A comparative multiproduct cost study of foreign-owned and domestic-owned US banks

Abstract

Significant presence of foreign-owned banks (FOBs) in the US banking markets has raised concerns about concentration of economic and financial power in foreign hands and increased risk exposure of the banking system. The proponents counter that international cost synergies, heightened competition, and improved bank performance resulting from the presence of FOBs justify foreign bank expansion. This paper contrasts the production technologies and the cost characteristics of the FOBs and the domestic-owned banks (DOBs) within a cost minimization context. The hypothesis of identical cost structures between the two groups is tested and rejected. Then, overall and product-specific scale and scope economy measures for the FOBs and the DOBs are derived for the 1992-1994 sample period, relative to the ownership-type-specific cost structures, and contrasted in order to shed light on the ownership-type effect on the cost structure of banks. Differences do manifest themselves between the two groups, but they are small in magnitude. No clear and strong patterns emerge between the ownership type and cost structure of the banks in the sample. These results are consistent with those of the relative efficiency of the FOBs and DOBs found in the literature.

Bank Interest Rate Margin, Portfolio Composition and Institutional Constraints

“…Foreign and domestic banks differ in their management strategies, clients, knowledge of the local market, international regulatory arbitrage, and international business platform. They face different kind of competitiveness in the banking market and different advantages in business operations (Elyasiani and Rezvanian 2002), which eventually affect their interest margins.…”

Comparative cost study of foreign and Thai domestic banks in 1990–2002: Its policy implications for a desirable banking industry structure

“…The estimation method, in principle, is similar to Elyasiani and Rezvanian (2002) 10 . Each parameter includes a dummy shift variable taking into the account whose parameters can differ between banks with branch networks and pure foreign banks without branch network.…”

“…Similar observations have been found by studies of banking markets in developed economies. According to Elyasiani and Rezvanian (2002) concerning the U.S. market, since foreign and domestic banks differ in their management strategies, clients, knowledge of the local market, international regulatory arbitrage, and international business platform, they have different kinds of competitiveness in the banking market and different advantages in business operations. The foreign banks' parent companies' lack of familiarity with local market knowledge and difficulties in applying home country strategies to emerging market economies hinder their efforts to penetrate markets and earn profits.…”

“…In order for this cost function to be meaningful in an economic sense, the following four constraints should be met: symmetry between cross partial derivatives (2a), monotony of products and factor prices (2b), homogeneity of degree one in factor prices (2c), and weak concavity in factor prices, satisfied by (2d). Furthermore, to ensure a sufficient degree of freedom in estimation as well as to simplify the estimation work as in Rezvanian (2002). it is also assumed that the cost function (1) is separable between factor prices and products (2e).…”

Rational Cost Inefficiency in Chinese Banks

“…16 Recent bootstrapping applications to DEA have been conducted by Löthgren and Tambour (1999); in the case of banking efficiency by Casu and Molyneux (2003); and in the case of Chinese rural credit cooperatives, Dong and Featherstone (2006). 17 See for example Drake and Hall (2003), Cavallo and Rossi (2002), Elyasiani and Rezvanian (2002), Maudos et al (2002), Drake (2001) Altunbas and Molyneux (1996) and Molyneux and Forbes (1993) 18 See Rezvanian and Mehdian (2002), Hardy and di Patti (2001), Karim (2001), Laevan (1999), Katib and Matthews (1999), Chu and Lim (1998), Bhattacharyya et al (1997) and Fukuyama (1995) 19 In addition to the papers cited in footnote 1, other studies by Chinese scholars that have used nonparametric techniques include Fang et. al.…”