Advertisement

The UK’s banking FDI flows and Total British FDI: a dynamic BREXIT analysis

  • Fabian J. BaierEmail author
  • Paul J. J. Welfens
Original Paper

Abstract

The City of London has been the global leader for the provision of international banking services since the 1980s when Thatcher-era deregulation, followed by the EU single market program, stimulated big international FDI inflows – mainly of US banks – into the UK. The “single passport” rule allowed international banks in the UK to serve the whole of the EU28 market from London whose supply-side dynamics contributed to economic growth in the UK and a rising output share of the UK banking system in British GDP. With the expected BREXIT, there are serious challenges for the City since the passporting of banks will end and the regulatory framework will be adjusted; EU equivalence rules for UK banks that might be valid after the implementation of BREXIT cannot be a substitute for passporting so that lower FDI inflows and higher FDI outflows in the banking sector should be expected; inflow dynamics should also be shaped by international M&A dynamics influenced by the real Pound depreciation in 2016, while the prospects of reduced EU market access post-BREXIT also became relevant in 2017/18 and should influence the FDI dynamics of the UK – a similar pattern might occur in the BREXIT implementation year (i.e. 2019) and the following adjustment period where the change in City banks’ access to the single market will matter; as regards the latter, quasi-tariff-jumping FDI outflows from the UK can be expected where the FDI of City of London banks could go primarily to the EU27/Eurozone or the US. The empirical findings confirm the expected FDI pattern for the UK banking sector – overall FDI inflows in the wake of the BREXIT referendum have increased, in line with the Froot-Stein effect, while FDI inflows to the UK banking sector have declined.

Keywords

Brexit UK FDI Banking Financial markets 

Abbreviations

US

United States

FDI

Foreign Direct Investment

UK

United Kingdom

GDP

Gross Domestic Product

EU

European Union

M&A

Mergers & Acquisitions

ESRB

European Systemic Risk Board

EBA

European Banking Authority

AIIB

Asian Infrastructure Investment Bank

ESMA

European Securities and Market Authority

OECD

Organisation for Economic Co-operation and Development

ECB

European Central Bank

BIS

Bank for International Settlements

UNCTAD

United Nations Conference on Trade and Development

LBS

Locational Banking Statistics

CPIS

Coordinated Portfolio Investment Surveys

IMF

International Monetary Fund

BSI

Balance Sheet Items Statistics

PPML

Pseudo Poisson Maximum Likelihood

LTV

Loan to Value

JEL classification

F02 F4 F21 G1 G2 

Notes

Acknowledgements

This paper is part of EIIW research funded by the Deutsche Bundesbank. While the authors gratefully acknowledge funding from the Deutsche Bundesbank within the project “The Influence of Brexit on the EU28: Banking and Capital Market Adjustments as well as Direct Investment Dynamics in the Eurozone and other EU Countries”, opinions expressed within represent those of the authors and do not reflect the views of the Deutsche Bundesbank or its staff. We gratefully acknowledge research assistance by Christina Peussner and editorial assistance by Kennet Stave and David Hanrahan (EIIW), as well as comments from the participants of the 4th FDI workshop November 2019 in Mainz; and the EIIW project workshop 2018 at HIS Markit, Frankfurt. The usual disclaimer applies.

References

  1. Ahearne AG, Griever WL, Warnock FE (2004) Information costs and home bias: an analysis of US holdings of foreign equities. J Int Econ, Elsevier 62(2):313–336CrossRefGoogle Scholar
  2. Anderson JE (2011) The gravity model. Annu Rev Econ 3:133–160CrossRefGoogle Scholar
  3. Anderson JE, Van Wincoop E (2003) Gravity with gravitas: a solution to the border puzzle. Am Econ Rev 93:170–192CrossRefGoogle Scholar
  4. Aviat, A., Coeurdacier, N. (2007), The geography of trade in goods and asset holdings, Journal of International Economics Vol. 71, Issue 1, 8 March 2007, Pages 22–51Google Scholar
  5. Bachmann R, Ruth S (2017) Systematic monetary policy and the macroeconomic effects of shifts in loan-to-value ratios, contribution at the conference of the macroeconomic committee. Université du Luxembourg 30 June - 1 July 2017Google Scholar
  6. Balli F (2008) New Patterns of International Portoflio Allocation and Income Smoothing. Working Paper, Massey UniversityGoogle Scholar
  7. Balli F, Louis RJ, Osman M (2008) International portfolio inflows to GCC markets. Are there any general patters? MPRA Paper 10158Google Scholar
  8. Balta N, Delgado J (2008) Home bias and market integration in the EU. CESifo Economic Studies 55(1):110–144CrossRefGoogle Scholar
  9. Barrell R, Pain N (1997) Foreign direct investment, technological change, and economic growth within Europe. Econ J 107:1770–1786CrossRefGoogle Scholar
  10. Berkel B (2007) Institutional determinants of international equity portfolios – a country level analysis. BEJM 7(1):34CrossRefGoogle Scholar
  11. Bertaut, C., Kole, L.S. (2004), What Makes Investors Over or Underweight? Explaining International Appetites for Foreign Equities, International Finance Discussion Paper No. 819, Board of Governors of the Federal Reserve SystemGoogle Scholar
  12. Born, A., Enders, Z. (2018), Global banking, trade, and the international transmission of the great recession, CESifo Working Paper No 6912, http://www.cesifo-group.de/DocDL/cesifo1_wp6912.pdf. Access date 7 Jan 2019
  13. Brei, M., Von Peter, G. (2017), The Distance Effect in Banking and Trade BIS, Working Papers No. 658, Bank for International SettlementsGoogle Scholar
  14. Bruno R, Campos N, Estrin S, TIAN M (2016) Technical Appendix to ‘The Impact of Brexit on Foreign Investment in the UK’. Gravitating Towards Europe: An Econometric Analysis of the FDI Effects of EU Membership. Center for Economic Performance, London School of Economics and Political Science, LondonGoogle Scholar
  15. Buch CM (2002) Are banks different? Evidence from international data? Int Financ 5(1):97–114CrossRefGoogle Scholar
  16. Buch CM (2005) Distance and international banking. Rev Int Econ 13(4):787–804CrossRefGoogle Scholar
  17. Chan K, Covrig V, Ng L (2005) What determines domestic Bias and foreign Bias? Evidence from mutual fund equity allocations worldwide, The. J Financ 60(3):1495–1534CrossRefGoogle Scholar
  18. Coeurdacier N, Guibaud S (2005) International equity holdings and stock returns correlations: does diversification matter at all for portfolio choice? Working paper, London business schoolGoogle Scholar
  19. Coeurdacier N, Martin P (2009) The geography of asset trade and the euro: insiders and outsiders. Journal of Japanese and International Economies 23(2):90–113Google Scholar
  20. Coeuré, B. (2017), European CCPs after Brexit, speech to the global financial markets association, Frankfurt (20 June 2017), https://www.bis.org/review/r170706b.pdf. Access date 7 Jan 2019
  21. Daude C, Fratzscher M (2008) The pecking order of cross-border investment. J Int Econ 74:94–119CrossRefGoogle Scholar
  22. De Santis RA, Gerard B (2009) International portfolio reallocation: diversification benefits and European monetary union. Eur Econ Rev, 2009 53(8):1010–1027CrossRefGoogle Scholar
  23. Donnery, S. (2017), Remarks by Ms. Sharon Donnery, deputy governor (central banking) central Bank of Ireland at Chatham house, London, (23 March 2017), https://www.bis.org/review/r170405h.pdf
  24. Dunning JH (1979) Explaining changing patterns of international production: in defence of the eclectic theory. Oxf Bull Econ Stat 41(4):269–295CrossRefGoogle Scholar
  25. Dunning JH (1998) Location and the multinational Enterprise – a neglected factor? J Int Bus Stud 29(1):45–66CrossRefGoogle Scholar
  26. Dunning JH (2001) The eclectic (OLI) paradigm of international production: past, present and future. Int J Econ Bus 8(2):173–190CrossRefGoogle Scholar
  27. Eichengreen, B. (2018), The international financial implications of Brexit, University of California at Berkeley, Forthcoming in International Economics and Economic Policy Google Scholar
  28. Eichengreen B, Luengnaruemitchai P (2006) Bond Markets as Conduits for Capital Flows: How Does Asia Compare? NBER Working Paper No.12408. National Bureau of Economic Research, CambridgeCrossRefGoogle Scholar
  29. Faruqee H, Li S, Yan I (2004) The determinants of international portfolio holdings and home Bias, IMF working paper no.04/34. International Monetary Fund, Washington D.C.Google Scholar
  30. Fidrmuc J (2008) Gravity models in integrated panels. Empir Econ 37(2):435–446CrossRefGoogle Scholar
  31. Forbes KJ (2008) Why do Foreigners Invest in the United States? NBER Working Paper No.13908. National Bureau of Economic Research, CambridgeCrossRefGoogle Scholar
  32. Friewald NJ, Subrahmanyam R (2012) M.G. (2012), illiquidity or credit deterioration: a study of liquidity in the US corporate bond market during financial crises. J Financ Econ 105(1):18–36CrossRefGoogle Scholar
  33. Froot K, Stein J (1991) Exchange rates and foreign direct investments. Q J Econ 106(4):1191–1217CrossRefGoogle Scholar
  34. Gande, A., Parsely, D., Wei, S.J. (2009), Does source country corporate governance affect international investment patterns? Working paper, Columbia business schoolGoogle Scholar
  35. Garcia-Herrero A, Wooldridge P, Yang DY (2009) Why Don't Asians invest in Asia? The determinants of cross-border portfolio holdings. AEP 8(3):228–256Google Scholar
  36. Gehrig T (1998) Cities and the geography of financial Centres, CEPR discussion paper no. 1894, LondonGoogle Scholar
  37. Gelos GR, Wei SJ (2005) Transparency and international portfolio holdings. J Financ 60(6):2987–3020CrossRefGoogle Scholar
  38. Ghosh S, Wolf H (2000) Is there a curse of location? Spatial determinants of capital flows to emerging markets. In: Edwards S (ed) Capital flows and the emerging economies. University of Chicago Press, Chicago, pp 137–158Google Scholar
  39. Hahm JH, Shin K (2009) Complementarity among international asset holdings. IJFS 23:37–55Google Scholar
  40. Head, K., Mayer, T. (2014), Gravity equations: workhorse, toolkit and cookbook. In Handbook of International Economics. Edited by Gene M. Grossman and Kenneth S. Rogoff. New York: Elsevier, Vol. 4, Chap 3, pp. 131–195Google Scholar
  41. HM GOVT (2016) HM Treasury analysis: the long-term economic impact of EU membership and the alternatives, London April 2016Google Scholar
  42. Jeanneau, S., Micu, M. (2002), Determinants of International Bank Lending to Emerging Market Countries, BIS Working Paper No. 112, Bank for International SettlementsGoogle Scholar
  43. Jungmittag A, Welfens PJJ (2016) Beyond EU-US trade dynamics: TTIP effects related to foreign direct investment and innovation. EIIW Paper 212Google Scholar
  44. Kim, S., Lee, J.W., Shin K. (2006), Regional and Global Financial Integration in East Asia, Working Paper, Tufts UniversityGoogle Scholar
  45. Kim W, Sung T, Wei SJ (2007) Does Corporate Government Risk at Home Affect Investment Choices Abroad? NBER Working Paper No.13721. National Bureau of Economic Research, CambridgeGoogle Scholar
  46. Knickerbocker FT (1973) Oligopolistic reaction and multinational enterprises. Harvard University Press, Oligopolistic reaction and multinational enterprise, CambridgeCrossRefGoogle Scholar
  47. Lane, P. (2005), Global bond portfolios and EMU, European Central Bank Working Paper No 553Google Scholar
  48. Lane, P., Milesi-Ferretti, G.M (2005), The International Equity Holdings of Euro Area Investors, Working Paper, Trinity College and IMFGoogle Scholar
  49. Lane P, Milesi-Ferretti GM (2008) International investment patterns. Rev Econ Stat 90(3):538–549CrossRefGoogle Scholar
  50. Martin P, Rey H (2004) Financial super-markets: size matters for asset trade. J Int Econ 64:335–361CrossRefGoogle Scholar
  51. Okawa Y, Van Wincoop E (2012) Gravity in international finance. J Int Econ 87:205–215CrossRefGoogle Scholar
  52. Pendle, L. (2007), What Determines Australia's Foreign Equity Investment?, Working Paper, University of SydneyGoogle Scholar
  53. Poelhekke, S. (2014), Do global banks facilitate foreign investment?, working paper, VU University Amsterdam and Dutch central BankGoogle Scholar
  54. Portes R, Rey H (2005) The determinants of cross-border equity flows. J Financ Econ 65:269–296Google Scholar
  55. Portes R, Rey H, Oh Y (2001) Information and capital flows: the determinants of transactions in financial assets. Eur Econ Rev 45:783–796CrossRefGoogle Scholar
  56. Rose AK, Spiegel MM (2004) A gravity model of sovereign lending: trade, vol 51. Default and Credit, IMF Staff Papers, pp 50–63Google Scholar
  57. Salins V, Benassy-Quere A (2006) Institutions and bilateral asset holdings, vol 2006-19. CEPII Working PaperGoogle Scholar
  58. Sapir, A., Schoenmaker, D., Veron, N. (2017), Making the best of Brexit for the EU27 financial system, POLICYBRIEF issue 1, February 2017. http://bruegel.org/wp-content/uploads/2017/02/Bruegel_Policy_Brief-2017_01-060217.pdf
  59. Tinbergen J (1962) Shaping the world economy: suggestions for an international economic policy. The Twentieth Century Fund, New YorkGoogle Scholar
  60. Vlachos J (2004) Do regulatory similarities increase bilateral portfolio holdings? CEPR discussion paper no.4417. In: Centre for economic policy researchGoogle Scholar
  61. Welfens PJJ, Baier F (2018) BREXIT and foreign direct investment: key issues and new empirical findings. International Journal of Financial Studies 6(2):46.  https://doi.org/10.3390/ijfs6020046 CrossRefGoogle Scholar
  62. Yu G (2009) Accounting standard and international portfolio holdings: analysis of cross-border holdings following mandatory adoption of IFRS, working paper. University of Michigan Ross School of BusinessGoogle Scholar

Copyright information

© Springer-Verlag GmbH Germany, part of Springer Nature 2019

Authors and Affiliations

  1. 1.EIIW at the University of Wuppertal and Schumpeter School of Business and EconomicsWuppertalGermany
  2. 2.Johns Hopkins UniversityWashingtonUSA

Personalised recommendations