Foreign-Owned Banks in the U.S.: Earning Market Share or Buying It?

Foreign-owned U.S. banks have been chronically unprofitable for more than a decade. We employ a profit efficiency model introduced by Berger, Hancock, and Humphrey (1993), modified to be less sensitive to variations in asset size, to estimate the relative profit efficiency of 62 foreign-owned and 240 U.S.-owned banks between 1985 and 1990. Our results indicate that foreign-owned banks were significantly less profit-efficient than were U.S.-owned banks, primarily due to foreign banks' reliance on expensive purchase funds. For foreign-owned banks, the results are consistent with a strategy of sacrificing profits in exchange for fast growth and increase market share during the 1980s.

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