidiaries in one or two world regions is insufficient to neutralize both types of crises, while being present in three or more regions is more stabilizing during a local crisis but also more destabilizing during an international crisis. Our findings contribute to the literature examining bank stability and have several policy implications.

KEYWORDS:

• Financial crises
• bank stability
• bank foreign expansion
• subsidiaries

JEL CLASSIFICATION:

• G21
• G28
• G01

Acknowledgement

We would like to thank Robert DeYoung, Iftekhar Hasan, Bernard Hoekman, Kose John, Laetitia Lepetit, Philip Molyneux, and Philippe Rous, for their helpful comments on earlier versions of the article; participants of the Economic Research Forum 22nd Annual Conference in Cairo, the 6th International Conference of the Financial Engineering and Banking Society in Malaga, the 65th Annual Meeting of the French Economic Association in Nancy, and the 33rd International Symposium on Money, Banking and Finance in Clermond-Ferrand. All errors, of course, rest with the authors.

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

¹ The MENA region refers to the Middle East and North Africa region. It constitutes of the following countries: Algeria, Bahrain, Djibouti, Egypt, Iran, Iraq, Israel, Jordan, Kuwait, Lebanon, Libya, Malta, Morocco, Oman, Palestine, Qatar, Saudi Arabia, Syria, Tunisia, UAE, and Yemen.

² Equity to total assets is at an average of 11.4% in the MENA region compared to 11.2% and 6.9% in the U.S. and the Eurozone, respectively. On average, the return on equity of MENA banks is also higher: 13.5%, 12.2% and 5.9% in MENA, The U.S., and the Eurozone, respectively (source: Bankscope).

³ The Gulf Cooperation Council (GCC) includes Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates.

⁴ The term ‘foreign subsidiaries’ will be used throughout this paper to refer to bank subsidiaries owned by banks in the sample, and which are operating in countries other than the country of main operations.

⁵ Although the two shocks examined in our study are of different natures, however, and as listed above, numerous studies have documented the effects of different kinds of shocks on the financial markets in general, and the banking sector in particular.

⁶ We evaluate in this paper two types of crisis, political and financial. Regardless of the nature of a crisis, numerous studies have documented their impact on financial systems worldwide.

⁷ All these figures are taken from the World Bank Financial Development and Structure Dataset.

⁸ In the FSI-BIS (2012) and FSI-BIS (2014) surveys, Kuwait was the first country (2005) of their survey sample to start implementing the Basel II pillars, while Egypt was the last one (2011).

⁹ The countries are: Tunisia, Egypt, Libya, Syria, Yemen and Bahrain, henceforward referred to as AS_DIRECT.

¹⁰ Neaime (2012) shows that the crisis reached the MENA region stock markets in 2008, decreasing stock market capitalization from 1,189,187 (Mil USD) in 2007 to 645,211 (Mil USD) in 2008. Guyot, Lagoarde-Segot, and Neaime (2014) also document a sharp decrease in Egypt market capitalization in 2008, compared to 2007.

¹¹ The size of these subsidiaries could not be obtained due to limited data availability.

¹² Regions are defined by continents, with two exceptions: The MENA region and North America. The North American region, given the low number of observations in Canada, is solely represented by the U.S.

¹³ These countries are Djibouti, Israel, Libya, Malta, Morocco, and Oman.

¹⁴ This includes all subsidiaries outside the main country of operations, yet still within the MENA region.

¹⁵ Some studies favour the HT model over the FEVD estimator. See for example, Breusch et al. (2011a), Breusch et al. (2011b) and Greene (2011). The HT model uses an instrumental variable approach to deal with the possible correlation between the explanatory variables and the unobserved individual effects.

¹⁶ Our instruments are: loans/total assets, ownership concentration, bank type (GOBs, Islamic, and conventional with an Islamic window), size, and economic freedom. The results from the Probit regressions are available on request.