I have analysed empirically the impacts of ownership on the cost efficiency of banks in SA and the channels by which knowledge have spilled over. I have found evidence of impacts of foreign ownership on cost efficiency. The foreign-owned banks have a higher efficiency score resulting from differences in risk preferences between categories of banks. The regressions of cost efficiency on control variables for size and structure of activities shows significant influences of foreign ownership that can be explained by better corporate governance, smaller size and transfer of knowledge and know-how from their mother company. In addition, it can be observed that there is a link between the first big acquisition of a domestic bank by a British bank in 2005 and foreign banks’ efficiency scores. One year before the acquisition deal, the efficiency score of foreign banks decreased slightly to increase again one year after the deal. This suggests some competition effects. From 2000 to 2010 both categories of banks increased their cost efficiency scores slowly but steadily. But there is still a big efficiency gap (28 percentage points) on average between domestic and foreign- owned banks. Although it is not easy to use and replicate processes and systems used by foreign banks that operate in investment banking, but with a score of about 80%, the domestic banks have plenty of room for efficiency improvement and clearly this should be a concern for policy makers, especially as efficiency implies economies of scale and scope, which in turn can provide better and cheaper banking products and services. One way is to allow more competition in retail banking by letting more foreign banks operate in this segment. This is what possibly the SA government had in mind when it authorised the acquisition of ABSA by Barclays bank. But 5 years later and despite the acquisition of 20% shares of the ICBC in the Standard Bank, this result show and confirm (finding from case study) that resulting competition did not occur. It is generally considered that foreign banks increase competition and access to financial services, enhance financial and economic performance of their borrowers and bring greater financial stability (Clarke, Cill, Martinez Peria and Sanchez, 2003; Claessens, 2006, Chopra, 2007, and Cull and Martinez Peria, 2011). But with two big independent banks out of four left (Nedbank and First Bank), the SA government may feel reluctant to allow more acquisitions, as it may fear for SA financial and economic
stability. And indeed, there is reason to be fearful. An important concern over foreign banks’ presence is the tendency for foreign banks to leave foreign markets in times of economic downturn and political crisis, also called a hit and run strategy. A consequence of this strategy is the possibility of triggering risks for financial stability as well as a decrease of private sector credits. But many examples show that the hit and run strategy is not systematic. For instance in the case of Argentina and Mexico, Dages, Goldberg and Kinney (2000), who look at the rate of growth in lending during and after the Tequila Crisis of 1995 show that foreign banks expand lending even when domestic GDP is stagnating or falling. They conclude that foreign banks’ lending provides a counter-cyclical support to the economy. Other fears of policy makers are the tendency of foreign banks to cherry-pick, meaning that foreign banks are more interested in large and less risky customers, neglecting the credit-lending to smaller borrowers. In the policy-makers view, this leaves domestic banks with more potentially risky customers, leading to more bankruptcies and credit constraints on the private sector (Hermes and Lesink, 2002; World Bank, 2002). However, as the survey from chapter 4 shows, this is already the case as most of the foreign banks operate in the wholesale segment (excluding ABSA bought in 2005 by Barclays) and no negative aspects have so far been reported as the retail segment seems to be dominated by the four big SA banks. Therefore, given the huge potential to increase efficiency, the domestic banks should take more opportunity to gain economies of scale and scope. One solution is perhaps to introduce more competition and allow even more acquisition of domestic banks. Since foreign banks are usually large, market-lending banks, they operate at larger scale than domestic banks. There is reason to believe that foreign banks will be able to take advantage of economies of scope because generally they are universal banks and/or members of financial conglomerates that offer a wide range of products and services.
Advocating more competition in the retail-banking sector is important for spillover effects and/or transfer of knowledge. The survey in this study shows that despite the availability of some technologies, knowledge and skills, efficiency as well as spillover effects occurred but were limited to the segment in which the foreign banks operate. This result corroborates the finding on efficiency from this chapter and confirms the result of the empirical model in chapter 6 that finds no evidence of spillovers effects
but limited competition effects. This also confirms the fact that if the foreign banks are only interested in limited market segments then the effect on overall competition will be small. But inversely, it can be assumed that if they are interested in the broader market, their effect on competition may be large (Kraft, 2002)”.