What Is a Foreign Branch Bank?
A foreign branch bank is a type of foreign bank that is obligated to follow the regulations of both the home and host countries. Because the foreign branch banks' loan limits are based on the parent bank's capital, foreign banks can provide more loans than subsidiary banks. This is because the foreign branch bank, while possibly small in one market, is technically part of a larger bank — hence, it enjoys the capital base of the larger parent entity.
Foreign Branch Bank Explained
Banks often open a foreign branch to provide more services to their multinational corporation customers. However, operating a foreign branch bank may be considerably complicated because of the dual banking regulations that the foreign branch needs to follow.
For example, suppose that Bank of America opens a foreign branch bank in Canada. The branch would be legally obligated to follow both Canadian and American banking regulations.
With globalization and capital markets maturing, the administrative burden of multiple regulatory standards might be offset by other operational economies of scale. These may include global branding, marketing, and product offerings best served by a single parent entity with numerous local branches.
A foreign bank branch should not be confused with a subsidiary, which technically is a separate legal entity, although owned by a parent corporation. Naturally, taxation and regulatory burdens drive the pros and cons of the branch versus subsidiary operational model dilemma.
According to The World Bank, banks are more likely to operate as branches in countries that have higher corporate taxes and when they face lower regulatory restrictions on bank entry, in general, and on foreign branches, in particular. Subsidiaries are the preferred organizational form by banks that seek to penetrate the local market establishing large and mostly retail operations. Finally, there is evidence that economic and political risks have opposite effects on the choice of organizational form, suggesting that legal differences in the degree of parent bank responsibility vis-à-vis branches and subsidiaries, under different risk scenarios, play an important role in the type of operations international banks maintain overseas.