Foreign bank diversification and efficiency prior to and during the financial crisis: Does one business model fit all?

Diversified and focused business models may affect foreign bank efficiency differently in branches or subsidiaries. We investigate whether there is a unique optimal business model in three dimensions: assets, funding and income. We apply recently developed bootstrap methods to estimate group efficiency separately for diversified and focused banks and to test for differences across groups. We further analyze the link between bank efficiency and bank-specific characteristics including diversification measures. Using Luxembourg bank data that includes the financial crisis, we find there is no unique business model as diversified and focused foreign banks coexist and compete in all three dimensions. The most efficient business model appears to be diversified with regard to assets and focused with respect to funding and income. Over time, we find a shift to more focused assets and funding but not income.