International banking is now a days becoming backbone of any economy. It plays a vital role in the development of financial system of country. International banking activities has been grown-up speedily due to increased international trade flows and foreign direct investment activities, the globalization of capital markets, and the liberalization of domestic financial markets since 1960s. International banking activities may involve cross-border activities and activities of banks outside their home country (i.e. foreign banks). Banking has gradually become more globalized, which leads towards advances in communications and technology, economic integration. Especially, foreign bank entry has increased sharply in the last few decades, which helped different nations in the development of their financial system. Foreign banks also helped the economies in financial crisis to deal with it and also helped in the establishment and restructuring of their financial system after that crisis.
Many studies have taken out on this issue, i.e. on foreign banking on different developed and under-developed nations and transition economies as well. The competitive advantage of the foreign banks was first investigated by Goldberg (1992). Following this original study, many studies including Meinster and Elyasiani (1988), Mahajan et al. (1996), DeYoung and Nolle (1996), Elyasiani and Mehdian (1995), Jagtiani and Khanthavit (1996) have been taken and gave deeper and meaningful analysis. All of these studies had uses formal econometric analysis based on a precise theoretical background of microeconomics. These studies concluded that cost structure and performances differ between domestic and foreign banks as they are different in management strategies, clients, knowledge of the local market, and international business platforms. These studies had proved that foreign banks can improve the financial system of any country depending on the issue whether it is a developed or under-developed country. Most of the studies of FDI in banking in the U.S rightly focus on branches and agencies.
Adrian E. Tschoegl (2010), had studied the impact of foreign banks by dividing foreign banks into two categories i.e. affiliates and subsidiaries. He argued that in general, there is no reason to expect foreign banks to be better than local banks in well-developed competitive retail markets; this argument was also supported by Dufey and Yeung, in 1993.
Foreign banks are not successful in already competitive domestic banking markets. Aggregate data of different studies supports this argument by stating that foreign banks have no advantage in already competitive retail banking markets. Demirgiic-Kunt and Huizinga (1999) and Claessens et al., (2001) found that foreign banks are likely to have higher margins and profits than domestic banks in developing countries, but lower margins and profits in industrial or developed countries. Demirgiiu-Kunt and Huiz-inga (2001) further found evidence...