Abstract

Economic Motives for Foreign Banking: The Danish Case

In sum not one but many circumstances are necessary to explain why Danish banks set up foreign subsidiaries and branches, and in this way place a special but important part of their activities abroad. Due to fixed costs in credit rating most foreign loans to Danish borrowers are mediated not by boreign but by Danish banks. As foreign banks even with the same risk ask a higher commission and/or rate of interest on a direct loan to a Danish customer than if formally placed through the books of the Danish banks, the latter can exploit the monopolistic pricing by the former by themselves receiving the funds and placing them with their coustomers. Together with a growing demand for foreign funds and the official Danish regulations which prevent the Danish banks through their domestic offices to provide on a large scale foreign funds to their customers, this explains why Danish banks set up foreign subsidiaries and branches. Such a new structure for the activities of the banks will tend to reduce the cost of foreign borrowing and will thus tend to reduce the freedom of the Danish authorities to pursue an independent monetary policy.