This paper investigates the changing cost performances of foreign and domestic banks in Thailand in relation to increased foreign bank penetration by estimating their cost functions using panel data from 27 banks during 1990-2002. Our empirical analysis suggests that production technologies of foreign bank branches are distinct from those of Thai domestic banks. After the Asian crisis, financial reforms increased operating costs of domestic banks and reduced costs of foreign bank branches. Foreign acquisition of domestic banks after the crisis modernized their business activities, reduced costs associated with fee-based businesses and improved their operational efficiency.JEL Classification: G21, G28, G32, D24

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This paper investigates the impact of foreign bank entry on Thai domestic banks by using panel data on 17 domestic commercial banks from 1990 to 2002. The paper examines different factors affecting bank performance, including changes in the foreign ownership of banks, financial regulations, and market structure.We find that an increase in foreign bank presence leads to a rise in overhead expenses, a decline in profits, and an increase in the interest spreads of domestic banks. In the short run, increased competition from foreign banks negatively affects domestic banks. However, in the long run, domestic banks' performance should improve.JEL Classification: G21, G28, G32, D24

Bank integration and competition policies are a core part of current financial reforms intended to strengthen the financial sector in Malaysia. This paper intends to clarify the production technology employed in Malaysian banks and indicate important policy implications for current bank consolidation policy. While it is essential to conduct a microeconomic analysis of the banking sector to appraise financial reform policy, Katib and Mathews (2000) is the only formal study in this area that uses micro level data on Malaysian banks. Our analysis expands on Katib and Mathews’ study in three aspects. Firstly, while Katib and Mathews employed Data Envelopment Analysis, we use estimation analysis based on a parametric approach. Secondly, we examine technological differences among Malaysian banks according to the size of operations, location of branches and ownership structure. Thirdly, we also explicitly incorporate the existence of hidden bad loans in estimating cost functions. According to our estimation analysis, there is a difference in production technology between large‐sized banks and small or medium‐sized banks. While economies of scale are observed for large‐sized banks, no economies of scope and technological progress are observed for any banks. The results of our analysis suggest that, while the current reform policy is basically appropriate, serious problems remain regarding bank consolidation and the lack of market competition.

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