A Comparative Multiproduct Cost Study of Foreign-Owned and Domestic-Owned US Banks

Significant presence of foreign-owned banks (FOBs) in the US banking markets has raised concerns about concentration of economic and financial power in foreign hands and increased risk exposure of the banking system. The proponents counter that international cost synergies, heightened competition, and improved bank performance resulting from the presence of FOBs justify foreign bank expansion. This paper contrasts the production technologies and the cost characteristics of the FOBs and the domestic-owned banks (DOBs) within a cost minimization context. The hypothesis of identical cost structures between the two groups is tested and rejected. Then, overall and product-specific scale and scope economy measures for the FOBs and the DOBs are derived for the 1992-1994 sample period, relative to the ownership-type-specific cost structures, and contrasted in order to shed light on the ownership-type effect on the cost structure of banks. Differences do manifest themselves between the two groups, but they are small in magnitude. No clear and strong patterns emerge between the ownership type and cost structure of the banks in the sample. These results are consistent with those of the relative efficiency of the FOBs and DOBs found in the literature