Q:

How are foreign currency banks different from domestic banks?

A:

Quick Answer

Foreign currency banks differ from domestic banks because of the types of loans, investments and deposits each accepts. The balance-sheet differentiation sets foreign currency banks and domestic banks apart.

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How are foreign currency banks different from domestic banks?
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Full Answer

Foreign currency banks are more flexible in borrowing and lending than domestic banks. Because foreign currency banks lend and borrow from the Euro markets, they have more capital. Additionally, foreign currency banks are more likely to close down upon failure to meet their debts.

Foreign banks have a varying performance relative to domestic banks in different markets. Because of the higher foreign currency circulation in developing countries, in these places foreign banks perform better than domestic banks. On the contrary, foreign banks underperform in developed countries.

Regardless of the business approaches regarding the domestic and foreign banks, performance is a function of the host country circumstances. If the local regulations of the host country are conducive for all banks, foreign currency banks tend to excel. If the local regulations of the host country favor domestic banks, foreign banks operate with difficulties that lower their performance.

Additionally, the gap in performance between foreign currency banks and domestic banks occurs because of the difference in their operational behavior. Unlike domestic banks, foreign currency banks have portfolios that are more rigid. In particular, foreign currency banks have limited engagements in the lending business, especially when they are not fully established.

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