Foreign Bank and Domestic

Journal of Banking & Finance 35 (2011) 819839
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Journal of Banking & Finance

journal homepage: www.elsevier.com/locate/jbf
Are foreign banks more protable than domestic banks? Home- and
host-country effects of banking market structure, governance, and supervision
Sheng-Hung Chen , Chien-Chang Liao
Department of Finance, Nanhua University, Chiayi, Taiwan
a r t i c l e
i n f o
Article history:
Available online 20 November 2010
JEL classication:
E32
L11
G21
G28
Keywords:
Bank protability
Foreign bank
Banking competition
Panzar and Rosse H
Governance
Country risk
Regulatory supervision
a b s t r a c t
Using both bank- and country-level data on banking sectors from 70 countries over the period
19922006, this paper empirically investigates the joint home- and host-country effects of banking market structure, macroeconomic condition, governance, and changes in bank supervision on foreign bank
margins. We nd that foreign banks are more protable than domestic banks when they operate in a host
country whose banking sector is less competitive and when the parent bank in the home country is
highly protable. Moreover, when foreign banks operate in a host country with lower growth rates of
GDP, higher interest and ination rates, and more stringent regulatory compliance with Basel risk
weights, their margins increase. Specically, changes in bank supervision of a parent banks ownership
restrictiveness in the home country signicantly increases foreign bank margins, while supervisory
changes in regulatory compliance with Basel risk weights in the host country enhances foreign bank
margins.
Crown Copyright 2010 Published by Elsevier B.V. All rights reserved.
1. Introduction
Over the last few decades, countries have extended their international nancial activities and opened their doors to foreign
banks, thereby increasing their levels of nancial liberalization
and integration and boosting the banking industry worldwide.
The globalization of banking has led to institutional and regulatory
improvements and benetted both local and foreign banks. At the
local level, globalization has increased the competitiveness of
banking markets by reducing administrative costs, lowering net
interest margins, and driving down bank rates of return. At the
international level, globalization has allowed foreign banksespecially those from more developed nancial systemsto expand
into emerging market economies, where they have sometimes
become dominant. Dietz et al. (2008) nd that according to 2006
survey on global industry prot revenues and prots in the banking industry amounted to $788 billion, which was higher than
prots in any other industry. The authors also indicate that
between 2000 and 2006 the prots of developed countries grew
signicantly faster than those in less developed countries. This
Corresponding author. Tel.: +886 5 2721001x56541; fax: +886 5 2427172.
E-mail addresses: shenghong@mail.nhu.edu.tw (S.-H. Chen), macrossgods@
yahoo.com.tw (C.-C. Liao).
shows the role of protability in banking industry is essentially

important and draws higher interest and concern from academics
and practitioners.
All bankswhether domestic or foreignseek to enhance their
protability. Their ability to do so involves both internal and external determinants. Internal determinants encompass the management decisions made by each bank and are related to the banks
level of liquidity, provisioning policy, bank size, capital adequacy,
and expense management. External determinants encompass macroeconomic factors beyond the banks control, such as the legal
environment, the state of the economy in which a nancial institution operates, changes in national governance, and the impact of
globalization.
Previous studies have evaluated how various factors impact
bank protability (e.g., Molyneux and Thorton, 1992; Ho and
Saunders, 1998; Demirg-Kunt and Huizinga, 2000; Goddard
et al., 2004). Jaffee (1989) nds that the interest spread was inuenced by (i) the degree of market concentration that affected bank
protability; (ii) regulatory constraints that prohibited the bank
from undertaking certain protable activities and increased the
cost of providing permissible activities; (iii) higher credit risk;
and (iv) exposure to interest-rate risk. Some researchers have
recently examined the impact of GDP on bank prots (Brock and
Suarez, 2000; Staikouras and Wood, 2003; Williams, 2003; Claeys
0378-4266/$ - see front matter Crown Copyright 2010 Published by Elsevier B.V. All rights reserved.
doi:10.1016/j.jbankn.2010.11.006
820
S.-H. Chen, C.-C. Liao / Journal of Banking & Finance 35 (2011) 819839
and Vennet, 2008), while others have assessed the impact of

ination on bank prots (Kosmidou et al., 2007; Pasiouras and
Kosmidou, 2007; Athanasoglou et al., 2008) and the ambiguous
effect of corporate income tax on net interest margin (Albertazzi
and Gambacorta, 2010). Recent literature has also analyzed the
effect of interest rates and banking market structure on such areas
as bank protability (Saunders and Schumacher, 2000; Maudos
and Fernndez de Guevara, 2004); credit risk (Angbazo, 1997;
Maudos and Fernndez de Guevara, 2004); non-interest revenue
(Spathis et al., 2002); and bank-specic factors like interest rates,
loans to assets, and a banks market shares (Claeys and Vennet, 2008).
To evaluate a banks performance and determine whether a positive empirical relationship exists between market concentration
and bank protability, researchers frequently use the paradigm
of StructureConductPerformance (Kosmidou et al., 2007;
Pasiouras and Kosmidou, 2007). When such a relationship exists,
it strongly implies that a bank will be able to gain a monopoly as
its market concentration increases. Furthermore, Garca-Herrero
et al. (2009) nd that better capitalized Chinese banks tend to be
more protable and indicate that a less concentrated banking
system increases bank protability. Delis and Tsionas (2009)
show that there is a negative relationship between efciency and
market power in line with the quiet life hypothesis. In addition,
Maudos and Solisa (2009) nd that Mexican banking industry with
high margins can be explained mainly by average operating costs
and by market power.
Over the last few decades, many developing countries have liberalized their nancial policies and begun encouraging the entry of
foreign banks into the domestic banking market. As a result, the
market structure of the banking industry has changed signicantly.
The traditional banking industry perspective suggests that when
banks enter a new market, it leads to more competition among
banks already in the market, thereby benetting borrowers but
ultimately harming local banks monopoly rents. Thorne (1993)
nds that the entry of foreign banks as a whole into a domestic
market has a positive effect on the domestic market due to the
spillover effect of the foreign banks know-how and expertise.
Claeys and Hainz (2006) conduct a theoretical analysis that
showed foreign bank entry would drive down a countrys average
interest rate for new loans. Peria and Mody (2004) nd that the
entry of foreign banks into Latin American markets decreased the
level of bank concentration. Maudos and Fernndez de Guevara
(2004) demonstrate that between 1993 and 2000, banking sectors
in Europe (including Germany, France, the United Kingdom, Italy,
and Spain) proxied both the Herndahl index and the Lerner index,
which measure the degree of concentration and market power.
Their results showed a signicant positive impact of market
concentration on the interest margin.
In regard to whether foreign banks or domestic banks perform
better in the same market, research has been contradictory. Some
studies have found no signicant differences between domestic
and foreign banks (Vennet, 1996; Hasan and Lozano-Vivas, 1998;
Crystal et al., 2001; Mian, 2003). Some studies have found that
domestic banks perform better (Sturm and Williams, 2004) and
that foreign banks are disadvantaged when compared to domestic
banks in developed countries (Peek et al., 1999; Berger et al., 2000;
Claessens et al., 2001; Sathye, 2001). One reason for this is that foreign banks may lack knowledge of the specic market at the time
of entrance (DeYoung and Daniel, 1996; Mahajan et al., 1996;
Berger et al., 2000; Kosmidou et al., 2004). Some studies have
found that foreign banks are more protable and more efcient
than domestic banks in emerging markets (Claessens et al., 2001;
Demirg-Kunt and Huizinga, 2000; Bonin et al., 2005; Grigorian
and Manole, 2006; Berger et al., 2009b). Others, however, have
found the opposite (Nikiel and Opiela, 2002; Yildirim and
Philippatos, 2007).
One possible reason for such contradictory results may lie in the
fact that empirical analysis for the performance of foreign banks
has mainly concentrated on European Union and US banks operating abroad. Another may be that most studies have compared the
performance of domestic banks with foreign banks for a single
country rather than analyzing how cross-country differences in
banking market structure inuence a banks protability. For
example, Williams (1996, 1998a,b, 2003) studies Australia, Minh
To and Tripe (2002) studies New Zealand, Ursacki and Vertinsky
(1992) focuses on Japan and Korea, Engwall et al. (2001) studies
the Nordic countries, and Dietrich and Wanzenried (2009) studies
Switzerland.
This paper contributes to previous studies in several ways. First,
we empirically investigate the key factors in 70 countries that affect bank protability in foreign banks when compared to domestic
banks. To do so, we analyze the long-term relationship between
bank protability and banking market structure using structural
measures, such as Panzar and Rosse H (PR H) statistics and the
Lerner index, as well as static measures, such as the Herndhal Hirschman Index (HHI) and the Concentration Ratio (CR), over the
period 19922006. Second, we empirically examine whether
cross-country differences in banking market structure, macroeconomic environment, institutional governance, banking competition, and country risk between host country and home country
inuence foreign protability. Third, we use regulation and supervision variables to explore the joint home- and host-country impacts of change in bank supervision on foreign bank protability.
The rest of this paper is organized as follows. Section 2 reviews
related literature dealing with international studies of bank protability. Section 3 describes the model for analysis used in the theoretical framework of this paper. Section 4 presents the empirical
model used for estimation, explains the data collection process,
and provides summary statistics. Section 5 discusses the results
of our empirical models. Finally, Section 6 presents our concluding
remarks.
2. Related literature
Previous literature related to bank protability can be classied
into two major categories. The rst is a cross-country comparison
of bank protability, and the second is the impact of banking market structure on bank prot. We discuss our detailed ndings in the
following sections and summarize the important empirical results
in Appendix A.
2.1. International comparison of bank protability
The empirical literature on bank prot focuses strongly on European countries. One exception to this is Williams (1996), who constructs a model that attempts to explain the performance of
Japanese nancial institutions in Australia. In general the model
performs well for measures of size, but comparatively poorly for
measures of protability. Brock and Suarez (2000) report that bank
spreads in the 1990s were inuenced by liquidity and capital risk
at the bank level and by interest rate volatility, ination, and
GDP growth at the macroeconomic level. Claessens et al. (2001)
analyze 7900 banks from 80 countries for the period 19881995
and found that foreign banks enjoyed higher prots than domestic
banks when operating in developing countries. They found the
opposite effect, however, for banks operating in developed
countries.
Kosmidou et al. (2007) analyze 19 Greek bank subsidiaries
operating in 11 nations during the period 19952001. Their ndings show that the protability of the parent bank and the operating experience of the host nation had a robust and positive impact
on the prots of Greek banks abroad. Claeys and Vennet (2008)

investigate the determinants of bank interest margins by taking a
sample of 1130 banks from 31 Western and Eastern European
countries (WEEC) over the years 19942001. They nd that capital
ratio and market concentration were positive and signicant for
both the WEEC and accession countries. Claessens and Horen
(2009) explore the performance of foreign banks in 51 countries
between 1999 and 2006 and nd that foreign banks from high income countries tended to perform better than domestic banks.
They also indicate that foreign banks from developing countries
tend to perform worse than domestic banks.
2.2. Banking market structure and bank protability
Banking structure clearly inuences protability persistence in
both domestic and foreign banks and plays a critical role in understanding international competitive advantages. A number of studies have identied determinants of bank protability in selective
countries and regions, but the impact of banking market structure
on bank protability across countries has seldom been studied
empirically, particularly in the context of international comparison. Lately, numerous studies have evaluated the effect of market
structure on bank protability in various countries, but international evidence based upon cross-country differences in the banking market structure remains sparse.
Saunders and Schumacher (2000) assess the impact of market
structure on bank prot and found that during the period 1988
1995 interest margins in six European countries and the United
States were affected by the degree of bank capitalization, bank
market structure, and volatility of interest rates. Corvoisier and
Gropp (2002) show that higher concentration might have resulted
in less competitive pricing by banks located in the euro area for the
period 19931999. Bikker and Haaf (2002) apply the PR H model
to measure banking competition in 23 countries. Their results supported the conventional view that concentration impairs banking
competitiveness. However, Beck et al. (2003) conclude that
highly-concentrated banking systems are less likely to suffer from
crises. Maudos and Fernndez de Guevara (2004) use the Lerner index proxied as the degree of competition in banking markets and
found that a statistically signicant and positive correlation existed
between concentration and bank interest margins in European
banking markets for the period 19932000.
Additionally, Athanasoglou et al. (2008) utilize GMM (Generalized Method of Moments) technique to a panel of Greek banks for
the period 19852001 and found that concentration negatively affected the banks protability; however, this effect was relatively
insignicant. To infer competitive behavior, Carb et al. (2009) employ ve indicators: loan-deposit interest spread, Lerner index, a
banks net income to the value of total assets, PR H statistics,
and the HHI. They nd that the determination of competition can
differ depending on the measure chosen to assess it. This is because
indicators of competition measure different things. Berger et al.
(2009b) teste indicators of market power to measure loan risk, bank
risk, bank equity capital, and the business environment. The results
suggest that banks with a higher degree of market power have less
overall risk exposure and that market power increases loan portfolio risk. In summary, these researchers indicate that banking market
structure does have a substantial inuence on bank protability.
3. The model
3.1. Theoretical framework
Based on a theoretical perspective proposed by Ho and
Saunders (1998) and Saunders and Schumacher (2000), this study
821
denes a bank as a risk-averse dealer in the credit market whose

purpose is the immediate provision of deposits and loans. Thus,
the major portfolio risk comes from interest-rate uctuations, or
volatility, before any deposits or loans are made. Risk-averse banks
facing asymmetric arrival time for the demand for loans and the
supply of deposits select optimal loan and deposit rates, which
minimize the risk of excessive demand for loans or the insufcient
supply of deposits. Therefore, we set up rates using the following
structure:
RD R a;
RL R b
where RD is the rate set on deposits, RL is the rate set on loans, R is

the expected risk-free interest rate, and a and b are fees charged by
the bank in order to provide immediacy and to bear interest-rate
risk. The fees a and b have to compensate the bank for bearing this
interest-rate risk. The optimal fees a, b and thus the spread
sp = (a + b)3 are expressed as:
sp a b
c
h
1
Rr2I Q
2
where ch measures the banks risk neutral spread and is the ratio of
the intercept (c) and the slope (h) of the symmetric deposit and loan
arrival functions of the bank. A large c and a small h will result in a
large ch and a large spread (sp). This means that if a bank faces relatively inelastic demand and supply functions in the markets in
which it operates, it may be able to exercise monopoly power by
demanding a greater spread than it could get if banking markets
were competitive (low ch ratio).
The ratio of ch provides some measure of the producers surplus
or monopoly rent element in bank spreads or margins. The second
term is a rst-order risk-adjustment term that depends on three
factors: (i) R, the bank managements coefcient of absolute risk
aversion; (ii) Q, the size of bank transactions; and (iii) r2, the
instantaneous variance of the interest rate on deposits and loans.
Note that the second term implies that, the greater the degree of
risk aversion, the larger the size of transactions. It also implies that
the greater the variance of interest rates, the larger the bank margins. This spread equation has an important implication: Even if
banking markets are highly competitive, as long as a banks management is risk-averse and faces transaction uncertainty, positive
bank margins will exist as the price of providing deposit and loan
intermediation.
3.2. Measuring banking market structure
This paper uses four measures proxies as the market structure
in the banking industry. Two are structural: PanzarRosse H
statistics and the Lerner index, and two are static: the Herndhal
Hirschman Index and the Concentration Ratio of the top four banks
(CR4).
3.2.1. Structural measures
3.2.1.1. PanzarRosse H statistics. Panzar and Rosse (1987) create a
convenient framework with which to assess banking market structure. Their modelthe PanzarRosseuses bank-level data to measure how a change in factor input prices is reected in equilibrium
revenues earned by banks. In a state of perfect competition, marginal costs and total revenues increase proportionally to input
prices. In a state of monopoly market, however, an increase in factor input prices raises marginal costs but reduces output and total
revenues. Following Bikker and Haaf (2002), Bikker et al. (2007),
and Bikker and Spierdijk (2008), this paper uses the PR H model
to measure the degree of competition in the banking industry by
estimating, for each country, the following empirically reduced
form of bank revenues:
822
lnpi;t a b ln PF i;t c ln PLi;t d ln PK i;t
nj gOI ei;t
3
where t is the number of periods observed, and i is the total number
of banks. ln denotes the natural logarithmic operator, p denotes a
banks interest revenues, PF stands for annual funding rate calculated as interest expense to total funds (IE/FUN) (as the proxy for
unit price of fund), PL denotes price of personnel expenses calculated as annual personnel expenses to total assets (PE/TA) (as the
proxy for unit price of labor), PK is the price of physical capital
expenditure calculated as non-interest expenses to xed assets
(ONIE/FA) (as the proxy for unit price of capital), and OI is calculated
as the ratio of the income to total assets. In order to apply the PR
approach to our data, this paper uses the following empirical reduced form equation of bank revenues, which is in line with Eq. (3):
lnpi;t a b ln PF i;t c ln PLi;t d ln PK i;t g1 ln LNASST i;t

g2 ln NONTAi;t g3 ln DPSF i;t g5 ln EQTAi;t g5 OI ei;t
4
where LNASST is the ratio of loans to total assets and represents the
credit risk on banks. NONTA is dened as the ratio of other nonearning assets to total assets. DPSF is the ratio of customer deposits
to the sum of customer deposits and short-term funding. EQTA is
generated by the ratio of equity to total assets ratio. Although the
choice of dependent and explanatory variables often varies, Eq.
(4) is similar to other equations commonly used in the literature.
The model posits that banks use three input factors: deposits, labor, and physical capital. PF, PL and PK are the unit prices of these
three inputs, or reasonable proxies. A number of bank-specic factors are included into Eq. (4). The H statistic is calculated as the
sum of the elasticities of a banks total revenue with respect to that
banks input prices. Hence, based on Eq. (4), the H statistic equals
H = a + b + c. The estimated value of the H statistic ranges between
1 and 1. Under perfect competition, a decrease in input prices reduces marginal costs and revenues by the same amount as a cost
reduction (H = 1). A value of the H statistic between 0 and 1 indicates
monopolistic competition. Values equal to or less than 0 are consistent with monopoly behavior, as a decrease in input prices decreases
marginal costs but does not reduce revenues. (For a summary of previous empirical ndings using H statistic, see Appendix B.)
3.2.1.2. Lerner index. The Lerner index can be characterized as the
negative inverse of demand elasticity. It represents the mark-up
of price over marginal costs and is an indicator of the degree of
market power. For example, a high Lerner index indicates a strong
degree of monopoly in the banking market, while a low Lerner index indicates a highly competitive market with less capacity to set
high margins. In effect it is a level indicator of the proportion by
which price exceeds marginal cost. Following the theoretical perspective of Berger et al. (2009b), this paper uses the Learner index
as a proxy for market power. Its empirical expression is:
p MC
LERNER
p
where p is the average price of a bank (proxied as the quotient between total revenues and total assets) and MC is the marginal cost
of total assets calculated from the estimation of a translogarithmic
costs function. Where the total costs depend on the prices of three
inputs and on the banks volume of production (total assets), the
costs function estimated is:
3
X
1
ln Costit bo b1 ln Q it b2 ln Q 2it
ckt ln W k;it
2
k1
3
X
k1
uk ln Q it ln W k;it
3 X
3
X
k1 j1
ln W k;it ln W j;it eit
where Qit represents a proxy for bank output or total assets for bank
i at time t, and Wk,it represent three input prices. W1,it, W2,it and W3,it
indicate the input prices of labor, funds, and xed capital, respectively. The input prices are dened as: (W1,it) personnel costs/total
assets; (W2,it) interest expenses/total deposits; and (W3,it) other
operating and administrative expenses/total assets.
MC TAit
"
#
3
X
Costit
b1 b2 ln Q it
u ln W k;it
Q it
k1
Finally, the Lerner index is averaged over time for each bank i for
inclusion in the regression model. The data for this measure of competition are at the bank level and are estimated country-by-country
and year-by-year.
3.2.2. Static measures
3.2.2.1. Herndhal Hirschman Index (HHI). We dene the HHI as:
HHI
3
X
s2i
i1
where si stands for the share of total volume of loans (deposits or

assets) of the group of nancial institutions. The HHI is calculated
by summing the squared market shares of all banks in the industry
on the assumption that competition takes place on a national scale.
Only in the case of big banks and wholesale markets could a greater
than national market be assumed. The fewer the rms in the banking industry, and the more the industry is dominated by a small
number of them, the higher the value of the index.
3.2.2.2. Concentration Ratio. The CR describes the degree of banking
competition in a national banking sector. This indicator could be
measured as the combined market share of the four biggest banks
(CR4) in terms of total assets (deposits or assets). Williams (2003)
suggests that CR may act as a barrier to entry when entering markets where domestic banks are highly-concentrated. This implies a
negative impact on prots.
4. Empirical model, data and summary statistics
4.1. Empirical model
Our baseline model aims to indentify cross-country determinants of bank performance using comprehensive panel data at both
the bank and country level. Following previous studies on empirical
specications, such as those conducted by Maudos and Fernndez de
Guevara (2004), Berger et al. (2009a), Claessens and Horen (2009),
and Dietrich and Wanzenried (2009), we incorporate a number of
independent variables in our empirical model, including net interest
margins, return on assets (ROA), and return on equity (ROE). For a
detailed description of these, see Appendix C.
Pi;j;t a0 a1 FBi;j;t a2 COST i;j;t a3 SIZEi;j;t a4 LIi;j;t

a5 CRi;j;t a6 IPi;j;t a7 OPC i;j;t a8 NOIi;j;t a9 OBSi;j;t
a10 ELi;j;t a11 MSi;j;t a12 OOIi;j;t a13 GDPHost
j;t
a14 IRHost
a15 IF Host
ei;j;t
j;t
j;t
where Pi,t in Eq. (9) stands for bank protability for bank i in country j in year t and ei,j,t represents the error term. To represent dependent variables, we use three measures of a banks protability
alternately: net interest margin (NIM), ROA, and ROE. NIM is the
net interest margin generated by the net interest income (=interest
income interest expense) divided by current assets. This ratio suggests that the higher the net interest margin, the better the performance. ROA is dened as the net prot divided by total assets; it
represents the earning performance of a bank based on total assets.
823
ROE is calculated as the return on equity, which is the net prot

after tax divided by shareholder equity. It represents the earning
performance of a bank based on the shareholders stake.
As independent variables, we include bank nancial characteristics, foreign bank ownership, and comprehensive measures of
banking market structure, macroeconomics, and governance
between home and host country. FBi,j,t which indicates foreign
ownership, is the dummy variable. It is equal to one for foreignowned banks whose shareholding is up to 50% or more. Domestically-owned banks are equal to 0. The main control variables for
bank nancial characteristics include: operation cost (COSTi,j,t),
interest payments (IPi,j,t), liquidity ratio (Lii,j,t), opportunity cost
(OPCi,j,t), credit risk (CRi,j,t), bank size (SIZEi,j,t), non-interest revenues (NOIi,j,t), capital strength (ELi,j,t), off-balance sheet activity
(OBSi,j,t), market shares (MSi,j,t), and other operating income
(OOIi,j,t). Three macroeconomic variables of the host country are
also used for regression: growth rate of GDP (GDPHost
j;t , real interest
Host
rate (IRHost
j;t , and ination rate (IF j;t .
where Parent Performacei,m,t represents a parent banks performance

of foreign bank in home country m. We use two indicators to measure parent banks performance in home country: protability level
and protability ranking. The protability level of parent bank includes NIM, ROA, and ROE in response to foreign banks prot measures. Protability ranking of parent bank indicates the comparative
protability in the home country. This relative indicator is dened
as the higher the protability for a parent bank, the larger the value of ranking for the indicator.
Based on Claessens and Horen (2009), we also use where a foreign bank comes from (either a developed country or a developing
country) as a dummy variable. The variable is equal to one if the
foreign bank comes from a developing country; if it comes from
a developed country, it is equal to 0. FBi;j;t DEV ki;j;t denotes a foreign banks location: either the home country from which the for

or the host country in
eign bank originates FBi;j;t DEV Home
i;j;t
4.1.1. The impact of banking competition on bank protability

Based on the specications of Eq. (9), we investigate the impacts
of banking market structure on bank protability. In particular, we
attempt to verify the explanatory power of banking competition
using both structure measures (PR H statistics and Lerner index)
and static measures (HHI and CR4). Hence, we incorporate the
measure of banking market structure into the following model:
effect of macroeconomic conditions in the home country on foreign

bank protability. FBi;j;t MacEconHost
denotes the direct effect of
j;t
macroeconomic conditions on the host country on all bank margins, including both foreign and domestic banks. Our regressions
include three macroeconomic variables dened earlier as: growth
rate of GDP per capita, ination rate, and real interest rate.
In addition, country risk plays an important role on bank profitability. Therefore, we use country-level variables, such as legal
risk (LR) and economic risk (ER), in our regression to control for risk
Host
differences across countries. FBi;j;t Riskj;t describes the host
Home
country risks for a foreign bank, while FBi;j;t Riskj;t
describes
the risks associated with the foreign banks home country. Furthermore, cross-country differences in governance between home
country and host country have potential inuences on bank performance. FBi;j;t GOV Host
measures the quality of government in the
j;t
host country, while FBi;j;t GOV Home
measures the quality of govj;t
ernment in the home country.
Following Kaufmann et al. (2007), we use three important governance indexes. The rst is Government Effectiveness (GE), which
we dene as the quality of public services, the quality of the civil
service, the degree of independence from political pressure, the
quality of policy formulation and implementation, and the credibility of the governments commitment to such policies. The second is Regulatory Quality (RQ), which we dene as the ability of
the government to formulate and implement sound policies and
regulations that permit and promote private sector development.
The third is Control of Corruption (CO), which we dene as the extent to which public power is exercised for private gain, including
both petty and grand forms of corruption, as well as capture of the
state by elites and private interests. FBi;j;t GOV Home
stands for
j;t
home country governance, while FBi;j;t GOV Host
stands for host
j;t
country governance.
Following Barth et al. (2004), we next consider 10 dimensions of
banking regulation and supervision (SUP) and investigate the home
and host country impacts of such supervision on bank protability.
We include nine supervisory variables in our regression: 1. Bank
Capital Requirements (whether related parties can own capital in
a bank); 2. Bank Ownership Restrictiveness (regulatory restrictiveness of ownership by one nancial rm or bank); 3. Basel risk
weights (whether the bank is risk-weighted in line with Basle
guidelines); 4. Securities Activities; 5. Licensed/Certied Auditor
(whether auditors are licensed or certied); 6. Auditors Report
(whether an auditors report is given to a supervisory agency); 7.
Consolidated Accounts (whether consolidated accounts covering
the bank and any one-bank nancial subsidiaries are required);
8. Solvency Intervention (whether the law establishes predetermined levels of solvency deterioration that forces automatic
Pi;j;t b0 b1 FBi;j;t b2 COST i;j;t b3 SIZEi;j;t b4 LIi;j;t

b5 CRi;j;t b6 IP i;j;t b7 OPC i;j;t b8 NOIi;j;t b9 OBSi;j;t
b10 ELi;j;t b11 MSi;j;t b12 OOIi;j;t b13 MST j;t
b14 GDP Host
b15 IRHost
b16 IF Host
ni;j;t
j;t
j;t
j;t
10
where MSTj,t represents the proxy as banking market structure in a

country j in year t. It is measured and generated by four indicators:
HHI, CR4, Lerner index and PR H statistic. We also use a foreign
banks ownership (FBi,j,t) and the same control variables used in
Eq. (9). We apply the Maximum Likelihood Estimation (MLE) method for panel data model with Random Effects (RE) to estimate
coefcients.
4.1.2. Joint home- and host-country effects of banking competition,
macroeconomic condition, governance, and supervision on bank
protability
Kosmidou et al. (2007) nd that the inuence of parent bank
protability had a signicant effect on the prots of subsidiary
Greek banks. To quantify home- and host-country effects on bank
protability, therefore, we incorporate the interaction term into
the following model with respect to banking competition, macroeconomic condition (degree of development and country risk), governance, and bank supervision between a foreign banks home
country and host country.
Pi;j;t c0 c1 FBi;j;t c2 Parent Performacei;m;t c3 MST j;t
Host
c4h Contoli;j;t c5 FBi;j;t DEV Home
i;j;t c6 FBi;j;t DEV i;j;t
X
Home
c7p FBi;j;t MacEconHost
j;t c7p FBi;j;t MacEconj;t
X
Home
c8q FBi;j;t RiskHost
j;t c8q FBi;j;t Riskj;t
X
Home
c9r FBi;j;t GOV Host
j;t c9r FBi;j;t GOV j;t
X

Home
c10s FBi;j;t SUPHost
ni;j;t
j;t c10s FBi;j;t SUP j;t
11
which the foreign bank operates and competes with domestic

. FBi;j;t MacEconHome
banks FBi;j;t DEV Host
measures the indirect
i;j;t
j;t
824
comes from the database of BankScope, which is produced by the

Bureau Van Dijk Corporation. Macroeconomic variables for a country come from World Development Indicators (WDI); and the information on supervision comes from databases compiled by the
World Bank. Cross-country differences in country condition and
nancial development come from Global Insight Inc. Country-level
data on institution quality comes from Worldwide Governance Indicators (WGI), which was developed and ranked by Kaufmann et al.
(2007). It covers more than 50 countries and can be downloaded
for free from: http://www.govidicators.org.
Table 1 summarizes statistics of the variables used for all banks,
both foreign and domestic banks. Note that the mean of return on
assets is 0.8480.797%, while the mean of return on equity is
9.9548.994%; therefore, it is apparent that foreign banks on average are more protable than domestic banks. The net interest margin of foreign banks is slightly lower than that of domestic banks,
but the gap between them is smaller. Compared to domestic banks,
foreign banks exhibit a lower ratio of operating cost (0.041), liquidity (42.217%), and logarithm of bank size (3.187). However, they
also have higher ratio of interest payment (4.312) and total capital
ratio (18.757%).
actions such as intervention); 9. Onsite Inspections (frequency of

onsite inspections conducted in large and medium sized banks).
4.1.3. Joint home- and host-country effects of changes in bank
supervision on bank protability
To further examine the home- and host-country effects of
supervisory changes on bank protability, we use the rst differencing calculation (D) for bank supervision variables with two
time periods between t-1 and t and then estimate the following
regression:
Pi;j;t c0 c1 FBi;j;t c2 Parent Performacei;m;t c3 MST j;t
11
X
c4h Contoli;j;t c5 FBi;j;t DEV Home

c6 FBi;j;t DEV Host
i;j;t
i;j;t
h1
X
c7p FBi;j;t MacEconHost

c7p FBi;j;t MacEconHome
j;t
j;t
X
Home
c8q FBi;j;t RiskHost
c8q FBi;j;t Riskj;t
j;t
X
c9r FBi;j;t GOV Host

c9r FBi;j;t GOV Home
j;t
j;t
X

c10s FBi;j;t DSUPHost

c10s FBi;j;t DSUP Home
ni;j;t
j;t
j;t
5. Empirical results
12
To describe the correlation between bank ownership and performance, we investigate whether banking market structure,
developing economy, governance, and supervision for foreign
banks between host country and home country play a partial or
joint role in driving this relationship. We start by using NIM,
ROE, and ROA to estimate a baseline model that enables us to compare how both foreign ownership and banking competition affect
bank performance. Next, we test whether banking competition,
governance, and supervision from host country and home country
inuence (either individually or jointly) the association between
foreign ownership and protability.
Basically, we follow the specications of Eq. (10). DSUP Home

reprej;t
sents bank supervision changes in home country for foreign banks,
while DSUPHost
describes bank supervision changes in home country
j;t
for foreign banks.
4.2. Data and descriptive statistics
We collect data from many different sources in order to conduct
an empirical analysis of 70 countries over the period 19922006.
The bank-level data on the nancial statement report mainly
Table 1
Summary statistics by bank ownership.
Variables
All banks
N
Domestic banks
Mean
Std. dev.
Foreign banks
Mean
Std. dev.
Mean
Std. dev.
Dependent variable
Net interest margin (NIM)
Return on assets (ROA)
Return on equity (ROE)
61,720
62,217
62,181
3.645
0.804
9.118
3.696
3.115
27.507
53,833
54,163
54,133
3.680
0.797
8.994
3.478
3.063
25.765
7887
8054
8048
3.407
0.848
9.954
4.928
3.446
37.149
Independent variables
Bank characteristics
Operation cost
Interest payments
Liquidity ratio
Opportunity cost
Credit risk
Log (bank size)
Non-interest revenues
Capital strength
Off balance sheet activity
Market shares
Other operating income
62,098
61,669
62,146
61,862
62,605
62,546
61,731
62,362
60,451
55,584
61,668
0.038
4.003
52.198
0.029
0.002
3.164
0.628
12.853
0.264
0.013
1.796
0.059
5.349
23.723
0.043
0.046
0.975
0.407
35.641
4.862
0.043
5.323
54,070
53,786
54,094
53,901
54,447
54,413
53,836
54,270
52,796
48,066
53,780
0.038
3.957
53.684
0.029
0.002
3.161
0.615
11.972
0.251
0.012
1.707
0.059
5.226
23.067
0.040
0.041
0.954
0.424
32.666
5.175
0.040
5.227
8028
7883
8052
7961
8158
8133
7895
8092
7655
7518
7888
0.041
4.312
42.217
0.032
0.005
3.187
0.715
18.757
0.349
0.025
2.405
0.062
6.119
25.584
0.058
0.070
1.108
0.245
50.927
1.408
0.060
5.900
Banking market structure

PR H statistics
Lerner index
HHI (assets)
CR4 (assets)
60,069
62,111
54,914
54,914
0.435
0.356
0.306
0.492
31.287
1.467
6.477
14.996
52,547
54,080
47,534
47,534
0.420
0.285
0.291
0.333
19.438
1.3267
6.066
11.774
7522
8031
7380
7380
0.513
0.259
0.382
0.151
72.608
1.565
7.792
2.792
Macroeconomic condition
Growth rate of GDP
Ination rate
Real interest rate
62,739
62,585
55,611
2.559
7.470
6.816
2.346
81.726
7.380
54,659
54,538
48,437
2.471
6.911
6.768
2.218
79.397
6.859
8080
8047
7174
3.151
11.260
7.136
3.005
95.953
10.219
825
Table 2
Impact of foreign ownership on protability: results from individual country regressions.
Criteria
Signicant
Insignicant
Foreign banks perform better than domestic ones
Austria
Egypt
Italy
Panama
Singapore
Tunisia
Algeria
Indonesia
Kenya
Poland
Slovenia
United States
Australia
Bangladesh
Switzerland
Cyprus
France
Honduras
Netherlands
Peru
Venezuela
Algeria
Colombia
Denmark
Greece
Macau
Norway
Reunion
Zimbabwe
Domestic banks perform better than foreign ones
Croatia
Luxembourg
Hong Kong
Thailand
Bulgaria
Canada
Ireland
South Africa
Slovakia
Czech
Republic of Korea
Bolivia
Hungary
Mexico
Portugal
Spain
Indonesia
The table provides summarized results from examining the impact of foreign ownership on protability for each country in the sample based on regression model (9).
5.1. The effects of banking market structure: Are foreign banks more
protable than domestic banks?
Before investigating the effect of banking market structure on
bank protability, we rst use Eq. (9) to perform individual country
regression in order to examine whether foreign banks are more
protable than domestic banks. This approach enables us to
explore whether huge differences exist between countries with
respect to the performance of foreign banks. Our results are summarized in Table 2. Note that the table divides the countries in
our sample into 4 groups. The rst one (upper left quadrant) consists of countries in which the correlation of foreign ownership to
bank protability is both positive and statistically signicant. In
these countries foreign banks are, on average, more protable than
domestic banks. The second group (upper right quadrant) consists
of countries in which the correlation of foreign ownership to bank
protability is positive, but not statistically signicant. The third
group (lower left quadrant) consists of countries in which the correlation of foreign ownership to bank protability is both negative
and signicant. In other words, domestic banks in these countries
tend to outperform foreign banks. The fourth group (lower right
quadrant) consists of countries in which the correlation of foreign
ownership to bank protability is statistically negative, but
insignicant.
Table 2 indicates that all four cases occur in our group of 47
countries. Foreign banks perform better than domestic banks in
12 countries: Austria, Algeria, Egypt, Indonesia, Italy, Kenya,
Panama, Poland, Singapore, Slovenia, Tunisia, and the United
States. They perform worse in 4 countries: Croatia, Hong Kong,
Thailand, and Luxembourg. Interestingly, this nding differs
greatly from that of Claessens and Horen (2009). This may be
due to the data period covered or to the control variables used
for empirical specication. The majority of countries do not exhibit
a signicant difference between domestic and foreign banks.
Among this group, ownership has a positive sign in 14 countries
and a negative sign in 15. These results reinforce those of previous
studies: When looking at aggregate data, there is no straightforward relationship between bank ownership and performance.
Our next step was to investigate which bank and country
factors have a signicant impact on the relative performance of
foreign banks while quantifying the inuence of banking competition on bank performance. As shown in Table 3, our empirical
results from the estimation of Eq. (10) indicate that in the context
of international investigation, foreign banks correlate both positively and signicantly to higher protability relative to domestic
banks.
It is interesting to note that differences in banking market structure across countries play a signicant role in protability when
we use PR H statistics, Lerner index, HHI, and CR4 to correspond
to different independent variables such as NIM, ROA, and ROE.
From the perspective of structural measures like PR H statistics,
Table 3 shows that a signicant negative relationship exists between bank NIM and degree of competition in the banking industry. This nding indicates that bank net interest margin is more
likely to be squeezed when a bank operates in a competitive banking industry in countries with free market access to foreign banks
or new domestic banks. This result is especially robust when using
the Lerner index (another structural measure). In contrast to alternative measures such as the HHI index, we also nd the same result. This indicates that a banks interest margin correlates both
signicantly and positively to a monopolistic banking market
structure, which is consistent with the CR4 measure.
In regard to bank nancial characteristics and macroeconomic
variables, the results from both NIM and ROA as dependent variables indicate that banks with better protability correlate signicantly and negatively with operating cost. When we use ROE as a
dependent variable, however, the correlation is insignicant. This
is in line with Maudos and Fernndez de Guevara (2004), who
use NIM as a dependent variable, as well as with Pasiouras and
Kosmidou (2007), who use ROA as a dependent variable. Banks
with better protability are positively and signicantly associated
with implicit payments in the NIM model. This indicates that
charging for a banks services through lower remuneration of liabilities would lead to higher interest margins for banks, which is
consistent with previous studies by Saunders and Schumacher
(2000) and Maudos and Fernndez de Guevara (2004).
Liquidity ratios correlate signicantly and positively with NIM,
ROA and ROE, which indicates that an increase in bank liquidity ratio tends to enhance a banks protability. Furthermore, banks with
better protability are positively and signicantly correlated to
their opportunity cost. This result, which is similar to ndings by
Saunders and Schumacher (2000), suggests that the opportunity
costs of reserves suggests the average return on earning assets
foregone by holding deposits in cash. As opportunity costs increase
the cost of funds beyond the observed rate, banks gain net interest
margins by compensating for these costs.
The relationship between bank protability and off-balance
sheet is signicantly negative in all estimation results from the
models, which means the more off-balance activities a bank undertakes, the more its prots will decrease. The relationship between
size (SIZE) and bank protability is negative on the net interest
margin. The negative coefcient indicates that larger banks tend
Dependent variables: bank protability

Net interest margin (NIM)
Intercept
Foreign banks ownership
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
(9)
(10)
(11)
(12)
7.18***
(72.04)
0.34***
(4.25)
6.37***
(57.07)
0.37***
(3.65)
7.63***
(68.31)
0.42***
(4.77)
7.77***
(71.51)
0.45***
(5.11)
4.69***
(58.17)
0.19***
(3.38)
3.85***
(43.06)
0.18**
(2.51)
4.81***
(55.96)
0.22***
(3.77)
4.97***
(59.50)
0.26***
(4.52)
12.92***
(12.85)
1.15**
(2.26)
12.60***
(12.55)
1.57***
(3.10)
12.90***
(10.77)
2.00***
(3.81)
19.73***
(15.22)
1.11**
(2.12)
Measures of banking market structure

PR H statistics
0.01***
(5.08)
Lerner index
0.02***
(10.59)
0.05***
(8.70)
0.35***
(7.93)
0.06***
(11.18)
15.98***
(15.94)
1.00***
(6.07)
14.99***
(10.75)
CR4 (assets)
7.48***
(6.16)
0.25***
(6.91)
1.17***
(4.36)
0.23***
(9.11)
0.11
(0.14)
1.95***
(2.85)
0.16***
(33.25)
0.01***
(9.18)
7.89***
(19.98)
0.00***
(5.92)
6.03***
(82.41)
0.01***
(6.23)
0.13***
(32.81)
2.86***
(9.22)
0.40***
(15.93)
2.57***
(5.01)
1.09*
(1.75)
0.20***
(41.49)
0.00***
(4.34)
9.13***
(27.99)
0.00***
(8.10)
6.52***
(93.65)
0.01***
(5.96)
0.15***
(40.42)
2.88***
(9.29)
0.41***
(16.50)
3.62***
(7.13)
1.08*
(1.72)
0.20***
(41.26)
0.00***
(4.27)
9.23***
(28.33)
0.00***
(8.15)
6.51***
(93.58)
0.01***
(5.91)
0.15***
(40.24)
0.97***
(3.83)
0.20***
(11.22)
2.62***
(6.13)
1.11***
(2.79)
0.66***
(160.28)
0.00***
(8.52)
1.37***
(5.05)
0.01***
(16.85)
4.39***
(77.00)
0.02***
(10.32)
0.70***
(225.87)
0.44*
(1.83)
0.13***
(6.49)
1.12*
(1.74)
1.47***
(3.03)
0.64***
(150.96)
0.01***
(9.48)
0.77**
(2.23)
0.01***
(16.85)
3.82***
(59.63)
0.01***
(8.25)
0.66***
(193.24)
1.07***
(3.98)
0.21***
(11.76)
2.62***
(6.62)
1.06**
(2.55)
0.65***
(156.13)
0.00***
(6.56)
1.30***
(4.75)
0.01***
(16.51)
4.51***
(76.56)
0.01***
(8.36)
0.68***
(216.69)
1.09***
(4.06)
0.22***
(12.11)
3.04***
(7.67)
1.11***
(2.65)
0.65***
(156.38)
0.00***
(6.29)
1.38***
(5.03)
0.01***
(16.66)
4.48***
(76.26)
0.01***
(8.38)
0.68***
(217.05)
1.21
(0.25)
0.34*
(1.88)
33.13***
(7.03)
4.38
(1.16)
1.51***
(21.00)
0.06***
(9.07)
20.60***
(5.04)
0.02***
(4.37)
12.44***
(13.96)
0.16***
(5.75)
1.90***
(35.48)
3.44
(0.72)
0.13
(0.70)
43.69***
(10.10)
3.44
(0.89)
1.56***
(22.60)
0.05***
(6.78)
27.98***
(7.05)
0.02***
(4.54)
11.46***
(12.93)
0.11***
(4.17)
1.81***
(35.08)
3.54
(0.74)
0.17
(0.95)
48.04***
(10.25)
3.19
(0.81)
1.58***
(22.76)
0.06***
(8.21)
28.16***
(7.03)
0.02***
(4.18)
13.01***
(14.49)
0.12***
(4.36)
1.85***
(35.70)
5.27
(1.09)
0.53***
(2.82)
30.19***
(6.24)
2.79
(0.71)
1.65***
(23.55)
0.07***
(9.79)
23.73***
(5.85)
0.02***
(4.36)
14.57***
(16.10)
0.12***
(4.22)
1.90***
(36.33)
Macroeconomic conations in host country

Growth rate of GDP
0.04***
(9.86)
Real interest rate
0.09***
(50.85)
Ination rate
0.01***
(47.32)
0.05***
(11.34)
0.10***
(51.74)
0.01***
(52.34)
0.07***
(17.46)
0.07***
(40.12)
0.01***
(50.28)
0.07***
(17.48)
0.07***
(39.61)
0.01***
(51.41)
0.02***
(5.64)
0.06***
(40.02)
0.01***
(27.61)
0.01**
(2.35)
0.07***
(45.97)
0.01***
(28.42)
0.00
(0.61)
0.05***
(37.83)
0.01***
(32.27)
0.00
(0.54)
0.05***
(37.35)
0.01***
(32.72)
0.39***
(6.23)
0.00
(0.08)
0.05***
(12.15)
0.06
(1.05)
0.06***
(3.04)
0.04***
(15.51)
0.19***
(3.12)
0.05**
(2.57)
0.05***
(16.34)
0.09
(1.48)
0.04**
(2.14)
0.04***
(15.64)
Observations
Number of banks
Log-likelihood
Wald v2
38,761
3847
72,003
12,789***
47,864
4731
97,297
15,362***
47,865
4731
97,248
15,464***
47,063
4671
84,575
40,559***
38,791
3851
67,186
30,170***
47,894
4735
89,749
38,000***
47,895
4735
89,750
38,000***
47,036
4671
221,124
1741***
47,865
4735
225,999
2126
47,865
4735
226,122
1879
47,866
4735
226,105
1,922
Log (bank size)

Market shares
Credit risk
Interest payments
Liquidity ratio
Opportunity cost
Capital strength
3.71***
(13.43)
0.35***
(15.19)
2.79***
(5.26)
1.01*
(1.78)
0.21***
(45.98)
0.00***
(8.06)
9.18***
(30.13)
0.00***
(8.27)
6.56***
(102.90)
0.02***
(14.14)
0.11***
(33.55)
0.39*
(1.95)
47,033
4667
89,285
17,300 ***
Numbers in parenthesis are t-values.

*
Statistical signicant at level of 10%.
**
***
0.76***
(3.78)
HHI (assets)
Bank nancial characteristics

Operation cost
826
Table 3
The impacts of banking market structure on bank protability: alternative measures of banking competition.
Table 4
The effects of parent banks protability on foreign banks performance: protability level.

Net interest margins (NIMs)
Intercept
(2)
(3)
(4)
(5)
(6)
(7)
(8)
(9)
(10)
(11)
(12)
12.22***
(135.53)
0.54***
(8.58)
13.22***
(130.96)
0.66***
(9.86)
13.10***
(129.23)
0.58***
(8.78)
14.16***
(127.42)
0.47***
(7.07)
8.01***
(100.00)
0.31***
(6.91)
7.08***
(78.05)
0.36***
(6.28)
8.26***
(97.21)
0.32***
(6.96)
9.24***
(98.72)
0.23***
(5.07)
47.40***
(37.45)
1.61***
(3.55)
47.00***
(37.48)
1.98***
(4.38)
48.31***
(38.01)
2.02***
(4.36)
51.42***
(36.55)
1.79***
(3.84)

PR H statistics
0.01***
(3.56)
Lerner index
0.02***
(11.87)
0.21***
(4.02)
0.36***
(9.25)
0.01*
(1.85)
1.55***
(10.06)
HHI (assets)
11.34***
(12.61)
1.55***
(11.73)
4.24**
(2.16)
0.05***
(19.00)
0.14***
(4.23)
2.40***
(132.01)
2.63***
(128.17)
2.64***
(128.74)
2.58***
(124.88)
1.54***
(90.29)
1.43***
(74.16)
1.62***
(89.43)
1.56***
(85.66)
11.45***
(37.66)
11.28***
(37.79)
11.49***
(38.30)
11.30***
(37.34)
6.79***
(32.88)
5.41***
(128.36)
1.26***
(3.17)
0.27
(0.62)
0.27***
(74.36)
0.00***
(6.89)
8.54***
(37.33)
0.00***
(2.84)
1.69***
(27.68)
0.02***
(12.01)
0.15***
(53.09)
7.52***
(31.02)
5.95***
(124.96)
1.75***
(4.67)
0.20
(0.43)
0.27***
(68.89)
0.01***
(11.02)
8.94***
(35.48)
0.00***
(2.94)
1.43***
(20.93)
0.01***
(8.02)
0.16***
(50.84)
7.51***
(30.99)
5.97***
(125.55)
2.03***
(5.26)
0.05
(0.10)
0.27***
(68.87)
0.01***
(11.03)
8.85***
(35.17)
0.00***
(2.59)
1.47***
(21.78)
0.01***
(7.88)
0.16***
(50.89)
7.27***
(30.00)
5.75***
(118.08)
0.26
(0.66)
0.06
(0.13)
0.27***
(67.92)
0.00***
(8.38)
8.48***
(33.66)
0.00***
(3.41)
1.73***
(25.12)
0.01***
(7.99)
0.15***
(49.62)
2.47***
(12.18)
3.51***
(89.12)
1.27***
(3.76)
0.71**
(2.26)
0.59***
(169.80)
0.00***
(3.33)
0.13
(0.61)
0.00***
(11.80)
0.99***
(17.05)
0.01***
(8.41)
0.65***
(239.22)
1.92***
(9.97)
3.19***
(72.33)
0.92*
(1.83)
0.92**
(2.40)
0.54***
(144.35)
0.00***
(3.46)
0.12
(0.42)
0.00***
(13.94)
0.81***
(12.96)
0.01***
(7.74)
0.59***
(192.00)
3.00***
(13.41)
3.68***
(88.50)
1.76***
(5.63)
0.52
(1.61)
0.58***
(159.61)
0.00***
(5.44)
0.16
(0.74)
0.00***
(11.39)
1.16***
(19.08)
0.01***
(7.72)
0.64***
(226.68)
2.78***
(12.41)
3.49***
(82.19)
0.30
(0.92)
0.56*
(1.74)
0.58***
(160.92)
0.00**
(2.38)
0.22
(0.99)
0.00***
(12.24)
1.40***
(22.56)
0.01***
(7.87)
0.64***
(228.16)
18.69***
(4.32)
25.16***
(36.28)
14.11***
(3.37)
2.53
(0.76)
2.61***
(37.51)
0.00
(0.13)
6.33*
(1.71)
0.02***
(5.46)
6.39***
(6.08)
0.02
(0.72)
2.78***
(52.76)
22.58***
(5.16)
24.88***
(36.57)
28.95***
(7.55)
1.37
(0.40)
2.45***
(36.49)
0.01
(1.44)
12.20***
(3.40)
0.02***
(5.83)
5.36***
(5.21)
0.02
(0.76)
2.66***
(52.07)
22.38***
(5.11)
25.24***
(36.92)
28.05***
(7.02)
0.82
(0.24)
2.49***
(36.98)
0.00
(0.06)
11.66***
(3.23)
0.02***
(5.81)
3.83***
(3.69)
0.02
(0.74)
2.71***
(52.95)
21.48***
(4.90)
24.67***
(35.45)
21.72***
(5.10)
0.98
(0.28)
2.52***
(37.16)
0.01
(0.91)
9.86***
(2.70)
0.02***
(5.66)
2.92***
(2.74)
0.03
(0.77)
2.73***
(53.02)

Growth rate of GDP
0.05***
(17.38)
Real interest rate
0.04***
(30.09)
Ination rate
0.01***
(53.33)
0.08***
(24.66)
0.03***
(19.82)
0.01***
(51.57)
0.08***
(24.12)
0.03***
(20.22)
0.01***
(51.99)
0.09***
(26.66)
0.03***
(19.19)
0.01***
(51.23)
0.00
(0.84)
0.02***
(18.67)
0.00***
(24.85)
0.01***
(3.10)
0.03***
(22.69)
0.00***
(24.66)
0.02***
(5.19)
0.02***
(18.37)
0.00***
(28.08)
0.02***
(8.29)
0.02***
(17.32)
0.00***
(27.10)
0.39***
(6.88)
0.01
(0.64)
0.04***
(11.00)
0.12**
(2.18)
0.04*
(1.95)
0.04***
(14.82)
0.21***
(3.88)
0.03*
(1.73)
0.04***
(15.43)
0.16***
(2.85)
0.03
(1.55)
0.04***
(15.08)
Observations
Number of banks
Log-likelihood function
Wald v2
47,424
4726
83,349
32,779***
47,424
4726
83,306
32,870***
47,425
4726
83,197
33,091***
46,631
4664
72,306
40,395***
38,512
3845
56,839
28,160***
47,440
4728
78,457
38,218***
47,441
4728
78,348
38,438***
46,609
4664
213,175
3886***
47,416
4728
217,912
4238***
47,416
4728
217,989
4085***
47,417
4728
217,987
4098***

Operation cost
Log (bank size)
Market shares
Credit risk
Interest payments
Liquidity Ratio
Opportunity cost
Capital strength
Off Balance sheet activity
46,615
4662
74,308
35,667***
827

*
**
***
0.05***
(18.05)
CR4 (assets)
Parent banks performance
Protability level
(1)
828
Table 5
The effects of parent banks protability on foreign banks performance: protability ranking.
Net interest margins (NIMs)
(1)
(2)
***
Intercept
6.34
(57.79)
***
0.70
(7.73)

PR H statistics
0.01***
(4.92)
Lerner index

(3)
***
5.41
(43.98)
***
0.74
(6.63)
(4)
***
6.74
(54.27)
***
0.71
(7.48)
(5)
***
9.44
(72.92)
***
0.38
(4.22)
(6)
***
4.56
(52.49)
***
0.24
(4.11)

(7)
***
3.56
(36.44)
***
0.28
(3.72)
(8)
***
4.64
(48.63)
***
0.26
(4.38)
0.02***
(10.56)
0.05***
(9.10)
HHI (assets)
0.06***
(11.23)
***
***
***
0.11
(33.00)
***
***
***
***
0.38
(5.15)
**
***
**
***
0.30
(20.95)
0.32
(20.41)
0.28
(17.78)
0.44
(29.33)
0.05
(4.32)
0.09
(7.54)
0.05
(4.25)
0.19
(16.14)
0.22
(1.98)
0.01
(19.13)
0.26
(2.05)
2.55
(7.17)
3.96***
(14.53)
0.54***
(21.08)
***
4.50
(8.19)
***
1.62
(2.61)
***
0.20
(45.60)
0.00***
(4.08)
9.26***
(30.50)
0.00***
(9.36)
***
6.27
(96.70)
***
0.02
(13.51)
***
0.11
(32.41)
1.48***
(5.56)
0.42***
(15.17)
**
1.87
(2.29)
***
2.61
(3.57)
***
0.16
(33.08)
0.00***
(4.77)
7.90***
(20.13)
0.00***
(7.03)
***
5.79
(78.64)
***
0.01
(5.80)
***
0.12
(31.65)
3.11***
(10.08)
0.57***
(20.67)
***
4.25
(8.04)
**
1.57
(2.36)
***
0.20
(41.32)
0.00
(0.87)
9.25***
(28.40)
0.00***
(9.00)
***
6.27
(88.42)
***
0.01
(5.30)
***
0.14
(39.79)
2.78***
(9.15)
0.36***
(13.62)
**
1.15
(2.27)
**
1.53
(2.43)
***
0.19
(39.94)
0.00***
(4.37)
8.24***
(25.71)
0.00***
(11.41)
***
6.57
(93.89)
***
0.01
(4.80)
***
0.13
(36.99)
0.97***
(3.80)
0.22***
(11.90)
***
3.01
(6.84)
***
1.19
(2.96)
***
0.66
(159.99)
0.00***
(7.36)
1.40***
(5.16)
0.01***
(17.02)
***
4.34
(74.61)
***
0.02
(10.19)
***
0.70
(225.81)
0.49**
(2.03)
0.18***
(8.46)
***
1.87
(2.85)
***
1.65
(3.32)
***
0.64
(151.00)
0.00***
(7.33)
0.76**
(2.20)
0.01***
(17.22)
***
3.75
(57.88)
***
0.01
(8.16)
***
0.67
(193.58)
1.08***
(3.98)
0.24***
(12.40)
***
3.00
(7.37)
***
1.13
(2.68)
***
0.65
(155.77)
0.00***
(5.45)
1.34***
(4.88)
0.01***
(16.67)
***
4.46
(74.45)
***
0.01
(8.23)
***
0.68
(216.65)
0.87***
(3.25)
0.15***
(8.06)
**
0.83
(2.04)
***
1.21
(2.91)
***
0.66
(159.72)
0.00***
(8.06)
0.48*
(1.76)
0.01***
(18.66)
***
4.64
(78.13)
***
0.01
(7.80)
***
0.69
(221.73)
1.06
(0.22)
0.21
(1.11)
***
35.78
(7.30)
4.66
(1.23)
***
1.50
(20.63)
0.06***
(8.10)
21.09***
(5.14)
0.02***
(4.18)
***
12.12
(13.37)
***
0.16
(5.76)
***
1.89
(35.23)
2.09
(0.44)
0.22
(1.24)
***
54.69
(12.52)
4.85
(1.25)
***
1.41
(20.35)
0.02***
(2.84)
28.14***
(7.09)
0.01***
(2.95)
***
9.84
(11.07)
***
0.12
(4.51)
***
1.67
(32.26)
3.98
(0.82)
0.18
(0.93)
***
40.47
(8.57)
2.72
(0.69)
***
1.57
(22.40)
0.06***
(7.50)
28.16***
(7.01)
0.02***
(4.44)
***
13.40
(14.84)
***
0.12
(4.21)
***
1.83
(35.23)
3.45
(0.37)
3.42***
(6.41)
***
54.92
(7.18)
2.97
(0.55)
***
1.21
(9.35)
0.11***
(6.98)
24.74***
(3.45)
0.03***
(3.40)
***
12.98
(7.08)
0.04
(0.69)
***
1.42
(15.04)

Growth rate of GDP
0.04***
(9.63)
Real interest rate
0.08***
(49.14)
***
Ination rate
0.01
(47.89)
0.06***
(11.90)
0.10***
(50.91)
***
0.01
(53.00)
0.07***
(16.93)
0.07***
(39.20)
***
0.01
(50.61)
0.09***
(21.66)
0.06***
(35.87)
***
0.01
(49.30)
0.02***
(5.84)
0.06***
(39.60)
***
0.01
(27.67)
0.01**
(2.32)
0.07***
(45.54)
***
0.01
(28.53)
0.00
(0.91)
0.05***
(37.60)
***
0.01
(32.32)
0.01***
(3.35)
0.05***
(34.41)
***
0.00
(30.71)
0.42***
(6.47)
0.00
(0.00)
***
0.05
(12.22)
0.18***
(2.85)
0.04**
(2.03)
***
0.04
(15.85)
0.22***
(3.45)
0.06***
(2.70)
***
0.04
(16.07)
0.07
(0.61)
0.10**
(2.35)
***
0.04
(9.14)
Observations
Number of banks
Wald v2
38,761
3847
71,786
13,224
47,864
4731
97,131
15,694
47,865
4731
96,331
17,298
47,049
4669
84,545
40,569
38,777
3849
67,137
30,221
47,880
4733
89,719
38,009
47,881
4733
89,207
39,036
47,022
4669
221,063
1744
47,865
4735
225,813
2497
47,852
4733
226,064
1885
16,699
1990
85,559
592

Operation cost
Log (bank size)
Market shares
Credit risk
Interest payments
Liquidity ratio
Opportunity cost
Capital strength
Numbers in parenthesis
*
Statistical signicant
**
***
47,033
4667
89,050
17,770
are t-values.
at level of 10%.
at level of 5%.
at level of 1%.
***
***
23.44
(9.18)
**
2.54
(2.40)
11.64***
(3.47)
1.22
(7.07)
0.16
(41.27)
***
(12)
***
12.60
(10.95)
***
1.70
(3.23)
15.27***
(15.28)
***
CR4 (assets)
(11)
***
9.25
(9.08)
***
2.97
(5.77)
***
1.54
(7.43)
***
(10)
***
12.18
(11.35)
**
1.33
(2.57)
0.35***
(7.91)
***
Parent banks performance

Protability ranking
(9)
***
6.50
(64.39)
*
0.10
(1.72)
Table 6
The impacts of home-country characteristics on foreign bank protability.
Macroeconomic environment
Country risk
GDP
Real interest rate
Ination rate level
Legal risk
Economic risk
Control variables
0.90*
(1.92)
2.73***
(45.86)
0.35*
(1.85)
Yes
0.56***
(7.76)
2.86***
(142.27)
0.01
(0.67)
Yes
0.64***
(8.90)
2.74***
(132.25)
0.00
(0.95)
Yes
0.56***
(8.27)
2.85***
(141.63)
0.00
(1.45)
Yes
4.75**
(2.07)
2.54***
(23.04)
2.50**
(2.29)
Yes
6.91**
(2.52)
2.54***
(23.03)
4.05**
(2.33)
Yes
Observations
Number of banks
Wald v2
6496
606
13,815
4058
50,416
4741
91,378
30,948
47,068
4696
83,848
28,369
50,255
4733
91,072
30,679
1995
313
4,489
1597
1995
313
4,489
1597
Control of corruption
Regulatory quality
Government effectiveness
Bank capital
Ownership restrictiveness
Basel risk weights
Control variables
0.58***
(7.11)
2.80***
(116.67)
0.04
(0.63)
Yes
0.47***
(4.84)
2.80***
(116.71)
0.13**
(1.98)
Yes
0.48***
(4.39)
2.80***
(116.71)
0.09
(1.47)
Yes
0.91***
(10.37)
2.72***
(96.47)
0.39***
(4.96)
Yes
0.58***
(6.95)
2.72***
(96.43)
0.10*
(1.81)
Yes
0.51***
(4.21)
2.72***
(96.39)
0.15
(1.55)
Yes
Observations
Number of banks
Wald v2
37,028
4753
66,805
21,229
37,028
4753
66,803
21,232
37,028
4753
66,804
21,231
27,943
4622
51,426
16,724
27,943
4622
51,436
16,703
27,943
4622
51,437
16,702
Foreign bank ownership (FBO)

Parent banks protability ranking
FBO home-country characteristics
Governance

Bank supervision
Bank supervision
Securities activities
Certied auditor
Auditors report
Consolidated accounts
Solvency intervention
Onsite inspections
Control variables
0.67***
(8.80)
2.72***
(96.38)
0.02
(0.34)
Yes
0.52***
(4.75)
2.72***
(96.39)
0.12*
(1.78)
Yes
0.54**
(2.50)
2.72***
(96.40)
0.12
(0.58)
Yes
0.66***
(7.90)
2.77***
(97.10)
0.03
(0.40)
Yes
0.65***
(8.05)
2.72***
(96.31)
0.02
(0.29)
Yes
0.74***
(10.00)
2.71***
(96.28)
0.02***
(4.39)
Yes
Observations
Number of banks
Wald v2
27,943
4622
51,438
16,699
27,943
4622
51,436
16,702
27,943
4622
51,438
16,700
27,795
4622
51,118
16,778
27,908
4622
51,338
16,708
27,914
4622
51,367
16,686

Developing country

PR H-statistics
Lerner index
HHI (assets)
CR4 (assets)
0.5436***
(8.57)
2.3968***
(132.12)
0.004**
0.61***
(8.90)
2.63***
(128.18)
0.53***
0.38***
(4.03)
2.86***
(142.07)
1.09***
1.22***
(7.98)
2.63***
(128.13)
0.03***
(continued on next page)
829
Dependent variable is net interest margin (NIM). Numbers in parenthesis are t-values.
Control variables for empirical estimation include intercept, operation cost, bank size, market share, credit risk, interest payments, liquidity, opportunity cost, capital strength, non-interest revenues, off-balance sheet, and other
operating income.
*
**
***
47,425
4726
83,350
32,787
50,839
4778
92,513
31,203
47,424
4726
83,346
32,785
46,615
4662
74,312
35,659
Observations
Number of banks
Wald v2
Control variables
(2.09)
Yes
HHI (assets)
Lerner index
(4.66)
Yes
PR H-statistics

Table 6 (continued)
(3.03)
Yes
CR4 (assets)
(4.06)
Yes
830
to earn lower prots, while smaller banks tend to earn higher profits. In other words, smaller banks experience economies of scale
and scope, while larger banks experience diseconomies of scale
and scope. These ndings are consistent with studies conducted
by Kosmidou et al. (2007) and Pasiouras and Kosmidou (2007).
Another nding in our study is that non-interest revenues are
signicantly negative. This means that operation income from
non-interest operating will decrease income, and other operation
activities will decrease, too. Banks with higher protability are
positively and signicantly associated with the ratio of market
share. More importantly, based on the results of the NIM and
ROA models, the relationship between bank protability and capital ratio is signicantly positive. However, in the ROE model the
relationship between bank protability and capital ratio is both
negative and signicant.
In Eq. (10), we analyze parent bank performance in home country in order to determine whether foreign banks are more protable than domestic banks. Table 4 presents the results of using
the protability level of parent bank in home country. In columns
(1)(4), the dependent variable is NIM. The coefcient on the profitability level of parent bank is 2.40, which is at a signicant level
of 1% when using PR H statistics. This implies that when a parent
bank has high levels of protability at home, its foreign iterations
will, on average, perform better than domestic banks in the host
country. Alternative measures such as the Lerner index, HHI, and
CR4 are signicant, which is similar to the ndings in Table 3.
When using ROA and ROE as dependent variables, the coefcients
of protability level of parent bank maintain an economic signicance at the 1% level.
However, protability level of parent bank in home country
does not reect the relative performance of their counterparts in
the home country. Hence, we apply another comparative indicator
as protability ranking in home country. To do so, we dene the
parent banks protability ranking as: the higher the protability
in comparison to its counterpart in its home country, the higher
the ranking for parent banks. Table 5 presents the results of our
regression using protability ranking for parent banks in home
country to explain their comparative performance. Parent banks
with higher protability rankings at home tend to experience higher protability rankings in their foreign banks than do domestic
banks in the host country. There was almost no change in our estimates when we used alternative measures of banking market
structure. Virtually all coefcients remain signicant at the 1%
and 5% level; however, the estimates are much smaller than those
in Table 4.
5.2. Home-country impacts of macroeconomic condition, governance,
and supervision on bank protability
After controlling for bank nancial characteristics and focusing
on the results from NIM as a dependent variable, we next examine
whether home-country banking market structure, macroeconomic
conditions, governance and supervision of foreign banks have any
spillover effects on NIM in the host country. To do so, we use interaction terms for a foreign banks ownership with home-country
characteristics, including: developing country, macroeconomic
conditions, country risk, governance, and bank supervision.
Table 6 presents the results of several robustness specications.
Because some country indexes are highly correlated with each
other, we include the indexes individually in the models. Each column of each panel reports coefcients from a single regression in
which the dependent variable is NIM. The control variables are
the same as in Table 3; however, to conserve space we only report
select coefcients. The empirical results are consistent with our
previous ndings. All major explanatory and control variables
maintain their sign and signicance as before. Overall, we conrm
Table 7
The Impacts of Host-Country Characteristics on Foreign Bank protability.
Country risk
GDP
Real interest rate
Ination rate level
Legal risk
Economic risk
Control variables
0.47***
(5.58)
2.85***
(141.67)
0.31**
(2.36)
Yes
0.94***
(13.26)
2.85***
(141.56)
0.11***
(16.97)
Yes
0.77***
(11.17)
2.82***
(134.41)
0.02***
(10.13)
Yes
0.55***
(8.00)
2.84***
(141.49)
0.01***
(26.93)
Yes
0.42***
(2.98)
2.40***
(99.28)
0.04
(0.55)
Yes
1.26***
(4.35)
2.39***
(99.01)
0.99***
(3.82)
Yes
Observations
Number of banks
Wald v2
50,841
4778
92,521
31,194
50,712
4766
92,181
31,436
47,509
4728
85,493
29,267
50,611
4764
91,696
31,550
27,539
4565
45,233
17,087
27,539
4565
45,212
17,130
Regulatory quality
Government effectiveness
Bank capital
Ownership restrictiveness
Basel risk weights
Control variables
0.86***
(11.01)
2.79***
(115.92)
0.42***
(7.24)
Yes
1.09***
(11.74)
2.79***
(116.10)
0.49***
(7.89)
Yes
1.29***
(13.00)
2.78***
(115.73)
0.57***
(9.73)
Yes
0.55***
(2.84)
2.62***
(93.80)
0.07
(0.38)
Yes
0.65***
(7.48)
2.62***
(93.76)
0.03
(0.66)
Yes
2.97***
(6.49)
2.62***
(93.79)
3.61***
(7.93)
Yes
Observations
Number of banks
Wald v2
37,029
4753
66,781
21,280
37,029
4753
66,776
21,289
37,029
4753
66,760
21,322
27,914
4616
50,709
15,835
27,914
4616
50,709
15,836
27,914
4616
50,678
15,898

FBO host-country characteristics
Governance

Bank supervision
Bank Supervision
Certied auditor
Auditors report
Onsite inspections
Control variables
0.66***
(8.40)
2.62***
(93.72)
0.07
(1.49)
Yes
0.78***
(4.93)
2.62***
(93.76)
0.16
(1.15)
Yes
0.59***
(4.27)
2.62***
(93.80)
0.03
(0.24)
Yes
0.41***
(3.07)
2.67***
(94.36)
0.23*
(1.88)
Yes
0.59***
(7.55)
2.62***
(93.57)
0.07
(0.90)
Yes
0.70***
(7.00)
2.61***
(93.60)
0.06
(1.25)
Yes
Observations
Number of banks
Wald v2
27,914
4616
50,708
15,838
27,914
4616
50,708
15,837
27,914
4616
50,709
15,835
27,754
4616
50,375
15,870
27,867
4616
50,590
15,802
27,879
4616
50,634
15,792

Developing country

PR H-statistics
Lerner index
HHI (assets)
CR4 (assets)
0.54***
(8.57)
2.40***
(132.12)
0.00**
0.61***
(8.90)
2.63***
(128.18)
0.53***
0.38***
(4.03)
2.86***
(142.07)
1.09***
1.22***
(7.98)
2.63***
(128.13)
0.03***
831
Observations
Number of banks
Wald v2
Dependent variable is net interest margin (NIM). Numbers in parenthesis are t-values.
Control variables for empirical estimation include intercept, operation cost, bank size, market share, credit risk, interest payments, liquidity, opportunity cost, capital strength, non-interest revenues, off-balance sheet, and other
operating income.
*
**
***
47,424
4726
83,346
32,785
47,425
4726
83,350
32,787
50,839
4778
92,513
31,203
(4.66)
Yes
46,615
4662
74,312
35,659
HHI (assets)
(3.03)
Yes
Lerner index
PR H-statistics
(2.09)
Yes
Control variables
Table 7 (continued)
CR4 (assets)
(4.06)
Yes
832
that foreign banks tend to be more protable than domestic banks

and that foreign bank whose parent bank has high levels of protability tend to perform well in the host country.
Our results show that foreign banks from developing economies
tend to have lower NIM in the host country. This indicates that
such banks do not compete well with domestic banks in regard
to loan interest rate. In regard to macroeconomic factors, we nd
no evidence that the growth rate of GDP, real interest rate, or ination rate level experienced in the banks home country have any
signicant spillover effects on its foreign banks NIM.
We also nd that legal and economic risks in the home country
do have economic and signicantly positive effects on their foreign
banks NIMs in the host country. This suggests that when a parent
banks legal and economic risks are high in its home country, it prefers to transfer its prots to its bank in other countries. When we
analyze the home-country effect of governance on foreign bank
protability, however, we nd a signicantly negative correlation
between NIM and regulatory quality within the home country for
foreign banks. No signicant effect exists regarding control of corruption and effectiveness of government.
When we look at the home-country effect of banking supervision on a foreign banks NIM, we nd that foreign banks whose
home country has strong restrictions regarding bank ownership
and requirements for licensed or certied auditors appear to have
a higher NIM than domestic banks. This suggests that the better
the quality of nancial regulation and supervision a home country
imposes on a foreign banks operations, the more likely the foreign
banks are to be more protable than domestic banks. Surprisingly,
we nd that the interaction terms among foreign ownership, bank
capital, and onsite inspections in a home country have a signicantly negative coefcient. This suggests that foreign banks whose
home country implements more restrictive control on a parent
banks capital and onsite examination is harmful to a foreign
banks NIM in the host country.
When we look at the home-country effects of banking competition on foreign bank protability, we nd that home-country bank
competition, proxied as PR H statistics, Lerner index, HHI (assets),
and CR4 (assets), has a signicant effect on a foreign banks NIM.
This means that foreign banks are more likely to use their NIM
when the banking market structure in their home country is
competitive.
5.3. The host-country effects of macroeconomic conditions,
governance, and supervision on bank protability
Similar to the specications in Table 6, we include the country
indicators individually in our empirical models because some indexes are highly associated with each other. Each column of each
panel reports coefcients from a single regression in which the
dependent variable is NIM. As shown in Table 7, we again nd that
foreign banks, on average, are more protable than domestic
banks. We also nd that foreign banks whose parent bank has high
protability rankings tend to perform better in the host country.
Table 7 shows the impact of host-country characteristics, such
as developing economy, macroeconomic environment, country
risk, governance, banking regulation, and bank supervision, on
bank NIM. Our results nd that foreign-owned banks operating
in developing host countries tend to be more protable than
domestic banks. Coefcients of both GDP and real interest rates
are signicantly negative, suggesting that foreign banks in a host
country with higher GDP and real interest rates tend to have less
NIM when compared to domestic banks. In addition, the regression
coefcient on ination rate is positive and signicant. As a result, a
host country with high ination levels would largely magnify foreign bank margins. When foreign banks operate in a host country
with high levels of economic risk, it tends to harm their NIM. This
833
Table 8
Joint effects of host- and home-country characteristics on foreign bank protability.
Dependent variables
Dependent variable: net interest margin (NIM)

PR H statistics
Lerner index

Parent bank protability ranking in home country
3.96***
1.80***
(4.33)
(23.34)
4.66***
1.72***
(4.65)
(20.77)
8.57***
2.03***
(8.60)
(24.73)
8.19***
2.01***
(7.70)
(24.34)
Home country characteristics

FBO foreign bank from developing country
FBO legal risk
FBO economic risk
0.12
3.96
4.36*
(0.43)
(1.51)
(1.71)
0.30
3.20
3.76
(1.06)
(1.16)
(1.40)
0.30
2.66
3.20
(1.20)
(1.06)
(1.30)
0.29
2.62
3.29
(1.16)
(1.03)
(1.33)
Governance
FBO regulatory quality
0.00
(0.04)
0.15
(1.09)
0.19
(1.55)
0.19
(1.49)
Bank supervision
FBO bank capital requirements
FBO bank ownership restrictiveness
FBO certied auditor
FBO onsite inspections
0.38*
0.07
0.11
0.01
(1.90)
(0.93)
(0.76)
(1.28)
0.41*
0.10
0.16
0.01
(1.83)
(1.13)
(1.00)
(0.73)
0.31
0.07
0.16
0.00
(1.41)
(0.88)
(1.01)
(0.11)
0.42**
0.08
0.17
0.01
(1.96)
(0.96)
(1.11)
(0.53)

FBO bank competition
1.94***
(3.20)
0.48***
(3.34)
6.37***
(14.45)
0.84***
(13.39)
Host country characteristics

FBO foreign bank operating in developing country
FBO GDP
FBO interest rate
FBO ination rate
FBO economic risk
0.47
0.06***
0.04***
0.09***
0.23*
(1.58)
(4.78)
(6.35)
(11.25)
(1.93)
0.41
0.03**
0.05***
0.12***
0.09
(1.35)
(2.29)
(7.98)
(47.73)
(0.71)
0.07
0.02*
0.04***
0.12***
0.17
(0.26)
(1.70)
(7.36)
(47.95)
(1.54)
0.05
0.02*
0.04***
0.12***
0.17
(0.18)
(1.76)
(7.44)
(47.82)
(1.48)
Governance
FBO political instability
FBO government effectiveness
0.18
0.03
0.15
(1.40)
(0.18)
(0.75)
0.03
0.06
0.15
(0.23)
(0.30)
(0.67)
0.17
0.12
0.17
(1.31)
(0.60)
(0.80)
0.14
0.07
0.16
(1.07)
(0.38)
(0.77)
Bank supervision
FBO basel risk weights
FBO consolidated accounts
4.18***
0.09
(6.06)
(0.56)
3.72***
0.30*
(4.69)
(1.69)
3.28***
0.25
(4.25)
(1.43)
3.32***
0.25
(4.27)
(1.44)

FBO bank competition
2.10***
(3.49)
3.67***
(3.39)
47.19***
(14.75)
0.11***
(13.84)
Observations
Number of banks
Wald v2
2197
499
3947
3871***
2380
524
4579
7160***
HHI (assets)
2379
524
4488
8280***
CR4 (assets)
2380
524
4502
8140***

We estimate the regression model specied as NIMijt = a0 + a1 FBOijt + a2 parent protibilityimt + a3 RFBOijt host country characteristicsijt + a4 RFBOijt home
country characteristicsijt + a5 Rcontrolijt+eijt. Control variables include some bank nancial characteristics such as operation cost, log (bank size), market shares, credit risk,
interest payments, liquidity ratio, opportunity cost, capital strength, non-interest revenues, off-balance sheet activity, and other operating income.
*
**
***
suggests a positive relationship between risk and return. However,

this risk factor causes the opposite nding: Foreign banks operating in countries with high levels of economic risk are less protable
than domestic banks.
When we focus on governance within the host country, we nd
some interesting results. Estimated coefcients on all governance
are negative and positive. This suggests that foreign-owned banks
operating in host countries with stricter controls over corruption,
regulatory quality, and government effectiveness tend to degenerate their margin. Nevertheless, foreign banks steadily demonstrate
better protability than domestic banks in all cases.
The results of bank supervision indicate that Basel risk weights
and consolidated accounts are signicantly and positively related
to foreign bank NIM. However, they provide less support for our
expectation that foreign banks in a host country with better bank
supervision will exhibit greater margins than domestic banks.
Again, we come back to the conclusion that foreign banks overall
are more protable than domestic ones and that the protability
of the parent strongly affects the performance of its foreign banks.
Specically, foreign banks operating in a host country with less
competition in the local banking industry tend to increase their

protability. Note again that this result is extremely robust in all
cases, regardless of which measure is used to gauge banking competition (i.e., PR H statistics, Lerner index, HHI, or CR4).
5.4. The joint effects of home- and host-country characteristics on
bank protability
To further assess the joint effects of home- and host-country
characteristics and bank protability with respect to macroeconomic condition, governance, and supervision, we estimate our
regression models using signicant coefcients in both home and
host country estimation, individually. Table 8 shows the results
of regression based on Eq. (11). Once again, the results conrm that
foreign banks are more protable, on average, than domestic banks
and that the protability of the parent strongly affects the performance of its foreign iterations.
When analyzing home-country macroeconomic characteristics
using PR H statistics as banking market structure, we nd that
the regression coefcient on economic risk is signicant but
834
Table 9
Joint effects of supervision changing in host- and home-country on foreign bank protability.
Dependent variables
Dependent variable: net interest margin (NIM)

PR H statistics
Lerner index

Parent bank protability ranking in home country
5.84***
0.66***
(12.23)
(7.90)
8.43***
1.02***
(15.54)
(10.78)
10.70***
1.26***
(17.00)
(12.78)
10.58***
1.24***
(15.11)
(12.62)
Home country characteristics

FBO foreign bank from developing country
FBO legal risk
FBO economic risk
0.10
2.75
2.38
(0.42)
(1.35)
(1.22)
0.29
4.49*
4.03
(1.05)
(1.76)
(1.64)
0.25
4.20*
3.82
(0.94)
(1.66)
(1.56)
0.24
4.21*
3.83
(0.92)
(1.66)
(1.56)
Governance
0.04
(0.39)
0.44***
(3.24)
0.48***
(3.55)
0.47***
(3.52)
Bank supervision
FBO D bank capital requirements
FBO D bank ownership restrictiveness
FBO D certied auditor
FBO D onsite inspections
0.62
0.49***
0.98*
0.03
(1.31)
(2.74)
(1.72)
(1.29)
0.22
0.62***
0.93
0.01
(0.36)
(2.74)
(1.27)
(0.34)
0.20
0.56**
0.88
0.01
(0.32)
(2.48)
(1.21)
(0.23)
0.21
0.56**
0.89
0.01
(0.34)
(2.46)
(1.22)
(0.23)
Degree of bank competition

FBO banking market structure
2.37***
(3.04)
0.62***
(2.78)
4.47***
(8.45)
0.62***
(8.20)
Host country characteristics

FBO foreign bank operating in developing country
FBO GDP
FBO interest rate
FBO ination rate
FBO economic risk
0.59**
0.00
0.05***
0.03***
0.27***
(2.17)
(0.14)
(7.90)
(4.35)
(6.69)
0.22
0.05***
0.00
0.00***
0.36***
(0.68)
(3.35)
(0.52)
(2.64)
(7.47)
0.08
0.05***
0.00
0.00**
0.35***
(0.26)
(3.53)
(0.22)
(2.08)
(7.42)
0.05
0.05***
0.00
0.00**
0.36***
(0.13)
(3.52)
(0.28)
(2.12)
(7.41)
Governance
FBO political instability
FBO government effectiveness
0.20
0.46***
0.64***
(1.51)
(3.29)
(4.03)
0.20
0.49***
0.87***
(1.29)
(2.93)
(4.57)
0.18
0.41**
0.85***
(1.19)
(2.42)
(4.49)
0.18
0.42**
0.84***
(1.19)
(2.49)
(4.44)
Bank supervision
FBO D basel risk weights
FBO D consolidated accounts
4.20***
0.40
(4.00)
(1.45)
4.56***
0.37
(3.40)
(1.09)
4.50***
0.37
(3.36)
(1.08)
4.49***
0.36
(3.34)
(1.07)
Degree of bank competition

FBO banking market structure
2.47***
(3.18)
5.47***
(3.23)
33.53***
(8.87)
0.08***
(8.46)
Observations
Number of banks
Wald v2
3718
556
7794
2469***
3956
581
9251
2313***
HHI (assets)
3956
581
9224
2525***
CR4 (assets)
3956
581
9227
2512***

We estimate the following regression model specied as NIMijt = b0 + b1 FBOijt + b2 parent protibilityimt + b3 RFBOijt D supervision (home country)jt + b4 RFBOijt D supervision (host country)jt + b5 RFBOijt host country characteristicsijt + b6 RFBOijt home country characteristicsjt + b7 Rcontrolijt + eijt. D
denotes the operator of bank supervision changing between last and current calendar year. Control variables include some bank nancial characteristics such as operation
cost, log (bank size), market shares, credit risk, interest payments, liquidity ratio, opportunity cost, capital strength, non-interest revenues, off-balance sheet activity, and
other operating income.
*
**
***
negative. This estimated coefcient is opposite to that of individual

estimation. Also noted that the result is not as robust as when we
use different measures of banking market structure. The possible
reason for this phenomenon lies in the potentially higher correlation between country risk and banking competition. When a parent bank is subject to stringent bank capital requirements, it may
harm the protability of its foreign bank in the host country. When
we use the remaining measures for estimation, we nd that the
coefcient on bank capital requirement is both signicant and negative. Clearly, the home-country impact of banking market structure on foreign bank protability is quantitatively signicant.
This suggests that banking competition in the home country is less
keen when foreign banks operate at higher levels of protability in
the host country.
When we consider the effects of host-country characteristics on
foreign bank protability, we nd that some parts of the estimated
result are different from the individual estimations discussed earlier. For example, we observe that foreign banks operating in host
countries that have higher real interest and ination rates display
notably higher margins. While a host developing country plays no

role in explaining foreign bank margins, the growth rate of GDP in
the host country seems to matter to foreign bank NIM. Indeed,
incorporating foreign banks in countries with lower growth rates
of GDP benets foreign bank margins. In addition, bank supervision
on Basel risk weight in the host country appears to have a largely
positive effect on foreign bank NIM.
Interestingly, when we use PR H statistics as the measure of
banking competition, the estimated coefcient on economic risk
is signicant and positive. These results, which are opposite from
the ones shown in Table 7, demonstrate the relationship between
risk and return. In other words, when foreign banks operate in a
host country with higher economic risks, they are more likely to increase their protability than domestic banks. Furthermore, when
foreign banks operate in a host country that implements compliance of consolidated accounts, they tend to be less protable than
domestic banks. Although this is statistically signicant only when
we use the Lerner index as a measure of banking market structure,
when we combine home and host country factors, the results show
835
Table A1
Empirical results from previous studies.
Explanatory variable
Default risk
Positive relation with
Negative relation with
No relation with
A
Angbazo (1997)
Athanasoglou et al. (2008)
Dietrich and Wanzenried (2009)A
Interest rate risk
Liquidity risk
Capital adequacy
Implicit interest payments

Opportunity cost of non-interest bearing
reserves
Opportunity cost of reserves
Management quality
Differences in barriers to statewide
branching
Productivity growth
Operating expenses management
Size
Claeys and Vennet (2008)

Maudos and Fernndez de Guevara (2004)N
Claessens et al. (2001)N
Claeys and Vennet (2008)N
Pasiouras and Kosmidou (2007)A
Angbazo (1997)N
Athanasoglou et al. (2008)A, Claeys and
Vennet (2008)N
Saunders and Schumacher (2000)N
Angbazo (1997)N
Angbazo (1997)N
Angbazo (1997)N
Williams (2003)A
Angbazo (1997)N

Angbazo (1997)N
Maudos and Fernndez de Guevara

(2004)N
(2004)N
Angbazo (1997)N
Athanasoglou et al. (2008)A

Bonin et al. (2005)A

Kosmidou et al. (2007)A
Size2
Ownership
Concentration
Cyclical output
Foreign strategic
Government-owned
International participation
Foreign bank share
Ination expectations
Overhead/ta
Per capital income
Market share
X-efciency
S-efciency
Dem. and sav. deposits
GDP growth

Athanasoglou et al. (2008)A,

Williams (2003)A
Williams (1998b)A
Williams (1998b)A
Stock market capitalization/total assets

Time
Cost


Williams (2003)A
Williams (1998b)A
Williams (2003)A

Williams
Williams
Williams
Williams
Williams
Home GDP
Home NIM
Licence
Home GDP growth
Asset growth
Yearly growth of deposits
Williams (2003)A
(2004)N

Exports
GDP growth rates difference
Parents banks ROA
Parents banks SIZE
Experience in the host nation
C5
Loan loss provisions
Lerner index
Capital ow

Williams (1998b)A
Williams (2003)A
(1998b)A
(2003)A
(1998b)A
(1998b)A
(2003)A
Williams (2003)A
Williams (2003)A
836
Table A1 (continued)
Explanatory variable
Positive relation with
Negative relation with
No relation with
Default risk
Angbazo (1997)N
Diff.btw bank and market growth of total

loans
Large bank: total assets > 10 bio. USD
Small bank: total assets < 500 mio. USD
Interest income share
Non-interest income

Williams (2003)A
Note: Dependent variable used for analysis denotes N = NIM, A = ROA.
Table B1
Empirical studies using PanzarRosse model.
Authors (published year)
Period
Countries
Empirical ndings
Shaffer (1982)
Nathan and Neave (1989)
Lloyd-Williams et al. (1991)
Molyneux et al. (1994)
1979
19821984
19861988
19861989
Monopolistic competition
1982: perfect competition; 19831984: monopolistic competition
Monopoly
Monopoly: Italy; monopolistic competition: France, Germany, Spain, and UK
Shaffer and DiSalvo (1994)

Vesala (1995)
Molyneux et al. (1996)
Coccorese (1998)
Niimi (1998)
Rime (1999)
Hondroyiannis et al. (1999)
Bikker and Groeneveld (2000)
De Bandt and Davis (2000)
19701986
19851992
19861988
19881996
19891991,
19941996
19871994
19931995
19891996
19921996
New York (USA)

Canada
Japan
France, Germany, Italy, Spain,
and UK
Pennsylvania (USA)
Finland
Japan
Italy
Japan
Bikker and Haaf (2002)

Murjan and Ruza (2002)
19881998
19931997
23 OECD countries
Arab Middle East countries
Gelos and Roldos (2002)
19942000
Hempell (2002)
Coccorese (2004)
Claessens and Laeven (2004)
19931998
19971999
19942001
European and Latin American

countries (eight countries)
Germany
Italy
50 countries
Mamatzakis et al. (2005)

Tsutsui and Kamesaka (2005)
Yuan (2006)
Al-Muharrami et al. (2006)
19982002
19832002
19962000
19932002
Matthews et al. (2007)

Yildirim and Philippatos (2007)
Park (2009)
19802004
19932000
19922004
Bikker et al. (2006)

Turk-Ariss (2009)
19952004
20002006
Switzerland
Greece
15 EU countries
France, Germany, and Italy
South Eastern Europe

Japan
China
Arab Gulf Cooperation Councils
(GCC) banking industry
British
Latin American
Korean
76 countries
12 Middle East and North Africa
(MENA) region countries
Duopoly but high degree of competitiveness

Monopolistic competition for all but two years
Monopoly
19891991: monopoly; 19941996: monopolistic competition
Large banks: monopolistic competition in all countries; small banks:
monopolistic competition in Italy, monopoly in France, Germany
Monopolistic competition. Oil-producing countries are less competitive than
non-oil countries
Argentina and Hungary are near perfect competition. Others are monopolistic
competition
The competition of Brazil, Greece, and Mexico are high, but the degree of USA,
Japan, Norway and Turkey are lower
19831988, 19972002 is monopoly equilibrium
Perfect competition
Kuwait, Saudi Arabia and the UAE operate under perfect competition; Bahrain
and Qatar operate under conditions of monopolistic competition
Pre-crisis period and the post-crisis period: monopolistically competitive; crisis
period: perfect competition
80% are in monopoly equilibrium
Perfect competition: Bahrain and Turkey
Monopoly: North Africa countries
Monopolistic competition: the other countries
the opposite effect on foreign bank margins. Overall, the host country effect of banking market structure plays an important role in
explaining why foreign banks are more protable than domestic
banks when competition in a host country is weaker. This result
is extremely robust when we use alternative measures of banking
market structure.
As can be seen from Table 9, we nd that changes in the gaps of

bank ownership restrictiveness in home country, certied auditor
(only signicant when using PR H statistics as a measure of banking market structure), and Basel risk weights in host country for
foreign banks are positively associated with increases in foreign
bank NIM. Both home- and host-country impacts of banking market structure yield alternatively similar results.
5.5. The joint home- and host-country effects of change in bank

supervision on bank protability
6. Conclusions
We also examine the joint home- and host-country effects of
supervisory changes on foreign bank protability. The sample contains at least two consecutive observations. Note that a change in a
positive direction indicates a move towards greater restrictiveness.
The empirical results are presented in Table 9.
Identifying key factors inuencing bank protability plays a key

role in improving the internal management of banks and in setting
bank policies. Previous literature on global banking has paid little
attention to the joint home- and host-country inuences of
Table C1
Variables denition and expected sign.
Description
Notation
Dependent variables
Net interest margin
Return on assets
Return on equity
(Net interest revenue)/total assets

(Net prots before taxes)/total assets
(Net prots before taxes)/total equities
NIM
ROA
ROE
Dummy variable equals to one for foreign banks and 0 for domestic banks
Calculated as equity/liability
The natural logarithm of the accounting value of the total assets
COST is total operation expenses provides information on the efciency of the management
A measure of liquidity, calculated as loans divided by customers and short-term funding
This variable is proxied by the ratio of liquid reserves/total assets
Ratio of operating expenses minus non-interest income to total assets reect extra payments to depositors through service charge remission or other types of transfers due
to competition in the market for deposits
The credit risk is calculated as loan-loss provisions to loans ratio
This variable is proxied by non-interest revenues/total revenue
This variable is calculated as off-balance sheet/total assets
It is a ratio of its assets relative to the total assets of the banking market
Other operating income/total assets
FB
EL
SIZE
COST
LI
OPC
IP
+
+
+
+
+
CR
NOI
OBS
MS
OOI
+
+
Estimates competitive behavior of banks on the basis of the comparative static properties of reduced-form revenue equations
A country-level indicator of bank competition, measured by the Lerner index, which is calculated as the average bank-level measure of the mark-up of price over marginal
costs, with higher values indicating less competition in the banking sector
The Herndhal index measures market concentration and equals the sum of the squares of each banks market share in total industry assets
The CR4 concentration measure calculated by dividing the assets of the ve largest banks with the assets of all banks operating in the market
PR H
LER
HHIA
CR4A
+
+
GDP growth
Growth in nation GDP
Ination rate
Current period ination rate (consumer prices)
Real interest rate
Real interest rate
Developing countries
Dummy variable equals to 1 if a bank locates in developing country
GDP
INF
IR
DC
Country risk
Legal risk
Economic risk
It is the risk rating of legal risk

It is the risk rating of economic risk
LR
ER
Dened as the quality of public services
GE
Dened as the ability of the government to formulate and implement sound policies and regulations that permit and promote private sector development
Dened as the extent to which public power is exercised for private gain, including both petty and grand forms of corruption
RQ
CO
+
+
Dummy variable that equals to 1 if related parties can own capital in a bank
CAP
Dummy variable that equals to 1 if regulatory restrictiveness of ownership by one nancial rms of banks
OWN
Dummy variable that equals to1 if it is risk-weighted in line with Basle guidelines
What are the conditions under which banks can engage in securities activities?
Dummy variable that equals to 1 if auditors licensed or certied
BASEL
SEC
AUDLIC
+
+
Dummy variable that equals to 1 if auditors report given to supervisory agency

Dummy variable that equals to 1 if consolidated accounts covering bank and any one-bank nancial subsidiaries required
Dummy variable that equals to 1 if the law establish pre-determined levels of solvency deterioration which forces automatic actions such as intervention
Frequency of onsite inspections conducted in large & medium size banks
AUDREP
CACCS
SOLACT
ONINS
+
+
+
+
Bank-specic
Foreign banks
Capital strength
Bank size
Operation cost
Liquidity
Opportunity cost
Interest payments
Credit risk
Off balance sheet
Market share
Other operating inc.
Industry-specic
PR H statistics
Lerner index
HHI assets
CR4 assets
Governance
Government
effectiveness
Regulatory quality
Bank supervision
Bank capital
requirement
Bank ownership
restrictiveness
Basel risk weights
Licensed/certied
auditor
Auditors report
Onsite inspections
Expected
sign.
Variables
837
838
banking market structure, macroeconomic conditions, governance,

and bank supervision on foreign bank protability. This paper contributes to this topic in three ways. First, it investigates the longterm relationship between bank protability and banking market
structure proxied by structural measures (PR H statistics and
Lerner index) and static measures (HHI and CR) in the context of
70 countries over the period 19922006. Our ndings indicate that
foreign banks are more protable than domestic banks when foreign banks operate in a host country with less banking competitiveness and when the parent bank is highly protable in the
home country. When the parent bank in the home country experiences high economic risks, restrictive capital requirements, and
less competitive banking market structures, however, its foreign
banks in a host country are likely to experience a signicant decrease in net interest margin while compared with domestic banks.
Second, this paper examines whether cross-country differences
in banking competition, macroeconomic conditions, country risk,
governance, and supervision between host country and home
country inuence foreign protability. We nd that foreign banks
in a host country with less competitive banking conditions, lower
growth rates of GDP, higher interest and ination rates, and regulatory compliance with Basel risk weights increase their margins.
Finally, we are the rst to explore the joint home- and hostcountry impacts of change in bank supervision on foreign bank
protability. We nd that change in bank supervision of a parent
banks ownership restrictiveness in the home country signicantly
increases foreign bank margins, while supervisory change in regulatory compliance with Basel risk weights in the host country enhances foreign bank margins.
Acknowledgements
The authors thank Professor Ike Mathur (Managing Editor), Professor George Kouretas (Guest Editor), Professor Athanasios Papadopoulos (Guest Editor), and an anonymous referee of the Journal of
Banking and Finance for valuable comments to substantially improve this paper previously presented at The 14th International
Conference on Macroeconomic Analysis and International Finance
(ICMAIF), Department of Economics, University of Crete, Rethymno, Greece, 2729 May 2010. Special thanks also to Professor
Christopher James for helpful comments and suggestions on various empirical estimations. An earlier version of this paper was
modied from the thesis by Chien-Chang Liao. We are grateful to
two referencesProfessor Yi-Hsun Lai and Professor Chin-Huang
Huangfor their invaluable advice and encouragement.
Appendix A
See Table A1.
Appendix B
See Table B1.
Appendix C
See Table C1.
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shows the role of protability in banking industry is essentially

and Vennet, 2008), while others have assessed the impact of

on the prots of Greek banks abroad. Claeys and Vennet (2008)

denes a bank as a risk-averse dealer in the credit market whose

where RD is the rate set on deposits, RL is the rate set on loans, R is

lnpi;t a b ln PF i;t c ln PLi;t d ln PK i;t

lnpi;t a b ln PF i;t c ln PLi;t d ln PK i;t g1 ln LNASST i;t

ln W k;it ln W j;it eit

where si stands for the share of total volume of loans (deposits or

Pi;j;t a0 a1 FBi;j;t a2 COST i;j;t a3 SIZEi;j;t a4 LIi;j;t

ROE is calculated as the return on equity, which is the net prot

where Parent Performacei,m,t represents a parent banks performance

4.1.1. The impact of banking competition on bank protability

effect of macroeconomic conditions in the home country on foreign

Pi;j;t b0 b1 FBi;j;t b2 COST i;j;t b3 SIZEi;j;t b4 LIi;j;t

where MSTj,t represents the proxy as banking market structure in a

Pi;j;t c0 c1 FBi;j;t c2 Parent Performacei;m;t c3 MST j;t

which the foreign bank operates and competes with domestic

comes from the database of BankScope, which is produced by the

actions such as intervention); 9. Onsite Inspections (frequency of

Pi;j;t c0 c1 FBi;j;t c2 Parent Performacei;m;t c3 MST j;t

c4h Contoli;j;t c5 FBi;j;t DEV Home

c7p FBi;j;t MacEconHost

c9r FBi;j;t GOV Host

c10s FBi;j;t DSUPHost

Basically, we follow the specications of Eq. (10). DSUP Home

Banking market structure

Foreign banks perform better than domestic ones

Domestic banks perform better than foreign ones

Dependent variables: bank protability

Return on assets (ROA)

Return on equity (ROE)

Measures of banking market structure

Macroeconomic conations in host country

Log (bank size)

Numbers in parenthesis are t-values.

Bank nancial characteristics

Dependent variables: bank protability

Return on assets (ROA)

Measures of banking market structure

Macroeconomic conations in host country

Bank nancial characteristics

Numbers in parenthesis are t-values.

Return on equity (ROE)

Measures of banking market structure

Return on assets (ROA)

Return on equity (ROE)

Macroeconomic conations in host country

Bank nancial characteristics

Parent banks performance

Real interest rate

Ination rate level

Basel risk weights

Foreign bank ownership (FBO)

Foreign bank ownership (FBO)

Foreign bank ownership (FBO)

Banking market structure

Foreign bank ownership (FBO)

Banking market structure

Real interest rate

Ination rate level