Vas up, Claus
A icle
Economic Mo i es o Fo eign Banking: The Danish Case
K edi und Kapi al
P o ided in Coope a ion wi h:
Duncke & Humblo , Be lin
Sugges ed Ci a ion: Vas up, Claus (1983) : Economic Mo i es o Fo eign Banking: The Danish Case,
K edi und Kapi al, ISSN 0023-4591, Duncke & Humblo , Be lin, Vol. 16, Iss. 1, pp. 117-125,
h ps://doi.o g/10.3790/ccm.16.1.117
This Ve sion is a ailable a :
h ps://hdl.handle.ne /10419/292953
S anda d-Nu zungsbedingungen:
Die Dokumen e au EconS o dü en zu eigenen wissenscha lichen
Zwecken und zum P i a geb auch gespeiche und kopie we den.
Sie dü en die Dokumen e nich ü ö en liche ode komme zielle
Zwecke e iel äl igen, ö en lich auss ellen, ö en lich zugänglich
machen, e eiben ode ande wei ig nu zen.
So e n die Ve asse die Dokumen e un e Open-Con en -Lizenzen
(insbesonde e CC-Lizenzen) zu Ve ügung ges ell haben soll en,
gel en abweichend on diesen Nu zungsbedingungen die in de do
genann en Lizenz gewäh en Nu zungs ech e.
Te ms o use:
Documen s in EconS o may be sa ed and copied o you pe sonal
and schola ly pu poses.
You a e no o copy documen s o public o comme cial pu poses, o
exhibi he documen s publicly, o make hem publicly a ailable on he
in e ne , o o dis ibu e o o he wise use he documen s in public.
I he documen s ha e been made a ailable unde an Open Con en
Licence (especially C ea i e Commons Licences), you may exe cise
u he usage igh s as speci ied in he indica ed licence.
h ps://c ea i ecommons.o g/licenses/by/4.0/
Economic Mo i es o Fo eign Banking:
The Danish Case
By Claus Vas up, Aa hus
I. In oduc ion
A ound he middle o he 1970s Danish banks s a ed "going in e -
na ional" by es ablishing pa ly o ully owned subsidia ies, b anches
and o ices ou side Denma k1. The economic easons o his de el-
opmen a e he subjec o he ollowing discussion, which should also be
alid o banking in o he small coun ies. Acco dingly, he commen s
a e also applicable o an impo an pa o he ac i i ies o he smalle
Eu o-banks. They a e somewha mo e ex ensi e han necessa y o
explaining he exis ence o he bigge Eu obanks (i.e. na ional egula-
ions, see e.g. Alibe [1980]).
As a backg ound o he discussion I shall i s deal wi h he ac i i ies
o banks in gene al, and hen wi h he kind o in e na ional banking
which is mos impo an o he o eign subsidia ies o Danish banks2.
II. The Ac i i ies o Banks in Gene al
Banks a e inancial in e media ies specializing in ecei ing deposi s
om and lending o hei cus ome s. Howe e , such an alloca ion o
1 A he same ime a ew o eign banks began o es ablish b anches and
o ices in Denma k. By he end o 1979 he e we e 4 b anches o o eign
banks in Denma k. A he same ime he ewe e 5 subsidia y banks in
Luxembou g ully owned by Danish banks, 1 b anch o a Danish bank in
New Yo k and 7 Danish banks each wi h a b anch a Cayman Islands. The e
is no o icial igu e o he numbe o subsidia ies pa ly owned by Danish
banks, bu he ac i i ies o hese subsidia ies a e no unimpo an o he
ques ion discussed. The Danish bank-owne s a e comme cial and sa ings
banks, and he se en big banks all ha e o eign subsidia ies. The e a e
no o icial s a is ics on he ac i i ies loca ed a he o eign subsidia ies, bu
i is commonly ega ded as conside able. On he o al media ion o o eign
loans by Danish banks see below.
2 See e.g. F iedman (1977), who as a esul o he pauci y o li e a u e on
in e na ional inancial in e media ion also akes as a poin o depa u e
heo ies o na ional banking and hen p oceeds o discuss he in e na ional
aspec s. See Bal enspe ge (1980) o a gene al e iew o heo ies o he
heo ies o he banking i m.
OPEN ACCESS | Licensed unde CC BY 4.0 | h ps://c ea i ecommons.o g/abou /cclicenses/
DOI h ps://doi.o g/10.3790/ccm.16.1.117 | Gene a ed on 2023-01-16 12:48:36
118 Claus Vas up
he same o deposi s and loans. Howe e , in many cases he banks will
ecei e deposi s on o he e ms han hey hemsel es place he unds
in loans and bonds. O en deposi s o he banks will ha e a sho e e m
o no ice han he e ec i e pe iod in which he banks can disengage
hemsel es om he loans. Co espondingly, he in e es o deposi s
and loans no mally is a iable wi hou no ice, bu he same is no ue
o unds placed by banks in bonds e c.
These kinds o ans o ma ion o e ms a e no mally called he
c ea ion o liquidi y by banks. The i s kind o liquidi y c ea ed by
he di e ences in e ms o no ice is due o he compa a i e ad an ages
o he banks wi h espec o hei cos s as inancial in e media ies.
Thus, when he banks a e willing o gi e a he long loans on he basis
o sho e m deposi s, he eason is ha he ma ke o deposi s is
unc ioning qui e well. The e o e he banks a e easonably ce ain ha
hey will be able o subs i u e deposi s wi hd awn by new deposi s, bu
pe haps a a highe a e o in e es . To he ex en ha he indi idual
bank is no su e ha i can ob ain su icien new deposi s a a sho
no ice, i will place a ce ain ac ion o i s deposi s in cash o easily
saleable bonds. By he same oken, hese unds a e no pa o he
liquidi y c ea ed by he bank.
The kind o liquidi y c ea ed by bo owing a a iable in e es a es
and lending by holding, e.g. bonds a ixed in e es a es is no mally
o a seconda y impo ance o he banks. This ansac ion assumes ha
he banks ha e less isk a e sion han hei cus ome s. O he wise, he
cus ome s would hemsel es un he implied isk connec ed wi h he
holding o longe e m bonds ins ead o plancing he unds in deposi s
wi h a a iable a e o in e es . Acco dingly, his c ea ion o linguidi y
is pe o med mos ly in he case whe e deposi s a e made by smalle
cus ome s.
In addi ion o his inancial in e media ion and c ea ion o liquidi y
he banks also ca y ou na ional as well as in e na ional paymen s
o he clien s. This ac i i y is also a consequence o he ela i ely low
cos s in his kind o business.
III. In e na ional Banking
Mos banking is e ail-banking ca ied ou by banks owned by indi-
iduals om he same coun y as he coun y o o igin o he cus ome s.
Howe e , in he absense o legal cons ain s he e is no eason why
OPEN ACCESS | Licensed unde CC BY 4.0 | h ps://c ea i ecommons.o g/abou /cclicenses/
DOI h ps://doi.o g/10.3790/ccm.16.1.117 | Gene a ed on 2023-01-16 12:48:36
Economic Mo i es o Fo eign Banking: The Danish Case 119
inancial esou ces does no necessa ily equi e he exis ence o banks.
The o iginal lende s hemsel es could make con ac and place hei
esou ces di ec ly wi h he inal bo owe s.
When he banks do ac as in e media ies, he eason mus be ha
as a consequence o hei size and specialized ac i i ies hey a e able o
pe o m his inancial in e media ion in a cheape , sa e and mo e
con enien way compa ed o o he s. This will no necessa ily be so o
all kinds o alloca ion o inancial esou ces. The e o e an explana ion
o he ac i i ies o banks, which akes as a s a ing poin he ad an ages
o he o iginal lende s and he inal bo owe s, also includes he
possibili y o o he kinds o inancial in e media ies, e.g. mo gage
ins i u ions and he possibili y o non-ins i u ionalized c edi s.
To be mo e explici , he ad an ages o in e media ion h ough banks
a e i s ha wi hin he amewo k o public egula ions among o he
hings he deposi o s can easily judge whe he he banks can and will
mee hei obliga ions. Second, ha he banks o hei pa ha e a
compa a i e ad an age in he c edi a ing o inal bo owe s. Especially,
he las poin is a consequence o a a he la ge elemen o ixed cos
in ol ed in a ing e c. Wi h such ixed cos s i is possible o inc ease
he p o i o he in e media ies, he ne in e es paymen o he o iginal
lende s and/o dec ease he cos o he inal bo owe s, i he bo owing
o each clien goes h ough a single o a ew banks ins ead o going
h ough many.
The ac ha banks o en ex end c edi on he basis o cus ome s'
o al economic posi ion is an addi ional eason why hey a e unin e es ed
in sha ing hei cus ome s wi h o he banks. The banks balance hese
wo aspec s agains hei desi e o isk minimiza ion and hus o
sp eading he isk connec ed wi h lending o any gi en clien among
mo e ins i u ions.
Fo smalle cus ome s he ixed cos a gumen is mo e impo an han
isk sp eading ,and consequen ly indi iduals and smalle i ms will
usually ha e connec ions wi h only one bank, while la ge cus ome s
( ela i e o he bank) a e likely o ob ain c edi om mo e han one
bank. Fo his eason he ela ionship be ween a bank and i s smalle
bo owing cus ome s will no be a pe ec ly compe i i e one, bu will
ins ead gi e he bank some deg ee o a monopolis ic posi ion.
The inancial in e media ion discussed abo e implici y assumes ha
he e ms wi h espec o a ia ion in in e es a es and ma u i y a e
OPEN ACCESS | Licensed unde CC BY 4.0 | h ps://c ea i ecommons.o g/abou /cclicenses/
DOI h ps://doi.o g/10.3790/ccm.16.1.117 | Gene a ed on 2023-01-16 12:48:36
120 Claus Vas up
such banks could no be owned by o eigne s. I has been he case o
B i ish banks in he o me colonies bo h a he ime o hei s a us
as such and la e du ing hei independence. Such an in e na ional
ac i i y may no mally be a ibu ed o he ac ha he bank owne s in
he mo he coun y ha e compa a i e ad an ages wi h espec o
"managemen " and o he "know how" in adminis a i e a ai s. How-
e e , he e is no eason o assume ha hese ad an ages will be e y
p onounced be ween ai ly equally de eloped coun ies as o jus i y o
a la ge ex end o eign owne ship o no mal e ail banks in he
indus ialized wo ld3.
As one would expec , he e o e, his is no he eason why Danish
banks ha e se up a numbe o o eign subsidia ies and b anches in
ecen yea s. No is he absence o non-in e es ing paying ese es
equi emen s a mo i e o es ablishing Eu obanks, as such equi emen s
a e o no impo ance o Danish banks. These o eign subsidia ies
owe hei exis ence o he desi e by Danish banks o use hei knowledge
o he c edi wo hiness o hei clien s. Tha his is he case can be seen
om he ac , ha a he end o 1979 he Danish banks' gua an ees o
o eign loans o hei clien s amoun ed o 22.5 pe cen o hei o al
lending. In he ca ego y o non- inancial co po a ions he gua an ees
amoun ed o as much as 52.8 pe cen o hei lending o his g oup4.
When he clien s o Danish banks u n o o eign capi al ma ke s,
hei bo owing could in p inciple ake place on he basis o a c edi
a ing acco ded di ec ly by o eign ins i u ions. Howe e , in many
cases i is cheape o go ia he Danish banks, he eason being
he abo e-men ioned ixed cos s in c edi a ing. The e o e, when
Danish banks media e a o eign loan, i assumes an al eady exis ing
o an expec ed no mal cus ome ela ionship o such bo owe s. Conse-
quen ly, he in e media ion o o eign loans by Danish banks is no mal-
ly an in e media ion o loans o Danish bo owe s.
As he weigh o he ixed cos o c edi a ing dec eases in impo ance
as he o al cos o bo owing inc eases, he u he consequence is
ha he "compe i i eness" o Danish compa ed o o eign banks de-
c eases bo h wi h he size and he ma u i y o he loan. The cos s o
and demand o a apid c edi a ing also inc ease wi h he isk o he
loan. The e o e he in e media ion o o eign loans by Danish banks will
s See G ube I (1977).
4 See S a is iske E e e ninge (1980).
OPEN ACCESS | Licensed unde CC BY 4.0 | h ps://c ea i ecommons.o g/abou /cclicenses/
DOI h ps://doi.o g/10.3790/ccm.16.1.117 | Gene a ed on 2023-01-16 12:48:36

Economic Mo i es o Fo eign Banking: The Danish Case 121
mos ly be in connec ion wi h sho o medium e m bo owing by
smalle Danish i ms.
In case o a loan wi h a long ma u i y o a single c edi a ing, he a
p io i in o ma ion o he Danish lende will be o a mino impo ance
o no exis a all. Acco dingly, wi hou legal cons ain s one can assume
ha compe i ion be ween e.g. Danish and o eign mo gage ins i u ions
will be mo e keen han be ween Danish and o eign comme cial banks.
Be o e se ing up o eign subsidia ies and b anches, Danish banks
usually media ed o eign loans by issuing a a commission a gua an ee
o he o eign bank ex ending he c edi s di ec ly o he Danish
cus ome s. By es ablishing o eign subsidia ies and b anches he Danish
banks a e changing his pa e n. A p e equisi e o his change o
cou se is ha he o eign banks ask a highe commission and/o a e
o in e es in he o me way o media ing he loans han in he case
whe e Danish banks hemsel es ge he necessa y unds on he in e -
na ional money o capi al ma ke s. When unde simila isk assessmen s
he o eign banks demand di e en paymen s om di e en cus ome s,
such p ice disc imina ion mus be de i ed om a ce ain monopolis ic
posi ion. Fu he , i is his di e ence in in e es and commission ha
Dansh banks y o cap u e h ough hei new ac i i ies. Wi h he
g ea e amoun o Danish bo owing in he las couple o yea s he o al
o hese di e ences has g own enough o co e some ex a cos s and
some addi ional p o i s o he Danish banks.
Howe e , his does no explain why Danish banks do no jus ecei e
deposi s om o eign banks, place hem on hei domes ic balances
and hen elend hese unds o hei cus ome s. O cou se, i could be
ha cos o ax conside a ions play a ole in hei choice be ween o eign
and domes ic book-keeping. Such conside a ions a e no impo an in
explaining why Danish banks go in e na ional, bu may o cou se play a
ole o he choice be ween di e en loca ions o a gi en o eign
ac i i y5. The p inciple eason o he o eign in e media ion o o eign
loans by Danish banks in hei o eign subsidia ies is he Danish o icial
o eign exchange egula ion. This egula ion p e en s he Danish banks,
h ough hei domes ic o ices, om p o iding mo e han a small amoun
o o eign unds o Danish cus ome s. Tha such a egula ion has led
o he es ablishmen o o eign subsidia ies o Danish banks is only a
5 The same is ue wi h espec o di e ences in banking and company
egula ions, e.g. he banks se up subsidia ies in Luxembou g, while hey
e y o en se up b anches in he US.
OPEN ACCESS | Licensed unde CC BY 4.0 | h ps://c ea i ecommons.o g/abou /cclicenses/
DOI h ps://doi.o g/10.3790/ccm.16.1.117 | Gene a ed on 2023-01-16 12:48:36
122 Claus Vas up
con i ma ion o he o en men ioned ac ha he exis ence o Eu o-
banks is condi ioned by some kind o o icial egula ion ha p e en s o
makes ce ain kinds o na ional banking mo e expensi e han necessa y.
As men ioned, he bo owing cus ome s o he o eign subsidia ies o
Danish banks a e no mally smalle cus ome s o he main banks, who
wish o bo ow o eign unds. The e o e i is also a condi ion o he
exis ence o hese subsidia ies ha Danish mone a y policy ei he by
high a es o in e es o quan i a i e ceilings on he in e nal ac i i ies
o Danish banks p o ides an incen i e o smalle co po a ions o
bo ow in o eign capi al ma ke s. As he a he igh mone a y policy
in Denma k e lec s he au ho i ies' in en ions o inancing and/o
educing he de ici on he cu en o accoun o he banlance o
paymen s, his de ici is a con ibu o y cause o he exis ence o he
o eign subsidia ies. To co e he ixed cos s o es ablishing he sub-
sidia ies i is also necessa y ha he Danish banks assume his s a e
o a ai o con inue o a while. Tha is p obably no a es ic i e
assump ion, as o many yea s Denma k has had a conside able and
g owing cu en accoun de ici .
The size o he o eign deposi s, which o ms he basis o he new
s uc u e, is no mally conside able. A he same ime he Danish
cus ome s a e ce ainly smalle co po a ions, bu no indi iduals. The e-
o e he indi idual loans o he subsidia ies a e no small compa ed o
he media ing bank. The c ea ion o liquidi y h ough changes in he
in e es e ms is he e o e insigni ican , and he unds ecei ed by he
Danish banks a e no mally elen on he same e ms o in e es (and
in he same cu ency, bu o cou se wi h a ma gin), as hose which
apply o he deposi s. The Danish banks a e he e in line wi h he
beha iou o he adi ional Eu o-banks, whe e his kind o business is
also o a mino impo ance6.
The c ea ion o liquidi y by ans o ming he ma u i y o he o eign
deposi s is a mo e impo an business o he o eign subsidia ies. The
deposi s a e o mally and ac ually on sho e ms, while he lending
has a somewha longe ma u i y7. Howe e , as he in e na ional capi al
and money ma ke s a e e y well unc ioning, he isk in such a ans-
o ma ion is unde no m ci cums ances ela i ely small.
6 See Niehans and Hewson (1976).
7 The Danish exchange egula ions equi e ha an impo an pa o he
bo owing (" ihanslan") does no ha e an a e age ma u i y sho e han
3 yea s.
OPEN ACCESS | Licensed unde CC BY 4.0 | h ps://c ea i ecommons.o g/abou /cclicenses/
DOI h ps://doi.o g/10.3790/ccm.16.1.117 | Gene a ed on 2023-01-16 12:48:36
Economic Mo i es o Fo eign Banking: The Danish Case 123
IV. The Limi a ion Placed on Danish Mone a y Policy
Finally, i is na u al o commen on how he Danish mone a y policy
will be o al eady has been a ec ed by his new ins i u ional amewo k
o p i a e bo owing in o eign money and capi al ma ke s.
The Danish mone a y au ho i ies ha e o en used he mone a y policy
wi h he pu pose o egula ing in e nal ac i i y and employmen . Due
o he need o p i a e inancial capi al in lows, i has, howe e , some-
imes been necessa y o change a ge and a ange he policy acco ding
o bo h he a es o in e es on o eign capi al ma ke s, and o he
p i a e sec o 's expec a ions wi h espec o he alue o he Danish
k one.
Wi h ixed exchange a es he limi s wi hin which he au ho i y can
choose be ween di e en a ge s a e se by he ansac ion cos s o he
in e na ional capi al lows o he p i a e sec o 8. As he compe i ion
be ween o eign banks and he o eign subsidia ies o Danish banks
in ensi ies, his will educe he cos s o ansac ion o he p i a e sec o .
Acco dingly, i may be assumed ha he o eign subsidia ies o he
Danish banks, which in eg a e he Danish and he in e na ional capi al
ma ke s, will also educe he eedom o he Danish au ho i ies o
pu sue an independen mone a y policy.
Re e ences
Alibe , R. Z.: "The In eg a ion o Na ional Financial Ma ke s: A Re-
iew o Theo y and Findings." Wel wi scha liches A chi , 114 (1978),
448-480. — Alibe , R. Z.: "The In eg a ion o he O -Sha e and Domes ic
Banking Sys ems." Jou nal o Mone a y Economics, 6 (1980), 509 - 526. —
Bal enspe ge , E.: "Al e na i e App oaches o he Theo y o he Banking
Fi m." Jou nal o Mone a y Economics, 6 (1980), 1 -37. — Danma ks S a is ik.
S a is iske E e e ninge , B (1980), No. 17. Kobenha n. — F eedman, C.:
"Mic o Theo y o In e na ional Financial In e media ion." Ame ican Eco-
nomic Re iew, Pape s, 67 (1977), 172- 179. — G ubel, H. G.: "A Theo y o
Mul ina ional Banking." Banca Nazionale del La o o, Qua e ly Re iew, 123
(1977), 349 - 363. — Niehans, J. and J. Hewson: "The Eu odolla Ma ke and
Mone a y Theo y." Jou nal o Money, C edi and Banking, 8 (1976), 1 - 27.
8 See e.g. Alibe (1978).
OPEN ACCESS | Licensed unde CC BY 4.0 | h ps://c ea i ecommons.o g/abou /cclicenses/
DOI h ps://doi.o g/10.3790/ccm.16.1.117 | Gene a ed on 2023-01-16 12:48:36
124 Claus Vas up
Zusammen assung
Wi scha liche Mo i e ü Auslandsbankgeschä e:
Das Beispiel Dänema ks
Wa um dänische Banken Auslands ilialen und -Zweigs ellen ein ich en und
dadu ch einen besonde en, abe wich igen Teil ih e Ak i i ä en ins Ausland
e lage n, kann le z lich nich du ch einen, sonde n nu du ch meh e e Um-
s ände e klä we den. Au g und es e Kos en bei de K edi e gabe we den
die meis en ausländischen K edi e an dänische K edi nehme nich on aus-
ländischen, sonde n on dänischen Banken e mi el . Da ausländische Ban-
ken selbs bei gleichem Risiko eine höhe e Kommission und/ode einen höhe-
en Zinssa z bei einem di ek en K edi an einen dänischen Kunden o de n
als es de Fall wä e, wenn diese K edi o mell übe die Büche dänische
Banken lie e, können die dänischen Banken die monopolis ische P eisges al-
ung de ausländische Banken ausnu zen, indem sie selbs die Gelde en ge-
gennehmen und an ih e Kunden wei e geben. Zusammen mi eine wachsen-
den Nach age nach ausländischem Geld und den o iziellen dänischen Be-
s immungen, die es dänischen Banken un e sag , ih en Kunden übe ih e
Inlandszweigs ellen in g oßem Um ange ausländische Gelde zu Ve ügung
zu s ellen, e klä dies, wa um dänische Banken Auslands ilialen und -Zweig-
s ellen ein ich en. Diese neue S uk u de Ak i i ä en de Banken wi d die
Kos en ü die Au nahme on Auslandsk edi en senken und dami die F ei-
hei de dänischen Behö den, eine unabhängige Geldpoli ik zu e olgen, ein-
sch änken.
Summa y
Economic Mo i es o Fo eign Banking: The Danish Case
In sum no one bu many ci cums ances a e necessa y o explain why
Danish banks se up o eign subsidia ies and b anches, and in his way place
a special bu impo an pa o hei ac i i ies ab oad. Due o ixed cos s in
c edi a ing mos o eign loans o Danish bo owe s a e media ed no by
bo eign bu by Danish banks. As o eign banks e en wi h he same isk ask a
highe commission and/o a e o in e es on a di ec loan o a Danish
cus ome han i o mally placed h ough he books o he Danish banks,
he la e can exploi he monopolis ic p icing by he o me by hemsel es
ecei ing he unds and placing hem wi h hei cous ome s. Toge he wi h
a g owing demand o o eign unds and he o icial Danish egula ions which
p e en he Danish banks h ough hei domes ic o ices o p o ide on a
la ge scale o eign unds o hei cus ome s, his explains why Danish banks
se up o eign subsidia ies and b anches. Such a new s uc u e o he ac i -
i ies o he banks will end o educe he cos o o eign bo owing and will
hus end o educe he eedom o he Danish au ho i ies o pu sue an
independen mone a y policy.
OPEN ACCESS | Licensed unde CC BY 4.0 | h ps://c ea i ecommons.o g/abou /cclicenses/
DOI h ps://doi.o g/10.3790/ccm.16.1.117 | Gene a ed on 2023-01-16 12:48:36