Domestic Bank Versus Foreign Bank Efficiency - Essay Example

Introduction Large banks tend to expand at international level by either acquiring the foreign banks or opening up their own subsidiaries in the international market. The mode of entry therefore is one of the key aspects of how the foreign banks are actually willing to operate in a new market. However, due to their lack of understanding of the local market foreign banks do not acquire the relative efficiency in short run and it is only in the long run that the foreign banks become able to gain efficiency. (Aliber,1984) The overall emergence of foreign banks on international scene took place on two different counts wherein first major wave of international expansion occurred in the decade before first World War and second emerged during 1960s. (Berger., Demsetz, & Strahan, 1999). Due to this growth of the international banks, there are two different issues which have emerged over the period of time vis a vis competitiveness differences between the domestic as well as foreign banks are concerned. First, the overall impact of the presence of international banks on the domestic banking system of the country and other was the inequalities in the competitiveness of both the domestic as well as the foreign banks.( Hughes, & MacDonald, 2002), It is therefore generally argued that the entry of foreign banks in domestic markets tend to increase the efficiency of the domestic banks and quality of the services offered by the domestic banks. Domestic and foreign banks can be effective competitors of each other given the fact that both can enjoy the relative cost efficiency as well as other forms of efficiency. It is however, significant to note that the foreign banks are often restricted in their activities under law and may not be allowed to perform all the activities which domestic banks are otherwise permitted. Further the highly concentrated nature of the banking system in different markets may not allow foreign banks to become relative more efficient considering the fact that the existence of information asymmetries in international bank may lead to the decisions which may not fully reflect the efficient nature of these organizations.(BIS, 2008) Studies conducted by Echingreen and Moody indicate that though the foreign banks were efficient in pricing the short term lending and following the booms and busts in domestic banking system however, their efficiency still remain illusive and international firms have to look for more innovative ways of achieving the efficiency and maintaining their superiority over some of the key aspects of their banking practices. The differences between the efficiency gains for domestic and foreign banks in both the developed as well as developing country’s banks is another important issue which need to considered from the perspective of how both the domestic as well as foreign banks exploit the competitive environment and achieve the relative efficiency.( William & Liao, 2008.) In short run, foreign banks therefore may not be able to compete successfully with the domestic banks however in long run, if the foreign banks are successful in achieving the relative efficiency gains. This research paper will therefore discuss some of the empirical studies performed on the topic of efficiency gains for foreign and domestic banks and how competitive differences can arise between the two besides discussing the gain differentiating in developed and developing countries. Conclusion The recent global crisis has left many questions to be answered regarding the ability of the international banks to manage themselves prudently. The failure of the large banks of the world indicate that the banks were not probably efficient in terms of managing their affairs and fail to take into account some of the critical factors which may be necessary for the overall success and failure of the banks at international level. The current financial crisis not only witnessed a systematic decline in the inter-bank activity at the international level but also initiated a chain reaction wherein the overall credibility of the banks in countries like UK and US sharply deteriorated. Studies have suggested that the entry of foreign banks into the domestic markets do result into the reduction in the profit margins as well as the overall costs and thus creating more competitive environment within the domestic market. What is however, significant to note that it significantly depends upon the capacity of foreign firms to take advantage of the arbitrage opportunities as the failure to do so may cause foreign banks a lot and their overall experience in the local market may not be good.( Arestis & de Paula, 2008) It has been suggested that when foreign banks make entry into the foreign market, they tend to lag behind and can only develop their efficiencies in the long run. There was a time when a trend of cross border mergers started to manifest as a result of the expansion of the banks at international level. This was the direct result of the liberalization of the banking sector in many countries of the world and as such certain regions attracted many international banks and financial institutions. However, these mergers and acquisitions were probably not successful in providing the desired results to the international firms as the international banks fail to realize the potential efficiency gains in short run. The relative differences between the efficiency of domestic as well as the foreign firms therefore define the overall success of each firm in the industry. Various research studies have shown that the mergers and acquisitions at international level were held in order to universalize the banking services such that foreign banks made an attempt to gain access to the international markets in order to not only dominate the banking sector but also other allied sectors such as insurance etc. (Gadanecz., 2004) . Studies however, confirm that there are large differences between the efficiencies of the domestic as well as the foreign banks mainly due to the fact that either the foreign banks are making wrong decisions in terms of their merger and acquisition activities or the overall efficiencies have not been measured correctly. (Berger et al, 2000). Either way, there is substantial body of evidence which suggest that the foreign firms do not normally enjoy the relative efficiency as compared to the domestic banks. References 1. Aliber, R.Z., 1984. International banking: A survey. Journal of Money, Credit and Banking 16, 4, 661-695. 2. Berger, A.N., Demsetz, R.S., Strahan, P.E., 1999. The consolidation of the financial services industry: Causes, consequences, and implications for the future. Journal of Banking and Finance 23, 153-194. 3. Berger, A.N., DeYoung, R., Genay, H., Udell, G.F., 2000. Globalisation of Financial Institutions: Evidence from Cross-Border Banking Performance. Brookings-Wharton Papers on Financial Services 3, 23-158. 4. BIS, 2008. International banking and financial market developments. BIS Quarterly Review, December. 5. Eichengreen, B., Mody, A., 2000. Lending booms, reserves and the sustainability of short-term debt: inferences from the pricing of syndicated bank loans. Journal of Development Economics 63, 5-44. 6. Gadanecz, B., 2004. The syndicated loan market: structure, development and implications. BIS Quarterly Review, December, 75-90. 7. Hughes, J.E. & S.B. MacDonald (2002), International Banking: Text and Cases (Addison-Wesley). 8. P. Arestis and L.F. de Paula (eds), Financial Liberalization and Economic Performance in Emerging Countries, Palgrave Macmillan, 194-216. 9. Williams, J., Liao, A., 2008. The search for value: Cross-border bank M&A in emerging markets. Comparative Economic Studies 50, 274-296. Read More