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Do Banks Follow Their Customers Abroad?

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  • Rama Seth
  • Daniel E. Nolle
  • Sunil K. Mohanty

Abstract

The market share of US business loans made by foreign‐owned banks has increased dramatically since 1980. At the same time, foreign direct investment in the US rose, so that much of the growth in foreign‐owned US‐based bank lending to businesses in the US could conceivably be accounted for by an increase in loans to the nonbank US affiliates of firms headquartered abroad, an expectation consistent with the conventional wisdom that banks “follow their customers” abroad. Our study investigates the lending patterns of US‐based banks from Japan, Canada, France, Germany, the Netherlands, and the UK, countries that account for the vast majority of foreign bank activity in the US. Simultaneously, we look at the borrowing patterns of nonbank US affiliates of firms from those countries. We find that banks from four of the six countries (Japan, Canada, the Netherlands, and the UK) allocated a majority of their loans to non‐home‐country borrowers for some or all of the 1981–1992 period. These findings suggest that the “follow the customer” hypothesis may have a more limited applicability than previously supposed.

Suggested Citation

  • Rama Seth & Daniel E. Nolle & Sunil K. Mohanty, 1998. "Do Banks Follow Their Customers Abroad?," Financial Markets, Institutions & Instruments, John Wiley & Sons, vol. 7(4), pages 1-25, November.
    • Handle: RePEc:wly:finmar:v:7:y:1998:i:4:p:1-25
    DOI: 10.1111/1468-0416.00021
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    Cited by:

    1. Marc Ruhr & Michael Ryan, 2005. "“Following” or “attracting” the customer? Japanese Banking FDI in Europe," Atlantic Economic Journal, Springer;International Atlantic Economic Society, vol. 33(4), pages 405-422, December.
    2. Niepmann, Friederike, 2015. "Banking across borders," Journal of International Economics, Elsevier, vol. 96(2), pages 244-265.
    3. Linda S. Goldberg, 2004. "Financial-sector foreign direct investment and host countries: new and old lessons," Staff Reports 183, Federal Reserve Bank of New York.
    4. Böninghausen, Benjamin & Köhler, Matthias, 2015. "Diversification and determinants of international credit portfolios: Evidence from German banks," International Review of Economics & Finance, Elsevier, vol. 39(C), pages 57-75.
    5. Niepmann, Friederike, 2015. "Banking across borders," Journal of International Economics, Elsevier, vol. 96(2), pages 244-265.
    6. Linda S. Goldberg, 2007. "Financial sector FDI and host countries: new and old lessons," Economic Policy Review, Federal Reserve Bank of New York, vol. 13(Mar), pages 1-17.

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