Economic Motives for Foreign Banking: The Danish Case

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