When are Multinational Banks Getting a Bang for Their Buck on Their Subsidiaries Abroad?

Abstract

This paper investigates whether foreign subsidiaries outperform their parent banks in terms of profitability and what determines this outcome. Using a large sample of multinational banks and their subsidiaries in a large number of countries, this study shows that, on average, foreign subsidiaries are less profitable than their parent banks are. At the same time, however, foreign subsidiaries have higher net interest margins but also higher overhead costs relative to their parent banks. One explanation for the results is that parent banks transfer income banks using overhead costs, what may explain the existing results. Moreover, the results show that foreign subsidiaries tend to perform better than their parent banks if the latter are underperforming in the home market. Finally, the results show that the determinants of the profitability of the subsidiary in relation to its parent bank are strongly determined by the origins of the parent bank and, to a lesser extent, by the host market’s characteristics as well as the distance to the home country of the multinational bank.