A pooled study of the profits and size of foreign banks in Australia

Abstract

This paper models profits and size of foreign banks in Australia using unbalanced pooled data. The model that is tested is drawn from the multinational banking literature. Licensed foreign banks are found to be larger but not more profitable than foreign merchant banks. Evidence of foreign banks buying size is also found, consistent with De Young and Nolle (1996)(Foreign-owned banks in the US: Earning Market Share or Buying it? Journal of Money, Credit and Banking 28, 622–636). Time series properties in the defensive expansion effect were also identified, although this was small for both profits and size. This paper finds the time series effect identified in Williams (1996)(Determinants of the Performance of Japanese Financial Institutions in Australia 1987–1992. Applied Economics 28, 1153–1165) represented a time trend rather than international experience. It is concluded that models drawn from the multinational banking literature are able to provide reasonable explanations for foreign bank size, but that a wider model is necessary to adequately model foreign bank profits.