Comparative cost study of foreign and Thai domestic banks in 1990-2002: Its policy implications for a desirable banking industry structure

This paper investigates the changing production technologies of foreign and domestic banks in Thailand in relation to increased foreign bank penetration by estimating their cost functions using panel data from 28 banks during 1990-2002. Our analysis suggests that foreign and domestic banks have the different advantages in their information production and processing. After the Asian crisis, more stringent prudential regulations improved the comparative cost performance of foreign banks. Foreign acquisition of domestic banks reduced costs associated with fee-based businesses and improved their operational efficiency. The analysis provides some evidence that consolidating domestic banks, allowing greater foreign bank penetration and enhancing information sharing system are needed to build a desirable banking industry structure.