Barry Williams

Domestic and international determinants of bank profits: Foreign banks in Australia

Abstract This paper develops and tests a model that integrates the existing multinational bank literature with the domestic bank profits literature. Using data for Australia, this paper demonstrates that an integrated model results in a small increase in explanatory power when compared to models drawn solely from the multinational banking literature. The paper finds that profits are a negative function of competitor market share and bank licence status, and a positive function of Australian size and home GDP growth. It is argued that there is incomplete integration between the market segments of domestic and multinational banks due to the first mover advantages of incumbent banks.

Factors affecting the performance of foreign-owned banks in Australia: A cross-sectional study

Abstract This study extends the existing literature of international banking by constructing a model of foreign intermediaries in Australia. An unresolved question is establishing those factors that result in banking across borders. While a variety of theories attempt to explain international banking, empirical tests are sparse (Mahajan, A., Rangan, N., Zardkoohi, A., 1996. Journal of Banking and Finance 20, 283–306). This study considers if the results to date apply in non US settings. Foreign bank size was found to be a positive function of bank licence, parent size and time in Australia, and a negative function of Australian net interest margins and fees. The negative sign on net interest margins and fees is consistent with De Young, R., Nolle, D., 1996. Journal of Money, Credit and Banking 28, 622–636. Foreign bank profits were a positive function of Australian net interest margins and fees. There was limited evidence of defensive expansion. This paper concludes that foreign bank size is explained well by the existing theories of international banking, but a wider model is appropriate for foreign bank profits.

Determinants of the performance of Japanese financial institutions in Australia 1987-1992

This paper constructs a model that attempts to explain the performance of Japanese financial institutions in Australia. In general the model proposed performs well for size measures, but comparatively poorly for measures of profitability. Size, as measured by home country equity, was found to increase both Australian assets and Australian profitability. Institutional features in both Australia and Japan were found to have their greatest impact upon size measures. Net interest margin differences were found to have no significant relationship with any performance measure used. However, the results are not sufficiently conclusive to produce a definitive model to explain the performance of foreign-owned banks in Australia.

Factors Determining Net Interest Margins in Australia: Domestic and Foreign Banks

This study tests the application of the Ho and Saunders (1981) model of bank net interest margins (NIMs), and its subsequent developments, using Australian data. The core elements of this model apply in Australia. Bank market power is found to increase NIMs, consistent with McShane and Sharpe (1985), with evidence of bank buying market share and mispricing for risk. Operating costs also have an important role in determining NIMs, together with implied payments and management quality. Bank NIMs are found to have fallen over the study period.

The Defensive Expansion Approach to Multinational Banking: Evidence to Date

This paper integrates the defensive expansion hypothesis in multinational banking with the internalisation approach to the multinational enterprise. This framework is then used to structure a review of the literature to date regarding the proposition that multinational banks follow their clients abroad, otherwise called the defensive expansion hypothesis. Both theoretical and empirical issues relevant to the study of the defensive expansion hypothesis are canvassed. The paper concludes that the defensive expansion hypothesis is best modelled using firm level data, and that investment measures are a preferred proxy for following clients. Furthermore, studies considering the defensive expansion hypothesis should control for the effects of parent firm size and economic cycles. The paper concludes that defensive expansion increases multinational size, but has little impact upon multinational bank profits. There is some evidence that defensive expansion impacts upon the type of organisational form adopted by the multinational bank in the host nation.

A pooled study of the profits and size of foreign banks in Australia

Abstract This paper models profits and size of foreign banks in Australia using unbalanced pooled data. The model that is tested is drawn from the multinational banking literature. Licensed foreign banks are found to be larger but not more profitable than foreign merchant banks. Evidence of foreign banks buying size is also found, consistent with De Young and Nolle (1996) (Foreign-owned banks in the US: Earning Market Share or Buying it? Journal of Money, Credit and Banking 28, 622–636). Time series properties in the defensive expansion effect were also identified, although this was small for both profits and size. This paper finds the time series effect identified in Williams (1996) (Determinants of the Performance of Japanese Financial Institutions in Australia 1987–1992. Applied Economics 28, 1153–1165) represented a time trend rather than international experience. It is concluded that models drawn from the multinational banking literature are able to provide reasonable explanations for foreign bank size, but that a wider model is necessary to adequately model foreign bank profits.

Bank risk and return: the impact of bank non‐interest income

Purpose - The purpose of this paper is to consider the impact on bank risk of portfolio diversification between traditional margin income and fee-based income for banks operating in Australia. Design/methodology/approach - Considering several performance variables, this analysis compares the benefits of diversification across different bank types relative to margin income and fee income. Further, regression analysis considers bank risk and revenue concentration. Findings - This paper documents that fee-based income is riskier than margin income but offers diversification benefits to bank shareholders. While improving bank risk-return tradeoff, these benefits are of second order importance compared to the large negative impact of poor asset quality on shareholder returns. Practical implications - These results have implications for all stakeholders in Australian banks. The results suggest that shareholders of banks will benefit from increased bank exposure to non-interest income via diversification. From a regulatory perspective, diversification reduces the possibility of systemic risk, but caution must be offered with respect to banks pursuing absolute returns rather than monitoring risk-return trade-offs, and so exploiting the benefits of the implied guarantee offered by “too big to fail” However, shareholders should also monitor bank exposure to non interest income to ensure that they do not become over-exposed to the point where the volatility effect outweighs the diversification benefits. Originality/value - The results of this study suggest that Australian regulators should consider requiring increased disclosure of the composition of bank non-interest income. Such disclosure would aid in understanding the changing nature of banking in Australia. Given the recent sub-prime crisis in the USA and the role played by fee based income sourced from securitization, increased disclosure of the nature of bank non interest income is now of global importance. This disclosure is particularly germane within the context of the implementation of Basle II, with its increased emphasis upon market discipline, given that Stiroh found increased disclosure in this area is accompanied by improved market pricing for risk.

The Impact of Non Interest Income on Bank Risk in Australia

The relationship between bank revenue composition and bank risk in Australia is modeled using data drawn from Australian bank confidential regulatory returns. It is found that those banks with lower levels of non-interest income and higher revenue concentration are less risky, consistent with previous international evidence. Evidence is also found supportive of increased risk due to too-big-to-fail effects, with this risk increase being offset by a decline in large bank risk after the crisis of 2007–2008. Non-interest income is generally found to be risk increasing, but some types of non-interest income are risk reducing when bank specialization effects are considered. It is also found that the 2008 financial crisis changed some aspects of the relationship between bank risk and revenue composition.

Foreign bank efficiency in Australia: what makes a difference?

Purpose - The purpose of this paper is to explore the factors that affect differences in measured efficiency of foreign-owned banks operating in Australia. The relevance of both comparative advantage theory and new trade theory to multinational banking in Australia will be tested. Design/methodology/approach - A three stage research method is employed. First, estimates of foreign bank efficiency are drawn from a larger sample of domestic and foreign banks in Australia. Efficiency is estimated using parametric distance functions, applying several different specifications of inputs and outputs. Second, factor analysis is used to estimate a series of common factors drawn from the above theories. Third, general to specific modelling is used to determine which of the factors from the second stage determine differences in foreign bank efficiency. Findings - Following clients (defensive expansion) was found to increase host nation efficiency, and new trade theory tended to, (but not conclusively), dominate comparative advantage theory. The limited global advantage hypothesis was found to apply for US bank revenue creation efficiency, but not for transformation of physical inputs into outputs. Banks from the UK and Japan were also found to display superior revenue creation efficiency. Competitor market share reduces host nation efficiency and positive parent bank attributes such as size, credit rating and profits are associated with lower host nation efficiency, as is home nation financial development. Originality/value - This is the first study that has used a combination of factor analysis and general to specific modelling to study determinants of foreign bank efficiency in the host nation.

The Chicken or the Egg? The Trade-Off between Bank Fee Income and Net Interest Margins

This study considers the time series relationship between bank fee income and bank net interest margins in Australia, applying panel vector autoregressions to a unique, hand-collected dataset. Increases in bank fee income are being used to supplement decreases in net interest margins. The increase in magnitude of fee income associated with reductions in margin income is smaller than the decrease in net interest margins, resulting in a net wealth transfer favouring users of bank services; although not all users of bank services gained and/or gained equally. The overall increase in fee income is marginally greater that the reduction in margin income. It is argued that banks have responded to falling margin revenue by increasing their range of fee-based services, especially insurance. Increases in fee income are found to pre-date declines in margin income, thus Australian banks were pro-active in the process of disintermediation. JEL Classifications: G21, G11, C33