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Modeling Foreign Bank Performance and Lending Behavior

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  • Philip Molyneux
  • Eli Remolona
  • Rama Seth

Abstract

This paper examines the profitability and commercial loan growth of foreign banks using a simultaneous‐equation framework. Maximizing behavior provides a two‐equation system in which bank profitability depends on variables related to expected returns, costs, and risks and in which loan growth is determined by risk and return variables. The model is tested to evaluate the determinants of foreign bank performace and lending behavior in the United States between 1987 and 1991. Overall the results indicate that factors such as capital strength, commercial and industrial loan growth, and assets composition were important in determining foreign banks’ return‐on‐assets in the period under study. The role of capital appears to be particularly important in explaining foreign bank performance. The single significant determinant of loan growth was found to be previous period's loan growth.

Suggested Citation

  • Philip Molyneux & Eli Remolona & Rama Seth, 1998. "Modeling Foreign Bank Performance and Lending Behavior," Financial Markets, Institutions & Instruments, John Wiley & Sons, vol. 7(4), pages 26-41, November.
    • Handle: RePEc:wly:finmar:v:7:y:1998:i:4:p:26-41
    DOI: 10.1111/1468-0416.00022
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