The Performance of Foreign-Owned Banks in Host Country Economies

Abstract

The paper deals with the phenomenon of foreign bank ownership, which is prevalent in the countries of Central, Eastern and South Eastern European region as well as in New Zealand. Using a sample of 17 countries and filtering out more than 140 domestically operating foreign-owned banks, we examine the determinants of their performance in relation to host country conditions over the period of seven years between 2005 and 2011. Based on our knowledge, we use the largest data set in this respect compared to other researchers. Using system GMM and fixed effects models, we reveal that macroeconomic fundamentals of the host country affect the foreign-owned banks' performance but do not suffice in explaining it fully. This result points out that sound banks with higher operational efficiency operating in growing economies with low inflation rate tend to perform better than their peers.