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When are multinational banks getting a bang for their buck on their subsidiaries abroad?

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Abstract

This paper investigates whether foreign subsidiaries outperform their parent banks in terms of profitability and what determines this outcome. Using a large 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 are. At the same time, however, foreign subsidiaries have higher net interest margins but also higher overhead costs relative to their parent banks. One explanation for the results is that parent banks transfer income banks using overhead costs, what may explain the existing results. Moreover, the results show that foreign subsidiaries tend to perform better than their parent banks if the latter are underperforming in the home market. Finally, the results show that the determinants of the profitability of the subsidiary in relation to its parent bank are strongly determined by the origins of the parent bank and, to a lesser extent, by the host market’s characteristics as well as the distance to the home country of the multinational bank.

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Bibliographic Info

Paper provided by National Bank of Poland, Economic Institute in its series National Bank of Poland Working Papers with number 97.

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Length: 34
Date of creation: 2011
Date of revision:
Handle: RePEc:nbp:nbpmis:97

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Keywords: international banking; foreign banks; subsidiary; performance;

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  1. Williams, Barry, 1998. "A pooled study of the profits and size of foreign banks in Australia," Journal of Multinational Financial Management, Elsevier, vol. 8(2-3), pages 211-231, September.
  2. Sturm, Jan-Egbert & Williams, Barry, 2010. "What determines differences in foreign bank efficiency? Australian evidence," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 20(3), pages 284-309, July.
  3. Peek, Joe & Rosengren, Eric S. & Kasirye, Faith, 1999. "The poor performance of foreign bank subsidiaries: Were the problems acquired or created?," Journal of Banking & Finance, Elsevier, vol. 23(2-4), pages 579-604, February.
  4. Rivard, Richard J. & Thomas, Christopher R., 1997. "The effect of interstate banking on large bank holding company profitability and risk," Journal of Economics and Business, Elsevier, vol. 49(1), pages 61-76, February.
  5. Smirlock, Michael, 1985. "Evidence on the (Non) Relationship between Concentration and Profitability in Banking," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 17(1), pages 69-83, February.
  6. Jeffrey M. Wooldridge, 2001. "Applications of Generalized Method of Moments Estimation," Journal of Economic Perspectives, American Economic Association, vol. 15(4), pages 87-100, Fall.
  7. Ursacki, Terry & Vertinsky, Ilan, 1992. "Choice of entry timing and scale by foreign banks in Japan and Korea," Journal of Banking & Finance, Elsevier, vol. 16(2), pages 405-421, April.
  8. Williams, Barry, 2003. "Domestic and international determinants of bank profits: Foreign banks in Australia," Journal of Banking & Finance, Elsevier, vol. 27(6), pages 1185-1210, June.
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