Board of Governors of the Federal Reserve System

June 1988

The Determinants of the Growth of Multinational Banking Organizations: 1972-86

Robert S. Dohner and Henry S. Terrell

Abstract:

The paper develops an empirical model to explain growth of total assets of a sample of the world's largest banks. The model was estimated over a period in which U.S. banks' assets grew less rapidly than the assets of large banks headquartered in other industrial countries. The model provides an estimate of the banks' allocation between home currency and foreign currency assets which allows an estimate of the impact of exchange rate exchanges on bank asset growth.

The results of the model suggest that no single economic variable explains the faster growth of non-U.S. banks. Changes in real exchange rates were estimated to have had a significant impact on bank asset growth through their impact on the dollar value of banks' home-currency assets. This impact was greater over a shorter time period when exchange rate movements tended to be larger. Over the longer run other factors, such as faster home-country economic growth, an expanding trade and foreign investment sector, and the ability of large banks to retain their share of domestic intermediation, tended to be relatively more important.

The model tested whether banks headquartered in particular countries tended to respond in a similar manner to economic variables and could be aggregated into a single behavioral equation. Aggregation was generally indicated for non-U.S. banks and was rejected for American banks. The model overpredicted asset growth for large U.S. and Canadian banks after 1982, suggesting that various factors including pressure by bank regulators to increase capital ratios and asset quality questions may have affected their asset growth sooner than banks headquartered in other countries.

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