Chapter 6 : The Foreign and Domestic Balance Sheet Strategies of U.S. Banks in a Changing Environment

The purposes of this study are to identify the nature and profitability of the foreign and domestic matched balance sheet strategies of U.S. banks, to identify the incidence and performance implications of individual bank strategy changes or lack of changes over time, and to identify the predominant markets served by the banks following each strategy and the associated profitability implications.The study analyzed the foreign and domestic balance sheet strategies (and changes) of a 1984 and 1987 pooled sample 143 relatively large U.S. banks with both foreign and domestic offices. The analysis was performed in the context of a changing banking environment, on that includes this significant period in the crisis in lending to LDCs. First, canonical correlation analysis was applied to the data. It identified three very significant sets of balance sheet relationships (variates) across the entire sample. The following general results were observed: (a) a consistent dichotomous matching of fording and domestic assets/liabilities in two of the three variates; and (b) generally more conservative (less interest-rate and liquidity risks) strategies matching foreign assets/liabilities than those matching domestic assets/liabilities. Second, the balance sheet strategies identified by the above analysis for the individual bank observations were classified into "strategy groups" using cluster analysis. Three strategy groups merited further analysis, each of which represents a particular focus in matching foreign and domestic assets/liabilities.These three strategy groups, in order of relative profitability (ROA and ROE) are: (a) domestic focused; (b) foreign focused, and (c) mixed unfocused. Each of the strategies represents a focus on the matching of foreign assets/liabilities, domestic assets/liabilities, and mixed foreign and domestic assets/liabilities, respectively. It is generally thought that focused strategies are essential for high performance in competitive markets. A foreign or domestic balance sheet strategy is consistent with a "focused strategy," while a mixed foreign/domestic strategy is consistent with an "unfocused strategy." Thus, as hypothesized, the banks that followed a foreign or domestic focused strategy are more profitable (ROA and ROE) than those that followed an unfocused strategy