What Determines Differences in Foreign Bank Efficiency? Australian Evidence

Abstract

This study applies parametric distance functions to estimate the efficiency of foreign banks in Australia, and subsequently employs extreme bounds analysis to establish the determinants of foreign bank efficiency that are robust to model specification. The limited global advantage hypothesis of Berger et al (2000) is supported. Following clients is found to reduce the efficiency of the profit-creation process. The market share of the incumbent banks acts as a barrier to entry to efficiency in the retail market, with acquisition of a domestic bank reducing this effect. Internet-based bank product delivery reduces the efficiency of profit creation in the initial phases of operation, and parent profits do not improve efficiency in the host market.foreign bank efficiency, distance functions, extreme bounds analysis, barriers to entry, following clients