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Foreign-Owned Banks in the U.S.: Earning Market Share or Buying It?

by Robert DeYoung and Daniel E. Nolle

OCC Working Paper 95-2, April 1995.

Abstract

This paper seeks to explain why U.S. subsidiaries of foreign banks earned such low profits during the past decade, while at the same time making dramatic gains in U.S. market share. We estimate profit efficiency for a panel of U.S.-owned and foreign-owned U.S. banks between 1985 and 1990, using a modified version of the profit efficiency model introduced by Berger, Hancock, and Humphrey (1993) that is less sensitive to asset size, measures a greater percentage of bank output, and controls for portfolio and financial risk.

We find that foreign-owned banks were significantly less profit-efficient than U.S.-owned banks, a result that was driven almost entirely by poor input efficiency. In particular, given their production levels, their fixed inputs, and the prices they faced, foreign-owned banks relied more on expensive purchased funds than did U.S.-owned banks. The results suggest that foreign banks traded profits during the late 1980s in exchange for fast growth and increased market share.

Disclaimer

As with all OCC Working Papers, the opinions expressed in this paper are those of the author alone, and do not necessarily reflect the views of the Office of the Comptroller of the Currency or the Department of the Treasury.

Any whole or partial reproduction of material in this paper should include the following citation: DeYoung, Robert and Daniel E. Nolle, "Foreign-Owned Banks in the U.S.: Earning Market Share or Buying It?," Office of the Comptroller of the Currency, E&PA Working Paper 95-2, April 1995.

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