DOMESTIC BANK VERSUS FOREIGN BANK EFFICIENCY

Domestic Bank versus Foreign Bank Efficiency



Domestic Bank versus Foreign Bank Efficiency

Banking has increasingly become more globalize, propelled by deregulation, advances in communications and expertise, and more general financial integration. Especially, foreign bank application has increased sharply in the last couple of decades. As the result, principle makers and academics are keenly interested in the functioning of foreign banks in host countries. Existing studies that compare the performance of foreign banks to that of domestic banks have, although, discovered distinct results.(Allen, 2004, 655) One reason for these differences may be that if being the foreigner is the liability or an asset depends on particular foreign bank's characteristics and local market conditions that leverage the bank's ability to manage business in the particular host country. However, couple of studies has endeavoured to analyze the function of such factors. This paper attempts to shed lightweight on some key factors.

Foreign banks can have the number of advantages compared to domestic banks. By servicing client's active in more than one homeland, they may achieve effectiveness gains. In addition, they may achieve benefits from spreading best-practice policies and procedures over more than one country. Furthermore, they might be able to diversify risk better, allowing them to undertake higher risk, but also higher come back investments. For example, foreign banks may have advantages in the pattern of more diversified funding bases, encompassing having access to external liquidity from their parent banks, which may smaller their funding costs. By being larger, they may achieve other scale advantages; for example, they may be able to afford more sophisticated models giving them superior risk management skills. (Allen, 2004, 655)

At the same time, foreign banks are probable to acquire additional costs and face more barriers compared to domestic banks. They may have less information compared to local banks on how to manage business in the host homeland, putting them at the disadvantage, at least until they have been in the homeland for some time. Furthermore, foreign banks might be exposed to discrimination by host homeland government and customers. And diseconomies might arise because of difficulties operating and supervising from the distance or in an institutional natural environment that is culturally different. Depending on which effects are stronger, foreign banks may present better or worse compared to domestic banks in the host country.

 Empirically, the existing literature is ambivalent on the relative performance of foreign banks.2 ...