The aim of this thesis is to provide a deeper understanding of why foreign banks would wish to operate in Australia. The study provides a more complete empirical examination of foreign banks in Australia than previously conducted. This thesis expands our knowledge of multinational banking, while providing a partial evaluation of deregulation of the Australian banking market. The theoretical framework for researching multinational banking is examined, to provide structure and coherency to a previously disparate literature. Previous research into multinational banking has been diverse, with limited unifying focus. This thesis considers that multinational banking is an example of the multinational firm. Using internalisation theory, it demonstrates that it is possible to impart consistency to the previous research.
This research proceeds in several distinct phases. Each phase results in an increased understanding of some part of
the process determining foreign bank performance in Australia. In the first phase, univariate tests were conducted of the differences between foreign owned intermediaries and the domestic intermediaries. These tests revealed that the foreign banks experienced greater losses in the early 1990s than either foreign merchant banks or the domestic intermediaries. These increased losses were principally due to greater doubtful debts, and are attributed to a poorly diversified portfolio that emphasised commercial loans and foreign currency items. These losses were exacerbated by a strategy that emphasised growth over interest margins and asset quality. The foreign merchant banks, on average, earned higher fee income, and de-emphasised growth, and this reduced the impact of the early 1990s. Lacking access to retail networks, the foreign banks used their international networks to raise foreign currency liabilities to fund Australian dollar assets, mainly commercial loans. In the recession of
the early 1990s, the foreign banks were most exposed to falls in value of commercial property, resulting in significantly greater losses.
In the second phase of this thesis, a model of foreign bank performance was proposed. This model was largely drawn from the multinational banking literature. The data allowed examination of both firm level and country level characteristics of the foreign intermediaries. This enabled study of issues not previously considered. This phase of the research found that a model drawing upon the multinational banking literature provides good explanatory power for foreign bank size, but not for foreign bank profits. This model also found strong evidence of non linearities in these relationships.
Foreign licensed banks were larger than foreign merchant banks. This difference declined over the study period. Those foreign intermediaries with larger parents were, on average, larger. This effect increased over the
study period. The increasing importance of parent size was due to the introduction of the Capital Adequacy accord during the study period. Some evidence was found of foreign intermediaries following their clients abroad, but with small impact on size. A negative relationship was found between foreign intermediary size in Australia and both interest margins and fees. Thus, the foreign intermediaries were willing to accept lower income to reach a target size. As they operate almost exclusively in the wholesale finance market, this indicates that any competitive impact of foreign bank entry did not reach the retail market.
In the third phase of this thesis, a second model was tested for profits only. This model recognised the dual identities of the foreign intermediaries as both multinational banks and as participants in the Australian banking system. This model provided a considerable increase in explanatory power compared to the first model. It was found that
foreign banks were less profitable than foreign merchant banks, but by 1992, both firm types had recovered from their earlier losses. The market dominance of the established major banks reduced foreign intermediary profits by at least $ 5 million per annum across the study period. Those foreign intermediaries with higher capital ratios were more profitable, consistent with Angbazo (1997). A positive relationship between foreign intermediary size and profits was found, indicating that the trade off between income and size in the first model was due to economies of scale.
Foreign intermediary profits and size are subject to different processes, and these differences must be controlled for when modelling foreign bank performance. These processes are not stable, but evolve over time in a non linear fashion. Overall, this thesis provides some guidance for policy at both the bank and industry level. This guidance is particularly timely in view of the recently
published Wallis Report.