Cross-Border Financing Squeezes the Domestic Banking Sector

ROCHESTER, N.Y., April 11, 2016 -- Globalization has had an enormous impact on almost every aspect of economic life. Today, financing activities that originate in one country for the benefit of a firm located in another country is an approach used extensively by multinational corporations to finance their operations around the world.

Enabling this new world order has been the creation of International Financial Reporting Standards (IFRS) which are a set of accounting standards developed by the International Accounting Standards Board (IASB) that is becoming the global standard for the preparation of public company financial statements.
 
But, while cross-border financing benefits some institutions, not all institutions benefit equally. According to new research from Simon Business School at the University of Rochester, competition from overseas financial markets can impact the domestic banking sector. The study titled, "Cross-Border Financing by the Industrial Sector Increases Competition in the Domestic Banking Sector," predicts that access to cross-border financing by multinational firms reduces the firms' reliance on domestic banks, thereby leading to lower income and greater competition in the domestic banking sector. Consequently, to offset lower income and more competition, domestics banks tend to take on more risk to remain competitive.
 
"Our results suggest that while financial reforms such as market liberalization offer financing benefits to firms, they also impose costs on domestic banks by reducing their lending income and inducing them to assume more risk," said Sudarshan Jayaraman, associate professor of accounting at Simon Business School and co-author of the study. "The overall desirability of these financial reforms involves a delicate tradeoff between imposing costs on the banking sector and rendering benefits to the industrial sector."
 
Jayaraman and his co-author, S.P. Kothari from Massachusetts Institute of Technology, conclude that there is evidence of a link from the industrial sector to the banking sector and cross-border financing by industrial firms induces greater competition between banks and alternative financing sources.
 
To learn more about the cutting-edge research being conducted at Simon Business School, please visit www.simon.rochester.edu.
 
About Simon Business School

The Simon Business School is currently ranked among the leading graduate business schools in the world in rankings published by the popular press, including Bloomberg Businessweek, U.S. News & World Report, and the Financial Times. The Financial Times recently rated the School No. 9 in the world for finance. More information about Simon Business School is available at www.simon.rochester.edu.

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