chapter  16
49 Pages

Cross-border banking: challenges for deposit insurance and financial stability in the European Union

ByROBERT A. EISENBEIS, GEORGE G. KAUFMAN

It is generally argued that foreign ownership of banks increases competition and efficiency in the banking sector of the host country, reduces risk exposures through greater geographical and industrial diversification, and enlarges the aggregate quantity of capital invested in the banking sector. Indeed, foreign entry through direct investment is widely recommended by researchers and analysts as a means of strengthening weak and inefficient banking structures, particularly in emerging economies. This is because banks that are willing and able to enter a foreign country, especially developing economies, through direct investments are generally larger, in healthier financial condition, more professionally managed and more technically advanced than the average host-country bank, and may therefore be expected to raise the bar for all banks. Foreign ownership of banks varies greatly among countries. In the European Union, for

example, Table 16.1 shows that foreign ownership averages 58 per cent in the 10 new EU Member States as compared with a weighted average of 16 per cent for the older EU members.1