Journal of Finance and Economics
ISSN (Print): 2328-7284 ISSN (Online): 2328-7276 Website: http://www.sciepub.com/journal/jfe Editor-in-chief: Suman Banerjee
Open Access
Journal Browser
Go
Journal of Finance and Economics. 2014, 2(3), 90-100
DOI: 10.12691/jfe-2-3-6
Open AccessResearch Article

Multinational Banks and the Performance of Their Subsidiaries Abroad

Oskar Kowalewski1,

1Institute of Economics, Polish Academy of Sciences, World Economy Research Institute, Warsaw School of Economics

Pub. Date: March 16, 2014
(This article belongs to the Special Issue Multinational Capital Budgeting)

Cite this paper:
Oskar Kowalewski. Multinational Banks and the Performance of Their Subsidiaries Abroad. Journal of Finance and Economics. 2014; 2(3):90-100. doi: 10.12691/jfe-2-3-6

Abstract

This paper investigates whether foreign subsidiaries outperform their parent banks in terms of profitability and what determines this outcome. Using a sample of multinational banks and their subsidiaries in a large number of countries, this study shows that, on average, foreign subsidiaries are less profitable than their parent banks. However, the results show that foreign subsidiaries tend to perform better than their parent banks if they are well capitalized, have low overhead costs and loss low provision. I find also show that foreign subsidiaries tend to perform better than their parent banks if the latter are underperforming in the home market. While, the legal distance between host country and host country is an important determinant of the profitability of the subsidiary in relation to its parent bank, to a lesser extent, are the host market’s characteristics. Finally, foreign banks are more likely to outperform parent banks in developing markets than in developed countries. However, different bank and host country determinants influence the profitability of the subsidiaries in these countries.

Keywords:
international banking foreign banks subsidiary performance

Creative CommonsThis work is licensed under a Creative Commons Attribution 4.0 International License. To view a copy of this license, visit http://creativecommons.org/licenses/by/4.0/

References:

[1]  Baltagi, B., 2001. Econometric Analysis of Panel Data, 2nd ed., John Wiley and Sons, Chichester.
 
[2]  Beck, T., Demirgüç-Kunt, A., 2009. Financial institutions and markets across countries and over time: Data and analysis. World Bank Policy Research Working Paper No. 4943, World Bank.
 
[3]  Berger, A. 1995. The relationship between capital and earnings in banking. Journal of Money, Credit and Banking 27, 432-456.
 
[4]  Berger, A.N, Hanweck, G., Humphrey, D. 1987. Competitive viability in banking: Scale, scope and product mix economies. Journal of Monetary Economics 20, 501-520.
 
[5]  Berger, A.N., DeYoung, R., Genay, H., Udell, G.F., 2000. The globalization of financial institutions: Evidence from cross-border banking performance. Brookings-Wharton Papers on Financial Services 3, 23-158.
 
[6]  Berger, A.N., Klapper, L.F., Udell, G. F., 2001. The ability of banks to lend to informationally opaque small businesses. Journal of Banking and Finance 25(12), 2127-2167.
 
[7]  Buch, C. M., DeLong, G., 2004. Cross-border bank mergers: What lures the rare animal? Journal of Banking and Finance 28(9), 2077-2102.
 
[8]  Buch, C. M., Driscoll, J. C., Ostergaard, C., 2010. Cross-border diversification in bank asset portfolios. International Finance 13(1), 79-108.
 
[9]  Bourke, P., 1989. Concentration and other determinants of bank profitability in Europe, North America and Australia. Journal of Banking and Finance 13, 65-79.
 
[10]  Claessens, S., Demirgüc-Kunt, A., H. Huizinga, 1998. How does foreign entry affect the domestic banking market? World Bank Policy Research Working Paper 1918, World Bank.
 
[11]  Claessens, S., van Horen N., 2009. Being a foreigner among domestic banks: Asset or liability? IMF Working Papers 09/273, International Monetary Fund.
 
[12]  Clarke, G. R. G., Cull, R., Martinez Peria, M.S., 2001. Does foreign bank penetration reduce access to credit in developing countries? Evidence from asking borrowers. World Bank Policy Research Working Paper No. 2716, World Bank.
 
[13]  Correa, R., 2008. Cross-border bank acquisitions: Is there a performance effect? International Finance Discussion Papers 922, Board of Governors of the Federal Reserve.
 
[14]  Crystal, J., Dages, B.G., Goldberg, L.S., 2001. Does foreign ownership contribute to sounder banks in emerging markets? The Latin American experience. Staff Report No. 137, Federal Reserve Bank of New York.
 
[15]  Demirgüç-Kunt, A., Huizinga H., 2000. Financial structure and bank profitability. World Bank Working Paper.
 
[16]  Focarelli, D., Pozzolo, A.F., 2001. The patterns of cross-border bank mergers and shareholdings in OECD countries. Journal of Banking and Finance 25, 2305-2337.
 
[17]  Demirgüç-Kunt, A., Huizinga, H., 1999. Determinants of commercial banks interest margins and profitability: Some international evidence, World Bank Economic Review 13, 379-408.
 
[18]  DeYoung, R., Nolle, D.E., 1996. Foreign-owned banks in the US: Buying market share of earning it? Journal of Money, Credit, and Banking 28, 622-636.
 
[19]  Grosse, R. Goldberg, L. G., 1991. Foreign bank activity in the United States: An analysis by country of origin. Journal of Banking and Finance 15, 1093-1112.
 
[20]  Haas de, R., van Lelyveld, I., 2010. Internal capital markets and lending by multinational bank subsidiaries. Journal of Financial Intermediation 19(1), 1-25.
 
[21]  Johnston, J., DiNardo, J., 1997. Econometric Methods,4 ed., The McGraw-Hill Companies, New York.
 
[22]  Kosmidou, K., Pasiouras, F., Tsaklanganos, A., 2007. Domestic and multinational determinants of foreign bank profits: The case of Greek banks operating abroad. Journal of Multinational Financial Management 17(1), 1-15.
 
[23]  Laeven, L., Valencia, F., 2010. Resolution of banking crises: The good, the bad, and the ugly. IMF Working Paper 10/146.
 
[24]  Leveen, S., Praveen, J., 1994. A desegregated approach to the analysis of the effects of bank foreign ownership on bank performance. Journal of Applied Business Research 10, 121-129.
 
[25]  Minh To, H., Tripe, D., 2002. Factors influencing the performance of foreign owned banks in New Zealand. Journal of International Financial Markets, Institutions and Money 12, 341-357.
 
[26]  Molyneux, P., Remolona, E., Seth, R., 1998. Modeling foreign bank performance and lending behavior. Financial Markets, Institutions and Instruments 7, 26-41.
 
[27]  Moulyneux, P., Thornton, J., 1992. Determinants of European bank profitability: A Note. Journal of Banking and Finance 16, 1173-1178.
 
[28]  Peek, J., Rosengren, E.S., Kasirye, F., 1999. The poor performance of foreign bank subsidiaries: Were the problems acquired or created? Journal of Banking and Finance 23(2-4), 579-604.
 
[29]  Rivard, R.J., Thomas, C.R., 1997. The effect of interstate banking on large bank holding company profitability and risk. Journal of Economics and Business 49, 61-76.
 
[30]  Roodman, D., 2009. A note on the theme of too many instruments. Oxford Bulletin of Economics and Statistics 71(1), 135-158.
 
[31]  Smirlock, M., 1985. Evidence on the (non) relationship between concentration and profitability in banking. Journal of Money, Credit and Banking 17 (1), 69-83.
 
[32]  Sturm, J.-E., Williams, B., 2010. What determines differences in foreign bank efficiency? Australian evidence. Journal of International Financial Markets, Institutions and Money 20(3), 284-309.
 
[33]  Ursacki T., Vertinsky, I., 1992. Choice of entry timing and scale by foreign banks in Japan and Korea. Journal of Banking and Finance 16, 405-421.
 
[34]  Wall, L., 1985. Why are some banks more profitable than others? Journal of Bank Research 15, 240-56.
 
[35]  Williams, B., 1996. Determinants of the performance of Japanese financial institutions in Australia 1987-1992. Applied Economics 28, 1153-1165.
 
[36]  Williams, B., 1998. A pooled study of the profits and size of foreign banks in Australia, Journal of Multinational Financial Management 8, 211-231.
 
[37]  Williams B., 2003. Domestic and international determinants of bank profits: Foreign banks in Australia. Journal of Banking and Finance 27, 1185–1210.
 
[38]  Woolridge, A., 2001. Applications of generalized method of moments estimation. Journal of Economic Perspectives 15, 87-100.