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MF
35,2
Foreign bank efficiency in
Australia: what makes a
difference?
180 Jan-Egbert Sturm
KOF Swiss Economic Institute, ETH Zurich, Switzerland and CESifo,
Germany, and
Barry Williams
School of Business, Bond University, Gold Coast, Australia and KOF Swiss
Economic Institute, Zurich, Switzerland
Abstract
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.
Keywords Banking, Globalization, Australia, Factor analysis
Paper type Research paper

Managerial Finance
Vol. 35 No. 2, 2009
pp. 180-201
# Emerald Group Publishing Limited
0307-4358
DOI 10.1108/03074350910923509
1. Introduction
Factors determining the efficiency of foreign banks in the host nation are an area that
has received relatively little attention to date. This paper responds to (and extends) the
research agenda commenced by Berger et al. (2004) for cross-border bank mergers, by
considering both country-level and firm-level characteristics of multinational banks
that determine differences in multinational bank efficiency in the host nation. Berger
et al. (2004) argue that there is a considerable gap in the current literature considering
financial institution management within the context of new trade theory. One
contribution of this paper is to add a new dimension to this area of research. This
research will commence from the frameworks offered by both comparative advantage
theory and new trade theory and so provide a new dimension to this growing literature.
The current work will extend this literature in two dimensions: by considering firm-
level as well as country-level characteristics and by considering the efficiency of
multinational banks. This research will have the further advantage of providing a test
of the limited global advantage hypothesis of Berger et al. (2000). The limited global
advantage hypothesis argues that banks from some nations are able to overcome the Foreign bank
diseconomies of cross-border operations due to various unspecified advantages. By efficiency in
responding to Berger et al. (2004) within the context of the limited global advantage
hypothesis, this paper will identify at least some of the sources of these unspecified Australia
advantages. As discussed by Berger (2007), there is a need for more research to
determine the causes of differences in foreign bank efficiency and this paper will
provide insight from the perspective of one nation and one possible methodology into 181
this question.
The stylised facts relating to cross-border banking generally conclude that in
developed nations foreign banks generally under-perform their domestic counter-parts,
with the opposite occurring in developing nations (Berger, 2007; Berger et al., 2000).
Further, Berger et al. (2000) find that banks from some developed nations (particularly
the USA) tend to perform well in developed host nations, even when benchmarked
against host nation domestic banks. An exception to this body of research is provided
in the Australian case by Sturm and Williams (2004), who found foreign banks to be
more efficient, on average, than domestic banks. Thus, the Australian environment
provides an interesting location for further investigation of multinational bank
performance. This is particularly important given the importance of multinational
banks in a globalised financial marketplace, yet by contrast, the relatively limited
evidence regarding factors determining foreign bank performance in the host market.
As far as these authors are aware, to date, there is no published evidence addressing
this question from the perspective of foreign bank efficiency.
This paper will consider the relevance of comparative advantage theory and new
trade theory (Casson, 1999; Dunning, 1977; Markusen and Venables, 1996; Williams,
1997), to the study of the efficiency of foreign banks in Australia. An important feature
of this study is that efficiency estimates of foreign banks will be drawn from efficiency
estimates from a larger bank population that includes both domestic and foreign
banks. In this way, any negative impact of the liability of foreignness will be controlled
for (Miller and Parkhe, 2002). As argued by Miller and Parkhe (2002), foreign firms face
a number of potential competitive disadvantages in the host nation due to information
asymmetries, cultural and language differences and other factors[1].
The framework to model foreign bank efficiency will be based upon the work of
Buch (2003), Berger et al. (2004) and Williams (2003). By applying bank-level data to
estimate bank efficiency as well as to estimate the impact of parent bank-level effects,
this paper provides further insights to the country-level approaches of Buch (2003) and
Berger et al. (2004), both of whom considered bank mergers across borders rather than
bank efficiency from a country-level perspective. This research will, however, provide a
new dimension to this previous stream of research, by considering multinational bank
efficiency which has not been previously considered in this manner.
It is found that following clients (defensive expansion) tend to increase host nation
bank efficiency and that new trade theory tends to dominate comparative advantage
theory in explaining differences in bank efficiency. However, as factor analysis was not
able to separate these two theories conclusively, further research is necessary in other
settings. Some support was found for the limited global advantage hypothesis, in that
banks from the USA were found to be more efficient in revenue creation, but less
efficient in transforming physical inputs into outputs, consistent with Berger (2007).
Competitor market share was found to reduce efficiency in the host market, consistent
with Williams (2003). Home nation financial development and positive parent bank
MF attributes such as size, credit ratings and profits were found to be associated with
35,2 lower host nation efficiency.
The rest of this paper is structured as follows; the next section provides a review of
the relevant literature. The third section will detail the method that will be used to
address the research question posed by this paper. The fourth section discusses the
nature of the sample that will be employed. The fifth section will present the results;
182 whereas the final section will provide a conclusion and suggests directions for further
research endeavour.

2. Literature review
This paper will consider the efficiency of foreign banks in Australian within the
contexts offered by comparative advantage theory and new trade theory. The
traditional approach to modelling multinational banks is based upon Ricardian
comparative advantage theory. In this approach, the multinational bank seeks to
exploit its comparative advantage and minimise its opportunity costs. Recent
examples of this framework within the context of multinational banking are offered by
Williams (2003) and Kosmidou et al. (2006). New trade theory (Markusen, 1995),
emphasises national similarities in determining investment flows. Recent studies of
cross-border mergers by Buch (2003) and Berger et al. (2004) have considered that both
of these theoretical approaches are relevant to multinational banking. Accordingly this
issue can be considered within these two frameworks.

2.1 Comparative advantage and opportunity costs

Within the structure offered by comparative advantage theory, multinational banks
can be considered to be subject to home nation effects, parent bank effects and host
nation effects, each providing a mix of advantages, opportunity costs and barriers to
entry.
2.1.1 Home nation effects. In multinational banking, the hypothesis that banks
follow their client’s abroad (defensive expansion) is a traditional approach. This is
usually tested by the use of a vector of measures that represent the host nation’s
trading and investment relationship with the home nation. As surveyed by Williams
(2002), this hypothesis is usually supported for size studies but results for the impact of
defensive expansion upon bank profits are less unambiguous. Defensive expansion
relationships are usually measured using direct investment relationships, as these are
most likely to result in the multinational bank requiring a physical presence to defend
its bank–client relationship. It is this defence of the bank–client relationship that forms
the core of the defensive expansion hypothesis.
Export of financial practices and financial sophistication is also argued as a
rationale for multinational banking. It is argued that those nations from more
developed and sophisticated financial systems are more likely to be able to export
efficient financial practices and so overcome the negative impact of the liability of
foreignness. Nations with higher levels of GDP per capita are more likely to possess
sophisticated and efficient financial systems, so GDP per capita is the usual measure of
this home nation effect. Buch and DeLong (2004) and Berger et al. (2004) found that
banks from nations with higher levels of GDP per capita are more likely to acquire
banks in other nations, which was presumed by Buch and DeLong (2004) to be due to
their higher levels of efficiency.
 2.1.2 Parent bank effects. As compared to Williams (2003), Buch (2003) and Berger Foreign bank
et al. (2004) did not employ bank-level data, instead confining their study to
macroeconomic data. While parent profits were not found by Williams (2003) to impact
efficiency in
upon host nation profits, Focarelli and Pozzolo (2001, p. 2326) argued that parent profit Australia
offers a readily available measure of parent efficiency. Thus, if a bank operates in the
home market more efficiently than other banks, this efficiency provides a potential
source of comparative advantage when expanding offshore. Overall, it is possible that
parent profitability does not translate into host market profitability, but does impact 183
upon host market efficiency.
It is often argued that in multinational banking size is an important variable (Hirtle,
1991), with parent size found to determine host nation size (Cho, 1985; Ursacki and
Vertinsky, 1992). Further, Tschoegl (2004) suggested that the largest bank in each
nation is the most likely candidate for successful offshore expansion. It would be
therefore expected that banks with larger parents are more likely to be efficient in the
host nations than smaller banks.
Experience of operating internationally is another possible parent characteristic
that enables a multinational bank to succeed in the host nation. Tschoegl (1982)
considered that this experience can have two dimensions: general experience of
international operations and experience of operating in a particular host nation.
Experience measures of the first type have been found to be highly correlated with size
measures (Cho, 1985), while Williams (1998a, b) found no support for host nation
experience effects for either size or profits of foreign banks in Australia. Again,
however, it is possible that host nation experience impacts upon efficiency in the host
nation, but not upon size or profits.
2.1.3 Host nation effects. Barriers to entry act to reduce the benefits of firm-specific
and nation-specific comparative advantages. As this study focuses upon a single
nation, many of the country-specific variables used by Berger et al. (2004) are a
constant for each year. To alleviate statistical and interpretive problems associated
with this issue, Williams (2003) applied a competitor market share variable. This
measures the degree of competition confronting a foreign bank in the host market;
considering the market share of the four dominant banks in Australia, plus the market
share of all other banks of the same nationality. This measure reflects the degree of
competition from the major Australian banks, plus the additional competition from
other banks of the same nationality seeking to establish a beachhead in the host nation
(Fieleke, 1977), via defensive expansion to follow their national client base. Williams
(2003) found that foreign bank profits in Australia were reduced by the impact of this
competitor market share. This result may not necessarily apply for efficiency, as this
level of competition may engender increased efficiency while depressing profits.
Foreign banks in Australia are disproportionately active in wholesale banking, which
is a price competitive sector of the banking market with an emphasis upon efficiency.
Thus, the barrier to entry represented by this measure may reduce profits while
increasing efficiency.

2.2 New trade theory

New trade theory represents the alternative approach to comparative advantage
theory. Unlike comparative advantage theory, new trade theory considers that relative
characteristics of nations determine the patterns of investment, that markets are no
longer competitive and homogenous and that firms can choose between trade with or
investment in a nation (Berger et al., 2004). This approach has also been termed eclectic
MF theory (Dunning, 1988) or the internalisation approach (Casson, 1990), with Williams
(1997) discussing each of these approaches within the context of the multinational firm.
35,2 From this basis, Markusen and Venables (1996) developed the convergence hypothesis
in which increasing similarity increases investment as opposed to trade. As
multinational banking is based upon intangible assets such as skills, knowledge, brand
names and communications, new trade theory lends itself particularly well to
multinational banking (Berger et al., 2004; Buckley, 1988). Berger et al. (2004) concluded
184 that in the case of cross-border mergers and acquisitions both new trade theory and
traditional comparative advantage theory were supported.

3. Method
This paper employs a three-step research design. In the first step, foreign bank
efficiency is estimated from a sample panel of data that include both domestic and
foreign banks in Australia between 1988 and 2001. Bank efficiency will estimated
using parametric distance functions (Coelli and Perelman, 2000), applying the
intermediation approach to bank production, as outlined below. In the second step,
foreign bank characteristics will be analysed using factor analysis. In this step, the
variables employed will be endogenous to those used in the first step. This step will
estimate a series of common factors representing distinctive features that are specific
to foreign banks operating in Australia. In the third step, the estimates of foreign bank
efficiency drawn from the first step are used as dependent variables, while the common
factors estimated in the second step are used as independent variables in unbalanced
panel regressions.
Step 1: bank efficiency estimation. Given that this study is focussing upon foreign
bank operations in the host nation, the choice of efficiency estimation technique is
limited by data availability. In this case, the data does not contain input or output
prices, thus cost, profit or alternative profit efficiency techniques are not available. As a
result parametric input distance functions from Coelli and Perelman (1999) will be
used. This approach applies maximum-likelihood estimation of efficiency allowing for
multiple inputs and multiple outputs to achieve an index of relative efficiency ranging
from 100 to 0, with 100 representing full efficiency. Such an approach allows for the
multiple input and output nature of banking and has the additional advantage of
allowing different specifications of inputs and outputs which allows for some
sensitivity analysis. We will include a time trend in the efficiency estimation to allow
for the impact of changing technology and other time-dependent circumstances. The
parameterisation of Battese and Corra (1977) is used, replacing V2 and U2 with
2 ¼ V2 þ U2 and ¼ U2/(V2 þ U2). The appendix in Battese and Coelli (1993) presents
the log-likelihood function of this model.
Efficiency of banks in Australia will be modelled using the intermediation approach.
From this sample of efficiency estimates the efficiency estimates of the foreign banks in
Australian will be drawn. In the intermediation approach, a bank is viewed as using
inputs such as deposits, staff and equity to produce outputs such as loans and off-
balance sheet items. This approach is commonly used in modelling bank efficiency
(Berger and Humphrey, 1992; Berger and Mester, 1997). As efficiency estimation can be
sensitive to input and output specification (Berger et al., 1993), several different
combinations of inputs and outputs will be applied to the available data. In the baseline
approach, following Allen and Rai (1996), banks will be considered to use equity,
employees and deposits to produce loans and off-balance sheet items (Model 1).
Extending this approach, outputs will be expanded into housing loans and other loans
(Model 1a) and in Model 1b outputs will include wholesale activity. A revenue-based Foreign bank
model of inputs and outputs will also be estimated, following and 1999, Avkiran (2000)
and Sturm and Williams (2004); inputs will be considered to be interest expenses and
efficiency in
non-interest expenses, while outputs will be considered net interest income and non- Australia
interest income (Model 2). Table I summarises these models.
Step 2: factor analysis. Given the theory discussed above, there are a number of
potential variables possible to explain the efficiency of foreign bank in Australia.
Factor analysis will be applied to determine the common characteristics of these
185
variables and to obtain a few uncorrelated variables that are linear combinations of the
original variables. This approach will have the advantages of reducing the number of
possible variables to a few key measures, of reducing the problems associated with
multicollinearity in the third stage of this study, and (hopefully) ensuring that any
complex interrelationships are reduced to a few variables representing the
fundamental effects of concern. Factor analysis will be conducted using both image
factoring and alpha factoring with the commonly used varimax rotation (Tabachnick
and Fidell, 2001). Those factors selected for inclusion in the third stage of this research
will have eigenvalues of greater than one.
Step 3: model estimation. In step 3, the estimated factors from step 2 will be used as
independent variables with the efficiency estimates from step 1 employed as dependent
variables in unbalanced pooled regressions. Because the efficiency estimates from step
1 were estimated from a sample that includes both domestic and foreign banks, the
diseconomies of the liability of foreignness will be controlled for. In order to achieve a
parsimonious model specification, general to specific modelling (Hendry, 1995) will
also be employed.

4. Data
The sample for the first stage of this study will be drawn from banks operating in
Australia between 1988 and 2001. Following Sturm and Williams (2004), these banks
will be classified as big four (the dominant four banks in Australia), other domestic
(mainly regional banks) and foreign banks. The data will be sourced mainly from the
bank’s individual annual reports, with some additional details, such as housing loans,
obtained from the Reserve Bank of Australia Bulletin and the website of the Australian
Prudential Regulation Authority[2].

Inputs Outputs

Model 1 (i) Employees (i) Loans

(ii) Deposits and borrowed funds
(iii) Equity capital
Model 1a (retail model) (i) Employees
(ii) Deposits
(iii) Equity capital
Model 1b (wholesale model) (i) Employees
(ii) Deposits
(iii) Equity capital
Model 2 (revenue model) (i) Interest expenses
(ii) Non-interest expenses
(ii) Off-balance sheet activity
(i) Loans less housing loans
(ii) Housing loans
(iii) Off-balance sheet activity
(i) Loans
(ii) Investments
(iii) Off-balance sheet activity
Table I.
(i) Net interest income Summary of models
(ii) Non-interest income employed
MF Data for the factor analysis in the second stage was obtained from a number of
different sources. Details regarding parent banks were obtained from Moody’s Credit
35,2 Opinions: Financial Institutions. Trade and investment stocks and flows from the
parent bank’s home nations were obtained from Australian Bureau Statistics
publications. Parent nation data were obtained from the International Financial
Statistics of the International Monetary Fund.
Several measures of home nation comparative advantage are possible. These
186 include trade measures and investment measures. Following the defensive expansion
approach to multinational banking, several measures of following clients will be
employed. The first measure will be home nation investment income, measured
according to the IMF’s Balance of Payments convention, in that flows from Australia to
the home nations will be measured as an outflow, with a negative value. A second
measure of defensive expansion effects will be total home nation trade (exports plus
imports) as a share of Australian GDP. Additional measures of defensive expansion
effects will be home nation capital flow into Australia, and home nation capital stock in
Australia, both in the relevant calendar year in billions of Australian dollars. In each
case, the investment measures will reflect direct investment rather than portfolio
investment, reflecting the argument of Williams (2002) that direct investment is more
likely to result in a need for a physical presence to satisfy the requirements of defensive
expansion.
As a last measure of home nation comparative advantage, the arguments of Buch
and DeLong (2004) and Berger et al. (2004) will be applied, in that nations with higher
GDP per capita are more likely to have efficient domestic financial systems and so are
able to export efficient financial practices into the host nation. Both Buch and DeLong
(2004) and Berger et al. (2004) found banks from nations with higher GDP per capita are
more likely to acquire banks in other nations and that banks from nations with lower
GDP per capita are more likely to be targets in cross-border mergers. Given that cross-
border mergers are conducted with some expectation of gains, this observed regularity
was argued by Buch and DeLong (2004) to reflect efficiency of the acquiring bank. This
study will determine if this effect translates into observed increases in efficiency in the
host nation.
Measures of parent bank comparative advantage encompass parent profitability,
parent size and parent experience. Measures of this type were not used by Buch and
DeLong (2004) and Berger et al. (2004). Following Focarelli and Pozzolo (2001, p. 2326),
parent profits acts as a possible measure of parent efficiency. While Williams (2003) did
not find any evidence that parent bank profits affected foreign bank profits in
Australia, it is possible that foreign bank efficiency in the host market is increased by
parent profits, but that this does not translate into host nation profits. Two measures of
parent profits in the home nation will be used, parent return on assets and parent net
interest margin. With parent bank size found to have in important role in multinational
banking (Cho, 1985; Ursacki and Vertinsky, 1992), two measures of parent size will be
used, log of parent assets and log of parent capital. In each case, the foreign currency
values will be converted into Australian dollars using the average of the relevant year’s
exchange rate. A further parent bank advantage may be its experience of operating in
the host nation (Tschoegl, 1982). This will be measured as the number of years since
the first transaction-based activity in Australia. The alternative measures of
experience, those representing multinationality in general, are usually found to be
highly correlated with measures of parent bank size (Cho, 1985). While Williams
(1998a, b) found no evidence that this measure of experience impacted upon profits in
the host nation, following the line of reasoning above, it is possible that efficiency but Foreign bank
not profits in the host nation is increased by host nation experience.
As a measure of host nation effects, this study will consider the barriers to entry
efficiency in
confronting foreign banks in Australia. In this case, these barriers to entry will be Australia
measured as competitor market share. As with Williams (2003), this will be specified as
the market share of the big four banks, which dominate the Australian banking
system, plus the markets share of all other banks of the same nationality. This will
measure the impact of market domination, as well as the competitiveness of the foreign
187
banks with the other banks seeking to establish a beachhead (Fieleke, 1977) in the host
nation by following their clients abroad.
New trade theory emphasises the role of similarity between home and host nations
in encouraging international investment. Following Berger et al. (2004) three measures
of similarity will be employed: differences in home nation growth (home nation real
GDP growth – Australian real GDP growth); similarity of economic size (GDP); and
similarity of GDP per capita. Both of the last two measures will represent similarity as
an index ranging between zero and one, with one representing complete similarity. In
the case of GDP, this will be calculated as (1 – abs (home real GDP – real Australian
GDP)/max (home real GDP, Australian real GDP). Similarity of real GDP per capita will
be calculated in the same manner.
Some control variables will also be included to ensure that there are no nation- or firm-
specific effects excluded from our consideration. It is possible that a combination of
parent characteristics that are represented by its credit rating impact upon efficiency in
the host nation. Thus, a measure of ranked credit rating will be included, this will be
constructed as having a value of one for all banks with a rating of AAA, if there are three
such banks, then the banks with the next lowest rating (Aa1) will be ranked four and so
forth. Further analysis will also be conducted in the third stage of this paper to determine
if dummy variables representing nationality have any additional explanatory power
after the variables represented by the factor analysis are considered[3].

5. Results
Consistent with Sturm and Williams (2004), the correlations between Models 1, 1a and
1b are the highest and the correlations with Model 2 are lower. The average estimated
efficiency of between 80 and 85 per cent is also consistent with previous Australian
studies, with some differences due to differences in estimation technique and increases
in sample size. Foreign banks are on average less efficient than the domestic
incumbents, also consistent with previous global studies[4]. However, one foreign bank
is also the most efficient for each model, it should be noted that it is not the same
foreign bank that is the most efficient for each model.
The Kaiser’s measure of sampling adequacy and Bartlett test of sphericity both
indicate factorability of the data. As the Kaiser’s test value is above the value of 0.6 and
the Bartlett’s test is significant, the factorability of the correlation matrix is
indicated[5]. The factor analysis results are shown in Table II. In the case of each of
alpha factoring and image factoring, factors are chosen on the basis of an eigenvalue of
one or greater. In each case, five factors were extracted, with the extracted factors after
varimax rotation showing high levels of commonality across the two factor analysis
methods. In the case of alpha factoring, the five factors extracted accounted for over
70 per cent of sample variance, whereas with the image factor analysis five factors
explained over 60 per cent of sample variance[6]. In this study, variables with a factor
loading approximately equal to or greater than 0.5 will be interpreted, as shown by the
MF Factor
35,2 1 2 3 4 5

Rotated factor matrix (extraction method: alpha factoring; rotation method: varimax with Kaiser
normalization)a
Home nation investment income 0.068 0.498 0.433 0.124 0.543
Trade with Australia as a share of 0.963 0.147 0.112 0.108 0.157
188 Australia GDP
Home nation capital flow 0.064 0.661 0.128 0.084 0.108
Home nation capital stock 0.003 0.863 0.190 0.388 0.194
Log (home nation GDP per capita) 0.750 0.139 0.485 0.108 0.230
Home ROA 0.088 0.133 0.087 0.079 0.848
Home NIM 0.391 0.141 0.002 0.561 0.118
Log (home assets) (average annual 0.461 0.381 0.261 0.385 0.242
exchange rate)
Experience in Australia (years) 0.073 0.203 0.078 0.605 0.053
Competitor market share 0.092 0.246 0.680 0.120 0.525
Real growth differential to Australia 0.011 0.093 0.711 0.101 0.130
Index of similarity of GDP 0.746 0.039 0.141 0.113 0.017
Index of similarity of GDP per capita 0.926 0.121 0.274 0.106 0.014
Ranked home credit rating 0.126 0.042 0.085 0.724 0.011
Rotated factor matrix (extraction method: image factoring; rotation method: varimax with Kaiser
normalization)b
Home nation investment income 0.069 0.481 0.563 0.160 0.341
Trade with Australia as a share of 0.897 0.117 0.131 0.099 0.058
Australia GDP
Home nation capital flow 0.068 0.617 0.118 0.077 0.087
Home nation capital stock 0.010 0.726 0.271 0.364 0.122
Log (home nation GDP per capita) 0.729 0.092 0.289 0.096 0.465
Home ROA 0.093 0.127 0.648 0.109 0.066
Home NIM 0.425 0.160 0.086 0.583 0.039
Log (home assets) (average annual 0.509 0.333 0.188 0.287 0.282
exchange rate)
Experience in Australia (years) 0.077 0.217 0.085 0.516 0.046
Competitor market share 0.085 0.257 0.576 0.124 0.561
Real growth differential to Australia 0.037 0.047 0.006 0.102 0.587
Index of similarity of GDP 0.781 0.055 0.007 0.154 0.177
Index of similarity of GDP per capita 0.883 0.115 0.018 0.095 0.266
Ranked home credit rating 0.101 0.014 0.071 0.603 0.119

Notes: alpha factor 1, image factor 1: macroeconomic factors; alpha factor 2, image factor 2:
defensive expansion; alpha factor 3, image factor 5: mixed factor, home and host effects; alpha
Table II. factor 4, image factor 4: parent factors; alpha factor 5, image factor 3: mixed factor, home/host/
Factor analysis results parent. aRotation converged in seven iterations. bRotation converged in six iterations

shaded elements in Table II, this critical value is greater than the value of 0.32
discussed in Tabachnick and Fidell (2001, p. 625).
The first factor found generally loaded on macroeconomic factors, with a
combination of trade, home GDP per capita and the two similarity indices all loading
on the same factor, as well as parent size. The macroeconomic factors had positive
loadings whereas the similarity factors had negative values for their loading. This
indicates that it is not possible to readily separate the impacts of comparative
advantage and new trade theory. The second factor represented defensive expansion Foreign bank
effects, with a positive loading on the two measures of direct investment into Australia
(stock and flow) and negative loading on the measure of home nation investment
efficiency in
income. Given that this third variable is measured according to the IMF’s balance of Australia
payments conventions, this sign reflects the fact that outflows from Australia to the
bank’s home nation are reported with a negative sign. The third factor in alpha factor
analysis loaded on the same variables as the fifth factor in image factor analysis, and
represented a mix of macroeconomic, defensive expansion and host nation effects.
189
Home nation investment income again entered this factor with a negative loading, and
the factor analysis again was not able to distinguish between defensive expansion
effects and new trade theory effects. In this case, the macroeconomic factors included
home GDP per capita and differences in real GDP growth rates. This factor also
included the impact of competitor market share.
The fourth factor represented parent bank factors, loading on parent bank profits,
experience in Australia and ranked home credit rating. The fifth factor in alpha factor
analysis loaded on the same variables as the third factor in image factor analysis.
The variables in this factor were again mixed, with the factor representing a mix of
home nation (investment income), host nation (competitor market share) and parent
bank effects (parent return on assets). As with the previous factors, home nation
investment income had a negative sign. Overall, the factor analysis was not able to
separate the variables as cleanly as the theoretical framework depicted, in particular,
macroeconomic factors representing comparative advantage theory tended to be
included in the same factor as new trade theory variables. This outcome is consistent
with Berger et al. (2004), who concluded that both types of effects were relevant to
cross-border mergers. However, factor loadings for parent effects and defensive
expansion effects each tended to be more concentrated into a single factor.
The third stage of the analysis of this study then employed the efficiency scores
from the first stage analysis as dependent variables and used the calculated factors for
each bank-year as the independent variables in a series of unbalanced panel
regressions. Each of these regressions were estimated as random effects models with
bank and time specific effects, as this was indicated by the Hausman and LM tests to
be the most appropriate. In this third stage, the fully specified model including all the
factors was estimated, together with a second model that also included the nation-
specific dummy variables[7]. These results are shown in Table III. Following these
estimations, a second set of regressions were estimated applying the general to specific
approach outlined in Hendry (1995). Again two sets of models were estimated, one
including the factors from the second stage and one including these factors and the
nation-specific dummy variables[8]. These results are shown in Table IV.
In general, the results for Models 1, 1a and 1b were different to those for Model 2.
Models 1, 1a and 1b represent the efficiency of banks in transforming physical inputs
and deposits into loans, off-balance sheet items and investments (Model 1b), while
Model 2 represents the efficiency of banks in transforming expenses into revenue.
Thus they each reflect different aspects of bank efficiency, as is borne out by the
empirical results in this study. Overall it was found that factor five, representing a mix
of home host and parent variables had a consistently negative and significant
relationship with bank efficiency measured using Models 1, 1a and 1b. Given that home
nation investment income has a negative loading in this factor, this result shows that
following clients increases bank efficiency in the host nation, consistent with the
defensive expansion hypothesis. Further, competitor market share reduces bank
 MF
35,2

190

Table III.

with bank- and

time-specific effects
Random effects models
TE_M1 TE_MIA TE_M1ATE_M1B TE_M2
Alpha Img Alpha Img Alpha Img Alpha Img

Constant Constant 0.69 (3.58) 0.76 (3.41) 0.88 (6.08) 0.91 (5.92) 0.82 (5.82) 0.92 (6.39) 0.35 (1.56) 0.36 (0.94)
ALPHAFAC1 IMGFAC1 0.02 (0.38) 0.05 (0.67) 0.00 (0.05) 0.04 (0.47) 0.06 (1.22) 0.00 (0.07) 0.15 (1.80) 0.29 (2.48)
ALPHAFAC2 IMGFAC2 0.01 (0.20) 0.03 (0.87) 0.06 (2.04) 0.08 (2.57) 0.00 (0.16) 0.03 (1.01) 0.09 (2.31) 0.04 (0.97)
ALPHAFAC3 IMGFAC5 0.02 (1.15) 0.02 (0.73) 0.03 (1.33) 0.01 (0.22) 0.00 (0.28) 0.00 (0.11) 0.03 (1.21) 0.10 (1.98)
ALPHAFAC4 IMGFAC4 0.01 (0.18) 0.04 (0.85) 0.00 (0.02) 0.04 (1.01) 0.02 (0.93) 0.03 (0.79) 0.11 (2.59) 0.14 (2.34)
ALPHAFAC5 IMGFAC3 0.05 (2.30) 0.08 (2.66) 0.05 (2.05) 0.06 (2.18) 0.03 (1.87) 0.06 (2.68) 0.03 (1.01) 0.06 (1.20)
DUMUK 0.21 (1.06) 0.16 (0.66) 0.03 (0.21) 0.10 (0.61) 0.00 (0.03) 0.03 (0.20) 0.42 (1.74) 0.96 (2.84)
DUMUS 0.08 (0.35) 0.20 (0.76) 0.13 (0.76) 0.17 (0.89) 0.06 (0.35) 0.20 (1.16) 0.76 (2.82) 1.56 (3.27)
DUMJP 0.12 (0.51) 0.04 (0.14) 0.09 (0.45) 0.04 (0.19) 0.13 (0.70) 0.04 (0.24) 0.59 (2.09) 1.44 (2.92)
DUMCAN 0.27 (1.07) 0.29 (0.97) 0.09 (0.53) 0.06 (0.32) 0.11 (0.61) 0.07 (0.36) 0.23 (0.82) 0.61 (1.82)
DUMDE 0.26 (1.10) 0.20 (0.71) 0.14 (0.87) 0.09 (0.53) 0.04 (0.26) 0.01 (0.03) 0.00 (0.00) 0.00 (0.00)
DUMING 0.09 (0.35) 0.01 (0.04) 0.13 (0.70) 0.13 (0.49) 0.11 (0.57) 0.13 (0.56) 0.00 (0.00) 0.00 (0.00)

Notes: Including dummy variables for nationality. t-statistics in parentheses. Alpha factor 1, image factor 1: macroeconomic factors; alpha factor 2,
image factor 2: defensive expansion; alpha factor 3, image factor 5: mixed factor, home and host effects; alpha factor 4, image factor 4: parent factors;
alpha factor 5, image factor 3: mixed factor, home/host/parent
 TE_M1 TE_M1A TE_M1B TE_M2
Alpha Img Alpha Img Alpha Img Alpha Img

Constant Constant 0.73 (15.89) 0.83 (18.65) 0.80 (29.72) 0.82 (35.90) 0.88 (39.63) 0.88 (40.60) 0.84 (18.17) 0.29 (0.77)
ALPHAFAC1 IMGFAC1 0.04 (2.03) 0.26 (2.41)
ALPHAFAC2 IMGFAC2 0.05 (2.67) 0.05 (2.20)
ALPHAFAC3 IMGFAC5 0.02 (1.85) 0.10 (2.07)
ALPHAFAC4 IMGFAC4 0.07 (2.50) 0.14 (2.66)
ALPHAFAC5 IMGFAC3 0.06 (3.87) 0.08 (4.64) 0.04 (2.73) 0.05 (2.81) 0.05 (3.94) 0.06 (4.29)
DUMUK 0.14 (1.66) 0.90 (2.74)
DUMUS 0.19 (2.28) 0.13 (3.07) 0.12 (3.02) 1.44 (3.15)
DUMJP 1.32 (2.78)
DUMCAN 0.61 (1.73)
DUMDE 0.19 (1.68)
DUMING 0.18 (1.80) 0.17 (1.73)

Notes: Random effects models with bank- and time-specific effects (t-statistics in parentheses). Alpha factor 1, image factor 1: macroeconomic factors;
alpha factor 2, image factor 2: defensive expansion; alpha factor 3, image factor 5: mixed factor, home and host effects; alpha factor 4, image factor 4:
parent factors; alpha factor 5, image factor 3: mixed factor; home/host/parent

reduced form model

General to specific
Table IV.
Australia
Foreign bank

191
efficiency in
MF efficiency in the host market, consistent with the profit results of Williams (2003),
indicating that increased dominance of the host market by the incumbent banks results
35,2 in the foreign entrants increasing expenditure on inputs to produce the same level of
outputs, resulting in lower profits and efficiency.
In the case of Model 1a, the retail focussed model, it was also found that factors 1 and
2 had negative relationships with foreign bank efficiency. This indicates that following
clients, with the exception of home nation investment income (factor 2) reduces bank
192 efficiency in the host nation. Further, home nation financial development, as measured by
GDP per capita is associated with reduced efficiency in the host market, as is parent bank
size. However, new trade theory is supported, with increased economic similarity
increasing bank efficiency in the host nation. In the case of Models 1, 1a and 1b, dummy
variables representing nationality indicate that banks from the USA tend to be less
efficient, contrary to Berger et al. (2000), who found banks from the USA to be more
efficient in Europe. However Berger et al. (2000) estimated cost and profit efficiency,
which is closer in general approach to Model 2, which will be discussed below.
In the case of Model 2, representing the efficiency of revenue creation, factor 4,
representing parent variables were found to be consistently negative and significant.
This indicates that increased experience in the host nation, higher parent profits (as
measured by parent net interest margins) and higher credit ratings tend to result in
lower revenue creation efficiency. The general to specific reduced form model also
showed that factor 3 has a significant and negative relationship with bank revenue
creation efficiency. This indicates that following clients, as measured by home nation
investment income, increases revenue creation efficiency. Consistent with the above
results, competitor market share reduces revenue creation efficiency and higher levels
of home nation financial development, as measured by GDP per capita, is associated
with lower host nation revenue creation efficiency. Supporting new trade theory, it was
also found that increased similarity in terms of real GDP growth rates increases
revenue creation efficiency. Dummy variables representing nationality are positive
and significant in the reduced form general to specific regression for the USA, UK and
Japan. The result for the US dummy variable is consistent with Berger et al. (2000) and
supports the limited global advantage hypothesis.

6. Conclusion
Overall, these results indicate that following clients will increase bank efficiency and
that new trade theory tends to be a stronger explanation of differences in bank
efficiency than the comparative advantage approach. However, the comparative
advantage approach should not be rejected on the basis of these results, as factor
analysis was not able to separate these two effects. Further, this is a study of a single
host nation, unlike Berger et al. (2000), who considered a multi-county sample.
However, as argued by Berger (2007) studies like this paper have the most potential to
further our understanding of the relative efficiencies of foreign bad domestic banks in
the host nation.
Banks from the USA are found to be less efficient at transforming physical inputs
into loans and other items, but more efficient in revenue creation efficiency, with banks
from Japan and the UK also displaying superior revenue creation efficiency. This
second result is consistent with the limited global advantage hypothesis. Competitor
market share reduces bank efficiency in the host nation, resulting in over use of inputs
to produce outputs, and as shown by Williams (2003), resulting in lower profits. It was
also found that home nation financial development is associated with reduced Foreign bank
efficiency in the host nation and that positive attributes of parent banks such as efficiency in
increased size, higher profits and higher credit ratings have a negative impact on
foreign bank efficiency in the host nation. Australia
As with Berger et al. (2004) (in the case of cross-border bank mergers) it is hoped
that this paper will provide a call to research into factors determining foreign bank
efficiency. This study has considered foreign bank efficiency from the perspective of
one host nation, Australia, and using parametric distance functions and factor
193
analysis. Thus there is a need to address this research question in a variety of nations
and using different techniques. The techniques applied in this study were the result of
the limitations imposed by data availability and it is possible that the results of this
approach, combined with the impact of the single nation focus, will mean different
outcomes in different settings. Thus, an important extension to this study will be to
determine how robust these results are to differences in institutional settings.
For bank management, the results of Model 2 bear more interest, as they reflect, as
closely as possible given data limitation, the efficiency of foreign banks in
transforming costs into revenue. Thus managers of banks seeking to maximise their
host market revenue creation efficiency should seek markets with low levels of
incumbency for domestic banks and high levels of home nation client operations.
Banks from home nations with higher levels of GDP per capita (and thus more
financially advanced), particularly the USA, the UK and Japan are most likely to
efficiently transform their cost expenditure into revenue.
From a perspective of national bank policy makers the results are a little less clear
cut in some ways. The results of Model 1 are the most informative from their
perspective. If the national authorities in a developed world wish to allow a limited
number of foreign banks into their market (as Australia did in 1985), they should select
banks which are most able to efficiently use scarce resources. Such banks are more
likely to be from those nations with large investment in the host nations and higher
economic similarity. However, given that the last two decades of banking deregulation
have emphasised increased openness, this is a less likely future regulatory scenario. A
scenario of limited foreign bank entry is more likely in newly opening developing
markets. As discussed above, the evidence to date finds multinational bank efficiency
in developing nations to be very different to the results in developed nations. Thus
there is a need to extend this study to a variety of circumstances to determine if these
results remain relevant to developing nations.

Notes
1. Berger et al. (2004, p. 334) discuss the liability of foreignness and the resulting
diseconomies of foreign operations.
2. These details are included in Appendix.
3. Details of these descriptive statistics are included in Appendix.
4. This outcome differs from that of Sturm and Williams (2004), this difference is most
likely due to the difference in estimation technique, with Sturm and Williams (2004),
applying non-parametric data envelopment analysis.
5. These results are included in Appendix.
6. These results are shown in Appendix.
7. The regressions results for the fully specified models without the nationality dummy are
shown in Appendix.
MF 8. The regressions results for the general to specific models without the nationality
dummy are shown in Appendix.
35,2
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About the authors

Jan-Egbert Sturm is Full Professor of Applied Macroeconomics at the Department of
Management, Technology and Economics (D-MTEC) as well as Director of the KOF Swiss
MF Economic Institute at the ETH Zurich, Switzerland. Professor Sturm is also affiliated to the
CESifo research network.
35,2 Barry Williams is Head of the Finance Group at the School of Business, Faculty of Business,
Technology and Sustainable Development, Bond University, Queensland, Australia. Professor
Williams is also research professor at the KOF Swiss Economic Institute. Barry Williams is the
corresponding author and can be contacted at: bwilliam@staff.bond.edu.au

196 Appendix

Home country
Home nation investment income 127 0.43 1.74 3.53 2.34
Trade with Australia as a share of Australia GDP 129 0.03 0.02 0.00 0.06
Home nation capital flow 128 1.28 1.27 0.67 6.05
Home nation capital stock 129 21.87 12.70 0.75 57.06
Log (home nation GDP per capita) 132 10.30 0.50 7.89 11.10
Parent bank
Home return on assets 132 0.63 0.62 1.66 3.02
Home net interest margin 121 2.52 1.37 1.62 4.93
Log (home assets) (average annual exchange rate) 132 12.13 1.04 9.04 14.04
Log (home capital) (average annual exchange rate) 127 9.44 1.10 6.79 12.71
Experience in Australia (years) 132 19.50 16.93 0.00 66.00
Ranked home credit rating 109 97.38 54.74 16.00 183.50
Host nation
Competitor market share 132 0.58 0.08 0.46 0.71
New trade theory
Dummy English language 132 0.58 0.49 0.00 1.00
Real growth differential to Australia 132 0.30 2.61 6.37 9.06
Index of comparative economic size 132 0.19 0.17 0.02 1.00
Index of comparative economic development 132 0.76 0.18 0.08 1.00
Control
Dummy Canada 132 0.02 0.12 0.00 1.00
Dummy Germany 132 0.05 0.21 0.00 1.00
Dummy Hong Kong 132 0.01 0.09 0.00 1.00
Dummy Japan 132 0.26 0.44 0.00 1.00
Dummy Jordan 132 0.02 0.15 0.00 1.00
Dummy Singapore 132 0.05 0.21 0.00 1.00
Dummy Switzerland 132 0.02 0.15 0.00 1.00
Dummy UK 132 0.32 0.47 0.00 1.00
Table AI. Dummy USA 132 0.25 0.43 0.00 1.00
Descriptive statistics: Dummy Bank WA 132 0.06 0.24 0.00 1.00
parent characteristics Dummy ING 132 0.02 0.12 0.00 1.00

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Series Observed Mean SE Minimum Maximum Foreign bank
efficiency in
Panel A: all banks Australia
Deposits 334 16,627,473 31,670,293 2,607 191,000,000
Employees 341 7,497 14,146 43 50,366
Housing loans 361 4,080,611 7,811,910 0 47,679,000
Loans 334 17,246,386 33,448,542 188,471 208,000,000
Non-interest income 321 494,091 961,216 1,678 6,522,999 197
Off-balance sheet activity 304 7,925,736 17,324,183 0 96,141,000
Equity capital 364 1,699,438 3,484,645 21,999 23,556,999
Interest income 324 2,030,574 3,564,893 31,235 19,918,999
Interest expense 322 1,324,700 2,272,543 6,150 12,958,999
Investments 334 3,599,697 6,158,195 2,700 45,165,999
Non-interest expense 283 872,726 1,440,134 8,131 8,348,999
Panel B: big four banks
Deposits 56 78,631,183 34,541,815 27,577,499 191,000,000
Employees 56 38,552 6,608 22,500 50,366
Housing loans 56 18,759,232 9,994,634 4,370,841 47,679,000
Loans 56 81,615,712 38,934,619 26,445,398 208,000,000
Non-interest income 56 2,124,322 1,125,816 626,499 6,522,999
Off-balance sheet activity 52 41,359,625 19,934,037 5,510,000 96,141,000
Equity capital 56 8,674,520 4,393,153 2,491,899 23,556,999
Interest income 56 9,281,054 2,835,641 4,902,799 19,918,999
Interest expense 56 5,834,337 2,030,585 3,103,399 12,958,999
Investments 56 14,866,742 6,556,399 6,403,099 45,165,999
Non-interest expense 56 3,450,101 1,160,910 1,799,699 8,348,999
Panel C: other domestic banks
Deposits 134 6,803,024 7,403,338 267,770 37,853,918
Employees 134 2,242 2,368 45 11,495
Housing loans 139 2,544,646 3,461,435 0 20,300,100
Loans 134 6,655,576 7,763,194 188,471 39,698,998
Non-interest income 133 233,326 565,918 1,678 4,331,999
Off-balance sheet activity 119 1,392,368 1,877,616 0 9,826,000
Equity capital 157 597,805 815,295 21,999 3,858,999
Interest income 133 763,401 764,347 46,361 3,310,999
Interest expense 133 538,757 550,861 6,150 2,457,599
Investments 134 1,932,073 3,369,209 54,484 29,246,999
Non-interest expense 131 334,516 574,008 22,322 4,260,999
Panel D: foreign banks
Deposits 144 1,657,115 2,037,772 2,607 12,322,799
Employees 151 644 788 43 3,311
Housing loans 166 414,926 1,093,813 0 6,386,400
Loans 144 2,069,206 2,564,837 295,810 16,633,098
Non-interest income 132 65,217 107,813 2,121 580,545
Off-balance sheet activity 133 699,486 893,698 5,772 5,086,258
Equity capital 151 258,060 304,297 21,999 1,576,768
Interest income 135 271,368 276,123 31,235 1,344,199
Interest expense 133 211,849 198,942 21,494 947,099
Investments 144 769,886 914,925 2,700 5,051,665
Non-interest expense 96 103,689 111,618 8,131 568,217

Note: All values in $A,000 except employees Table AII.

Source: Australian Bank data Descriptive statistics
MF Series Observed Mean SE Minimum Maximum
35,2
All banks
Model 1 280 0.83 0.12 0.24 0.96
Model 1a 261 0.83 0.09 0.51 0.96
Model 1b 280 0.86 0.08 0.51 0.97
Model 2 272 0.87 0.10 0.16 0.97
198 Foreign banks
Model 1 125 0.80 0.17 0.24 0.96
Model 1a 112 0.83 0.11 0.51 0.96
Table AIII. Model 1b 125 0.85 0.10 0.51 0.97
Average efficiency scores Model 2 85 0.85 0.13 0.16 0.97

Observations/correlation Model 1 Model 1a Model 1b Model 2

All banks
Model 1 280 0.70 0.63 0.03
Model 1a 261 261 0.61 0.01
Model 1b 280 261 280 0.08
Model 2 232 221 232 272
Foreign banks
Model 1 125 0.74 0.68 0.15
Model 1a 112 112 0.64 0.16
Model 1b 125 112 125 0.17
Model 2 78 73 78 85
Notes: Model 1: inputs: (i) employees, (ii) deposits, (iii) equity capital; outputs: (i) loans, (ii) off-
balance sheet activity. Model 1a: inputs: (i) employees, (ii) deposits, (iii) equity capital; outputs:
(i) loans less housing loans, (ii) housing loans (iii) off-balance sheet activity. Model 1b: inputs:
Table AIV. (i) employees, (ii) deposits, (iii) equity capital; outputs: (i) loans, (ii) investments, (iii) off-balance
Correlation between sheet activity. Model 2: inputs: (i) interest expenses, (ii) non-interest expenses; outputs: (i) net
efficiency scores interest income, (ii) non-interest income

Kaiser–Meyer–Olkin measure of sampling adequacy 0.664

Table AV. Bartlett’s test of sphericity Approximate 2 1203.066
KMO and Bartlett’s tests df 91
of factorability Significance 0.000
 Initial eigenvalues Extraction sums of squared loadings Rotation sums of squared loadings
Percentage Cumulative Percentage Cumulative Percentage Cumulative
Factor Total of variance percentage Total of variance percentage Total of variance percentage

Extraction method: alpha factoring

1 3.881 27.720 27.720 3.589 25.633 25.633 3.315 23.681 23.681
2 3.354 23.954 51.674 3.152 22.517 48.150 1.782 12.727 36.408
3 1.555 11.110 62.783 1.236 8.832 56.982 1.639 11.705 48.114
4 1.439 10.275 73.059 1.051 7.505 64.487 1.605 11.466 59.580
5 1.111 7.938 80.997 0.824 5.882 70.369 1.510 10.789 70.369
6 0.658 4.701 85.697
7 0.567 4.052 89.750
8 0.421 3.006 92.755
9 0.394 2.813 95.568
10 0.185 1.322 96.891
11 0.170 1.212 98.102
12 0.116 0.825 98.928
13 0.091 0.653 99.581
14 0.059 0.419 100.000
Extraction method: image factoring
1 3.881 27.720 27.720 3.522 25.158 25.158 3.208 22.914 22.914
2 3.354 23.954 51.674 2.773 19.810 44.968 1.447 10.333 33.247
3 1.555 11.110 62.783 0.974 6.955 51.923 1.311 9.366 42.612
4 1.439 10.275 73.059 0.723 5.161 57.084 1.306 9.330 51.942
5 1.111 7.938 80.997 0.502 3.583 60.668 1.222 8.726 60.668
6 0.658 4.701 85.697
7 0.567 4.052 89.750
8 0.421 3.006 92.755
9 0.394 2.813 95.568
10 0.185 1.322 96.891
11 0.170 1.212 98.102
12 0.116 0.825 98.928
13 0.091 0.653 99.581
14 0.059 0.419 100.000

Total variance explained

Table AVI.
Australia
Foreign bank

199
efficiency in
 MF
35,2

200

Table AVII.

with bank- and

time-specific effects
Random effects models
TE_M1 TE_M1A TE_M1B TE_M2
Alpha Img Alpha Img Alpha Img Alpha Img

Constant Constant 0.78 (18.64) 0.78 (15.59) 0.82 (27.50) 0.82 (25.61) 0.84 (30.06) 0.84 (29.33) 0.86 (15.91) 0.85 (14.64)
ALPHAFAC1 IMGFAC1 0.02 (0.74) 0.01 (0.21) 0.04 (2.00) 0.04 (1.71) 0.04 (1.67) 0.02 (0.81) 0.04 (0.82) 0.01 (0.15)
ALPHAFAC2 IMGFAC2 0.01 (0.33) 0.01 (0.41) 0.03 (1.40) 0.05 (2.02) 0.01 (0.28) 0.01 (0.33) 0.04 (1.21) 0.01 (0.20)
ALPHAFAC3 IMGFAC5 0.01 (0.62) 0.00 (0.02) 0.02 (0.94) 0.00 (0.20) 0.01 (0.48) 0.01 (0.33) 0.00 (0.02) 0.03 (0.85)
ALPHAFAC4 IMGFAC4 0.01 (0.33) 0.01 (0.25) 0.01 (0.56) 0.00 (0.19) 0.00 (0.02) 0.00 (0.07) 0.07 (2.26) 0.07 (1.58)
ALPHAFAC5 IMGFAC3 0.05 (2.52) 0.08 (2.73) 0.04 (1.93) 0.05 (2.04) 0.04 (2.52) 0.06 (2.70) 0.03 (1.01) 0.04 (0.93)

Notes: No dummy variables for nationality. t-statistics in parentheses. Alpha factor 1, image factor 1: macroeconomic factors; alpha factor 2, image
factor 2: defensive expansion; alpha factor 3, image factor 5: mixed factor, home and host effects; alpha factor 4, image factor 4: parent factors; alpha
factor 5, image factor 3: mixed factor, home/host/parent
 TE_M1 TE_M1A TE_M1B TE_M2
Alpha Img Alpha Img Alpha Img Alpha Img

Constant Constant 0.78 (19.82) 0.78 (20.52) 0.82 (35.62) 0.82 (35.90) 0.84 (36.41) 0.84 (47.03) 0.84 (18.17) 0.84 (15.49)
ALPHAFAC1 IMGFAC1 0.05 (2.35) 0.04 (2.03) 0.03 (1.88)
ALPHAFAC2 IMGFAC2 0.03 (1.96) 0.05 (2.20)
ALPHAFAC3 IMGFAC5 0.02 (1.80)
ALPHAFAC4 IMGFAC4 0.07 (2.50) 0.07 (1.99)
ALPHAFAC5 IMGFAC3 0.06 (3.86) 0.08 (4.64) 0.04 (2.82) 0.05 (2.81) 0.04 (3.52) 0.06 (4.36)

Notes: Random effects models with bank- and time-specific effects. No dummy variables for nationality. t-statistics in parentheses. Alpha factor 1, image
factor 1: macroeconomic factors; alpha factor 2, image factor 2: defensive expansion; alpha factor 3, image factor 5: mixed factor, home and host effects;
alpha factor 4, image factor 4: parent factors; alpha factor 5, image factor 3: mixed factor, home/host/parent

reduced form model

Table AVIII.
General to specific
Australia
Foreign bank

201
efficiency in