A Statistical Analysis of International Banking Measures and Relative Profitability

Abstract

There are three general conclusions from this study of the international activities of U.S. banks. The first two conclusions are based specifically on the 1980 analysis. The third conclusion is based on the analysis for each of the years 1978-1980. The first conclusion is that these banks manage some asset-related international banking activities (especially loans) less consistently and uniformly than their liability-related international banking activities. For example, this apparent mismatch in the management of major sources and uses of international funds may reflect shortcomings in spread (net interest margin) management. Spread management attempts to stabilize and maintain the spread between asset returns and liability costs over time. This apparent mismatch could also explain the second conclusion that some international loan assets are significantly less profitable than their domestic counterparts. This relationship is certainly consistent with the trends discussed above, including the experience of some U.S. banks in their loans to developing countries. The third conclusion is that the results of the factor analysis are generally consistent for each of the three years studied. This suggests general longitudinal consistency in the (1) management of the factors which explain most of the total variance in international banking activities and (2) correlation between these factors and relative bank profitability.

Thus, the hypothesis that international banking activities are less profitable than domestic banking activities is accepted, but only in a limited sense. Some international loan assets (Table 3), were less profitable than their domestic counterparts. However, some with the trends discussed above, including the experience of some U.S. banks in their loans to developing countries. International cash-assets (Table 4) were no less profitable than their domestic counterparts. However, this partial support for the general hypothesis lends support for the subsidiary hypothesis that international lending activities are less profitable than domestic lending activities. This partial support suggests (on the basis of relative profitability) that banks should carefully assess their strategic priorities in allocating funds among their foreign and domestic loan markets.