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Abstract:
Note: The following is a description of the paper and not the actual abstract.

The results of applying frontier efficiency analysis to financial institutions are surveyed. While most of the 130 studies have been applied to U.S. financial institutions, 21 countries are covered overall. We find that the various nonparametric and parametric frontier methodologies generally differ both in terms of reported average efficiency as well as in rankings of financial firms by their efficiency level. The results of these studies for government policy, methodological issues, and managerial performance are also summarized and topics where further analysis would prove useful are identified.

Abstract:
This paper surveys 130 studies that apply frontier efficiency analysis to financial institutions in 21 countries. The primary goals are to summarize and critically review empirical estimates of financial institution efficiency and to attempt to arrive at a consensus view. We find that the various efficiency methods do not necessarily yield consistent results and suggest some ways that these methods might be improved to bring about findings that are more consistent, accurate and useful. Secondary goals are to address the implications of efficiency results for financial institutions in the areas of government policy, research and managerial performance. Areas needing additional research are also outlined.

Abstract:
This paper addresses a little examined intersection between the problem loan literature and the bank efficiency literature. We employ Granger-causality techniques to test four hypotheses regarding the relationships among loan quality, cost efficiency and bank capital. The data suggest that problem loans precede reductions in measured cost efficiency: that cost efficiency precedes reductions in problem loans; and that reductions in capital at thinly capitalized banks precede increases in problem loans. Hence, cost efficiency may be an important indicator of future problem loans and problem banks. Our results are ambiguous concerning whether or not researchers should include loan quality in efficiency estimation.

Abstract:
We examine the economics of financing small business in private equity and debt markets. Firms are viewed through a financial growth cycle paradigm in which different capital structures are optimal at different points in the cycle. We show the sources of small business finance, and how capital structure varies with firm size and age. The interconnectedness of small firm finance is discussed along with the impact of the macroeconomic environment. We also analyze a number of research and policy issues, review the literature, and suggest topics for future research.

Abstract:
This article analyzes the economics of small business finance and the private equity and debt markets in which these businesses raise funds. The framework used is a financial growth cycle paradigm, in which the optimal choice among capital structures differs over the cycle. We also show the actual capital structure of small business and how this structure varies with the size and age of the firm. In addition, we analyze a number of research and policy issues, review the relevant literature, and suggest topics for future research.

Abstract:
This article evaluates the causes, consequences, and future implications of financial services industry consolidation using a value maximization framework. We also reviews the extant research literature within the context of this framework (over 250 references), and suggest future research topics. The evidence is consistent with increases in market power from some types of consolidation, improvements in profit efficiency and diversification of risks on average, and potential improvements in payments system efficiency. However, the data suggest little or no cost efficiency improvements on average; relatively little effect on the availability of services to small customers; and potential costs on the financial system from increasing systemic risk or expanding the financial safety net.

Abstract:
This article designs a framework for evaluating the causes, consequences, and future implications of financial services industry consolidation, reviews the extant research literature within the context of this framework (over 250 references), and suggests fruitful avenues for future research. The evidence is consistent with increases in market power from some types of consolidation; improvements in profit efficiency and diversification of risks, but little or no cost efficiency improvements on average; relatively little effect on the availability of services to small customers; potential improvements in payments system efficiency; and potential costs on the financial system from increasing systemic risk or expanding the financial safety net.

banks, mergers, payments, small business

Abstract:
Corporate governance theory predicts that leverage affects agency costs and thereby influences firm performance. We propose a new approach to test this theory using profit efficiency, or how close a firm's profits are to the benchmark of a best-practice firm facing the same exogenous conditions.
We are also the first to employ a simultaneous-equations model that accounts for reverse causality from performance to capital structure. We also control for measures of ownership structure in the tests. We find that data on the U.S. banking industry are consistent with the theory, and the results are statistically significant, economically significant, and
robust.

Capital structure, agency costs, banking, efficiency

Abstract:
We address the causes, consequences, and implications of the cross-border consolidation of financial institutions by reviewing several hundred studies, providing comparative international data, and estimating cross-border banking efficiency in France, Germany, Spain, the U.K., and the U.S. during the 1990s. We find that, on average, domestic banks have higher profit efficiency than foreign banks. However, banks from at least one country (the U.S.) appear to operate with relatively high efficiency both at home and abroad. If these results continue to hold, they do not preclude successful international expansion by some financial firms, but they do suggest limits to global consolidation.

Abstract:
We address the causes, consequences, and implications of the cross-border consolidation of financial institutions by reviewing several hundred studies, providing comparative international data, and estimating cross-border banking efficiency in France, Germany, Spain, the U.K., and the U.S. during the 1990s. We find that, on average, domestic banks have higher profit efficiency than foreign banks. However, banks from at least one country (the U.S.) appear to operate with relatively high efficiency both at home and abroad. If these results continue to hold, they do not preclude successful international expansion by some financial firms, but they do suggest limits to global consolidation.

Abstract:
We examine the effects of bank M&As on small business lending. Our methodology permits empirical analysis of the great majority of U.S. bank M&As since the late 1970s -- over 6,000 M&As involving over 10,000 banks (some active banks are counted multiple times). We are the first to decompose the impact of M&As on small business lending into static effects associated with a simple melding of the antecedent institutions and dynamic effects
associated with post-M&A refocusing of the consolidated institution. We are also the first to estimate the reactions of other banks in local markets to M&As. We find that the static effects of consolidation which reduce small business lending are mostly offset by the reactions of other banks in the market, and in some cases also by refocusing efforts of the consolidating
institutions themselves.

Abstract:
We examine the economic effects of small business credit scoring (SBCS) and find that it is associated with expanded quantities, higher average prices, and greater risk levels for small business credits under $100,000. These findings are consistent with a net increase in lending to relatively risky "marginal borrowers" that would otherwise not receive credit, but pay relatively high prices when they are funded. We also find that: 1) bank-specific and industrywide learning curves are important; 2) SBCS effects differ for banks that adhere to "rules" versus "discretion" in using the technology; and 3) SBCS effects differ for slightly larger credits.

Banks, credit scoring, small business, risk

Abstract:
This paper examines the efficiency and price effects of mergers by applying a frontier profit function to data on bank "megamergers." We find that merged banks experience a statistically significant 16 percentage point average increase in profit efficiency rank relative to other large banks. Most of the improvement is from increasing revenues, including a shift in outputs from securities to loans, a higher-valued product. Improvements were greatest for the banks with the lowest efficiencies prior to merging, who therefore had the greatest capacity for improvement. By comparison, the effects on profits from merger-related changes in prices were found to be very small.

Abstract:
This paper examines the efficiency and price effects of mergers by applying a frontier profit function to data on bank `megamergers'. We find that merged banks experience a statistically significant 16 percentage point average increase in profit efficiency rank relative to other large banks. Most of the improvement is from increasing revenues, including a shift in outputs from securities to loans, a higher-valued product. Improvements were greatest for the banks with the lowest efficiencies prior to merging, who therefore had the greatest capacity for improvement. By comparison, the effects on profits from merger-related changes in prices were found to be very small.

Abstract:
We study the dynamics of market entry following mergers and acquisitions (M&As) using banking industry data. The findings suggest that M&As are associated with significant subsequent increases in the probability of entry and may explain more than 20% of entry in metropolitan markets, and more than 10% of entry in rural markets. These findings also suggest that entry may be part of an ?external? effect of M&As that helps supply credit to some relationship-dependent small business borrowers. Our results are robust to use of alternative econometric methods, changes in specifications of the exogenous variables, and alteration of the data samples.

Entry, Bank, Mergers

Abstract:
This paper models the inner workings of relationship lending, the implications for bank organisational structure, and the effects of shocks to the economic environment on the availability of relationship credit to small businesses. Relationship lending depends on the accumulation over time by the loan officer of 'soft' information. Because the loan officer is the repository of this soft information, agency problems are created throughout the organisation that may best be resolved by structuring the bank as a small, closely-held organisation with few managerial layers. The shocks analysed include technological innovations, regulatory regime shifts, banking industry consolidation, and monetary policy shocks.

Abstract:
This paper models the inner workings of relationship lending, the implications for bank organizational structure, and the effects of shocks to the economic environment on the availability of relationship credit to small businesses. Relationship lending depends on the accumulation over time by the loan officer of "soft" information. Because the loan officer is the repository of this soft information, agency problems are created throughout the organization that are best resolved by structuring the bank as a small, closely-held organization with few managerial layers. The shocks analyzed include technological innovations, regulatory regime shifts, banking industry consolidation, and monetary policy shocks.

Banks, small business, mergers, relationship lending, organisational structure

Abstract:
This paper models the inner workings of relationship lending, the implications for bank organizational structure, and the effects of shocks to the economic environment on the availability of relationship credit to small businesses. Relationship lending depends on the accumulation over time by the loan officer of "soft" information. Because the loan officer is the repository of this soft information, agency problems are created throughout the organization that are best resolved by structuring the bank as a small, closely-held organization with few managerial layers. The shocks analyzed include technological innovations, regulatory regime shifts, banking industry consolidation, and monetary policy shocks.

Banks, small business, mergers, relationship lending, organisational structure

Abstract:
We examine the efficiency effects of the integration of the financial services industry and suggest directions for future research. We also propose a relatively broad working definition of integration and employ U.S. and European data on financial service industry M&As to illustrate several types of integration. The analysis suggests that there is a large potential for efficiency gains from integration, but only a relatively small part of this potential may be realized. Integration appears to bring about larger revenue efficiency gains than cost efficiency gains, and most of the gains appear to be linked to benefits from risk diversification.

Banks, insurance, securities firms, mergers, efficiency, international finance

Abstract:
Over the past several years, substantial research effort has gone into measuring the efficiency of financial institutions. Many studies have found that inefficiencies are quite huge, on the order of 20% or more of total banking industry costs and about half of the industry?s potential profits. There is no consensus on the sources of the differences in measured efficiency. This paper examines several possible sources, including differences in efficiency concept, measurement method, and a number of bank, market, and regulatory characteristics. We review the existing literature and provide new evidence using data on U.S. banks over the period 1990-95.

Abstract:
We jointly analyze the static, selection, and dynamic effects of domestic, foreign, and state ownership on bank performance. We argue that it is important to include indicators of all the relevant governance effects in the same model. "Nonrobustness" checks (which purposely exclude some indicators) support this argument. Using data from Argentina in the 1990s, our strongest and most robust results concern state ownership. State-owned banks have poor long-term performance (static effect), those undergoing privatization had particularly poor performance beforehand (selection effect), and these banks dramatically improved following privatization (dynamic effect). However, much of the measured improvement is likely due to placing nonperforming loans into residual entities, leaving "good" privatized banks.

Bank, governance, M&A, foreign acquisition, privatization

Abstract:
This paper examines the role of relationship lending using a data set on small firm finance. We specifically examine price and nonprice terms of commercial bank lines of credit (L/C) extended to small firms. Our focus on bank L/Cs allows us to examine a type of loan contract where the bank-borrower relationship is likely to be an important mechanism for solving asymmetric information problems associated with financing small enterprises. We find that borrowers with longer banking relationships tend to pay lower interest rates and are less likely to pledge collateral. These results are consistent with theoretical arguments that relationship lending generates valuable information about borrower quality.

Abstract:
Theories based on incomplete contracting suggest that small organizations may do better than large organizations in activities that require the processing of soft information. We explore this idea in the context of bank lending to small firms, an activity that is typically thought of as relying heavily on soft information. We find that large banks are less willing than small banks to lend to informationally 'difficult' credits, such as firms that do not keep formal financial records. Moreover, controlling for the endogeneity of bank-firm matching, large banks lend at a greater distance, interact more impersonally with their borrowers, have shorter and less exclusive relationships, and do not alleviate credit constraints as effectively. All of this is consistent with small banks being better able to collect and act on soft information than large banks.

Abstract:
Theories based on incomplete contracting suggest that small organizations may do better than large organizations in activities that require the processing of soft information. We explore this idea in the context of bank lending to small firms, an activity that is typically thought of as relying heavily on soft information. We find that large banks are less willing than small banks to lend to informationally "difficult" credits, such as firms that do not keep formal financial records. Moreover, controlling for the endogeneity of bank-firm matching, large banks lend at a greater distance, interact more impersonally with their borrowers, have shorter and less exclusive relationships, and do not alleviate credit constraints as effectively. All of this is consistent with small banks being better able to collect and act on soft information than large banks.

Functional form, organizational structure, distance, banking, soft information, hard information

Abstract:
The authors propose a more complete conceptual framework for analysis of credit availability for small and medium enterprises (SMEs). In this framework, lending technologies are the key conduit through which government policies and national financial structures affect credit availability. They emphasize a causal chain from policy to financial structures which affect the feasibility and profitability of different lending technologies. These technologies, in turn, have important effects on SME credit availability. Financial structures include the presence of different financial institution types and the conditions under which they operate. Lending technologies include several transactions technologies, plus relationship lending. The authors argue that the framework implicit in most of the literature is oversimplified, neglects key elements of the chain, and often yields misleading conclusions. A common oversimplification is the treatment of transactions technologies as a homogeneous group, unsuitable for serving informationally opaque SMEs, and a frequent misleading conclusion is that large institutions are disadvantaged in lending to opaque SMEs.

SMEs, Banks, Relationship Lending, Governance, International.

Abstract:
Market size structure refers to the distribution of shares of different size classes of local market participants, where the sizes are inclusive of assets both within and outside the local market. We apply this new measure of market structure in two empirical analyses of the U.S. banking industry to address concerns regarding the effects of the consolidation in banking. Our quantity analysis of the likelihood that small businesses borrow from large versus small banks and our small business loan price analysis that includes market size structure as well as conventional measures yield very different findings from most of the literature on bank size and small business lending. Our results do not suggest a significant net advantage or disadvantage for large banks in small business lending overall, or in lending to informationally opaque small businesses in particular. We argue that the prior research that excluded market size structure may be misleading and offer some likely explanations of why our results differ.

Banks, small business, mergers, relationship lending, size structure, loan prices

Abstract:
Although the modern theory of financial intermediation portrays liquidity creation as an essential role of banks, comprehensive measures of bank liquidity creation do not exist. We construct four measures and apply them to data on virtually all U.S. banks from 1993-2003. We find that bank liquidity creation increased every year and exceeded $2.8 trillion in 2003. Large banks, multibank holding company members, retail banks, and recently-merged banks created the most liquidity. Bank liquidity creation is positively correlated with bank value. Testing recent theories of the relationship between capital and liquidity creation, we find that the relationship is positive for large banks and negative for small banks.

Capital Structure, Liquidity Creation, Regulation, and Banking

Abstract:
We assess the effects of geographic expansion on bank efficiency, using cost and profit efficiencies estimated for over 7000 U.S. banks from 1993 to 1998. We find both positive and negative links between geographic scope and bank efficiency. Parent organizations exercise some control over the efficiency of their affiliates, although this control tends to dissipate with the distance to the affiliate. However, on average, distance-related efficiency effects tend to be modest, and our results suggest that some efficient organizations can export efficient practices to their affiliates and overwhelm any effects of distance. The results imply there may be no particular optimal geographic scope for banking organizations?some may operate efficiently within a single region, while others may operate efficiently on a nationwide or international basis.

Banks, efficiency, mergers, financial institutions

Abstract:
We assess the effects of geographic expansion on bank efficiency using cost and profit efficiency for over 7,000 U.S. banks, 1993-1998. We find that parent organizations exercise some control over the efficiency of their affiliates, although this control tends to dissipate with distance to the affiliate. However, on average, distance-related efficiency effects tend to be modest, suggesting that some efficient organizations can overcome any effects of distance. The results imply there may be no particular optimal geographic scope for banking organizations some may operate efficiently within a single region, while others may operate efficiently on a nationwide or international basis.

Banks, efficiency, mergers, financial institutions

Abstract:
China's economy has been growing rapidly based on globalization of trade, but the country is only beginning to globalize its banking sector. China's current banking reform includes partially privatizing three of its dominant Big Four state-owned banks and taking on minority foreign ownership of these institutions. Other state-owned banks are also engaging in this practice. Predicting the efficiency effects of these and other reforms is difficult because of little relevant background research evidence. This paper helps to fill some of the gaps in the literature, analyzing the profit and cost efficiency of banks representing 95% of commercial banking assets in China over 1994-2003 with different majority and minority ownership structures. The key findings are that the Big Four state-owned banks are by far the least efficient, and that minority foreign ownership of other banks is associated with significantly improved efficiency. These and other findings suggest that minority foreign ownership of the Big Four and other reforms that allow foreign banks to play larger roles will likely improve the performance of the Chinese banking sector, with positive effects on economic growth.

China, Banks, Efficiency, Foreign ownership

Abstract:
We test hypotheses about the effects of bank size, foreign ownership, and distress on lending to informationally opaque small firms using a rich new data set on Argentinean banks, firms, and loans. We also test hypotheses about borrowing from a single bank versus multiple banks. Our results suggest that large and foreign-owned institutions may have difficulty extending relationship loans to opaque small firms. Bank distress appears to have no greater effect on small borrowers than on large borrowers, although even small firms may react to bank distress by borrowing from multiple banks, raising borrowing costs and destroying some relationship benefits.

Banks, mergers, foreign ownership, financial distress, multiple lenders

Abstract:
Large and foreign-owned institutions may have difficulty extending relationship loans to informationally opaque small firms. Bank distress does not appear to affect small business lending, although even small firms may react to bank distress by borrowing from multiple banks.

Consolidation of the banking industry is shifting assets into larger institutions that often operate in many nations. Large international financial institutions are geared toward serving large wholesale customers. How does this affect the banking system's ability to lend to informationally opaque small businesses?

Berger, Klapper, and Udell test hypotheses about the effects of bank size, foreign ownership, and distress on lending to informationally opaque small firms, using a rich new data set on Argentinean banks, firms, and loans. They also test hypotheses about borrowing from a single bank versus borrowing from several banks.

Their results suggest that large and foreign-owned institutions may have difficulty extending relationship loans to opaque small firms, especially if small businesses are delinquent in repaying their loans.

Bank distress resulting from lax prudential supervision and regulation appears to have no greater effect on small borrowers than on large borrowers, although even small firms may react to bank distress by borrowing from multiple banks, despite raising borrowing costs and destroying some of the benefits of exclusive lending relationships.

This paper - a product of Finance, Development Research Group - is part of a larger effort in the group to study small and medium size firm financing. The authors may be contacted at aberger@frb.gov, lklapper@worldbank.org, or gudell@indiana.edu.

Abstract:
This study examines the use of small business credit scoring (SBCS), a newly introduced technology to quantitatively evaluate small businesses applications for micro credits of less than $250,000. Credit scoring statistically predicts the likelihood of borrower default or delinquency. SBCS data is primarily personal consumer data on the owner. It can be used to evaluate opaque small businesses as well as to reduce underwriting costs for transparent borrowers. This study of SBCS is based on 99 responses gathered in a telephone survey conducted by the Federal Reserve Bank of Atlanta in January1998. Gathered were data about credit sizes scored; use of scores for approval or setting credit terms; use of vendor-supplied model; and length of use of SBCS. Found that all banks using SBCS used it for loans under $100,000, and 74.2 per cent for loans under $250,000. Credit scores were used by 41.9 per cent of banks for automatic approval or rejection, and affected credit terms at 32 per cent of institutions. Most banks used vendor-supplied models. Research and public policy implications are discussed for four areas: (1) banking industry consolidation and emergence of large nationwide banks; (2) geographic definition for banking markets; (3) potential development of secondary markets for small business credits; and (4) proliferation of SBCS technology. (TNM)

Credit ratings, Federal Reserve Bank of Atlanta, Secondary markets, Credit, Financial markets, Access to capital, Banking industry, Bank loans, Financial policies, Lending policies, Public policies

Abstract:
U.S. commercial banks are increasingly using small business credit-scoring models to underwrite small business credits. The paper discusses this lending technology, evaluates the research findings on the effects of this technology on small business credit availability, and links these findings to a number of research and policy issues.

Abstract:
U.S. commercial banks are increasingly using credit scoring models to underwrite small business credits. This paper discusses this technology, evaluates the research findings on the effects of this technology on small business credit availability, and links these findings to a number of research and public policy issues.

Banks, credit scoring, small business

Abstract:
We propose a set of consistency conditions that frontier efficiency measures should meet to be most useful for regulatory analysis or other purposes. The efficiency estimates should be consistent in their efficiency levels, rankings, and identification of best and worst firms, consistent over time and with competitive conditions in the market, and consistent with standard nonfrontier measures of performance. We provide evidence on these conditions by evaluating and comparing efficiency estimates on U.S. bank efficiency from variants of all four of the major approaches -- DEA, SFA, TFA, and DFA -- and find mixed
results.

Abstract:
NOTE: Below is a description of the paper and not the actual abstract.

We define six consistency conditions that frontier efficiency approaches to measuring the performance of financial institutions should meet to be useful for regulatory purposes. The first three conditions--that the efficiencies generated by these approaches be consistent with each other in terms of their efficiency levels, rankings, and identification of best and worst firms--help determine the degree to which the different approaches are consistent with each other. The latter three conditions--that the efficiencies are consistent over time, consistent with competitive conditions in the market, and consistent with standard non-frontier measures of performance--help determine the degree to which the efficiencies generated by the different approaches are consistent with reality and are believable, which is necessary for the efficiency estimates to be useful. We evaluate all four of the main approaches to estimating frontier efficiency or X-efficiency by employing multiple techniques within each of the four approaches, for a total of nine efficiency techniques evaluated. To be sure that the applications are comparable, all nine techniques estimated use the same efficiency concept (cost efficiency), the same sample of banks, same time interval, same specifications of inputs and outputs, and (for the parametric methods) the same functional form.

Our data set consists of a panel of 683 large U.S. banks that were in operation over the entire period from 1977-88 and operated in states that allowed branch banking. This was a period of many changes in regulations and market conditions, making it an almost ideal period to determine how the different frontier approaches identify and measure bank efficiency over a variety of extreme conditions.

Our findings yield some mixed evidence regarding the consistency of the four approaches. For the first three consistency conditions, these data suggest that the parametric methods are generally consistent with one another, and the non-parametric methods are generally consistent with one another, but the parametric and non-parametric methods are not generally mutually consistent.

Possible ?tie-breakers"--or conditions which help to choose whether the non-parametric versus parametric methods might be ?better?--are whether the efficiencies drawn from the different approaches are consistent with reality and are believable. All of the methods are found to be consistent over time (condition iv), but the parametric methods appear to be more consistent with what are generally believed to be the competitive conditions in banking markets (condition v), and also more consistent with non-frontier measures of bank performance such as return on assets or various cost ratios that are often used by regulators, managers, and consultants (condition vi). Furthermore, the parametric measures are generally highly positively correlated with the standard non-frontier performance measures, whereas DEA measures are much less strongly related to these other indicators of firm performance.

When performing regulatory analysis (or any other analysis that depends on frontier efficiency measurement), the use of multiple techniques and specifications should be helpful. If the six consistency conditions are met for two or more approaches, then one can be more confident in the conclusions drawn.

Abstract:
Financial crises and bank liquidity creation are often connected. We examine this connection from two perspectives. First, we examine the aggregate liquidity creation of banks before, during, and after five major financial crises in the U.S. from 1984:Q1 to 2008:Q1. We uncover numerous interesting patterns, such as a significant build-up or drop-off of "abnormal" liquidity creation before each crisis, where "abnormal" is defined relative to a time trend and seasonal factors. Banking and market-related crises differ in that banking crises were preceded by abnormal positive liquidity creation, while market-related crises were generally preceded by abnormal negative liquidity creation. Bank liquidity creation has both decreased and increased during crises, likely both exacerbating and ameliorating the effects of crises. Off-balance sheet guarantees such as loan commitments moved more than on-balance sheet assets such as mortgages and business lending during banking crises.

Second, we examine the effect of pre-crisis bank capital ratios on the competitive positions and profitability of individual banks during and after each crisis. The evidence suggests that high capital served large banks well around banking crises - they improved their liquidity creation market share and profitability during these crises and were able to hold on to their improved performance afterwards. In addition, high-capital listed banks enjoyed significantly higher abnormal stock returns than low-capital listed banks during banking crises. These benefits did not hold or held to a lesser degree around market-related crises and in normal times. In contrast, high capital ratios appear to have helped small banks improve their liquidity creation market share during banking crises, market-related crises, and normal times alike, and the gains in market share were sustained afterwards. Their profitability improved during two crises and subsequent to virtually every crisis. Similar results were observed during normal times for small banks.

Financial Crises, Liquidity Creation, and Banking

Abstract:
We model two dimensions of bank globalization - bank nationality (a bank from the firm's host nation, its home nation, or a third nation) and bank reach (a global, regional, or local bank) - using a two-stage nested multinomial logit model. Our data set includes over 2,000 foreign affiliates of multinational corporations operating in 20 European nations. We find that these firms frequently use host nation banks for cash management services, and that bank reach may be strongly influenced by this choice of bank nationality. Our results suggest limits to the degree of future bank globalization.

Bank, Globalization, Europe, Mergers

Abstract:
We compare the timeliness and accuracy of government supervisors versus market participants in assessing the condition of large U.S. bank holding companies. We find that supervisors and bond rating agencies both have some prior information that is useful to the other. In contrast, supervisory assessments and equity market indicators are not strongly interrelated. We also find that supervisory assessments are much less accurate overall than both bond and equity market assessments in predicting future changes in performance, but supervisors may be more accurate when inspections are recent. To some extent, these results may reflect differing incentives of the parties.

Abstract:
We compare the timeliness and accuracy of government supervisors versus market participants in assessing the condition of large U.S. bank holding companies. We find that supervisors and bond rating agencies both have some prior information that is useful to the other. In contrast, supervisory assessments and equity market indicators are not strongly interrelated. We also find that supervisory assessments are much less accurate overall than both bond and equity market assessments in predicting future changes in performance, but supervisors may be more accurate when inspections are recent. To some extent, these results may reflect differing incentives of the parties.

Abstract:
We investigate how banking market competition, informational opacity, and sensitivity to shocks have changed over the last three decades by examining the persistence of firm-level rents. We develop propagation mechanisms with testable implications to isolate the sources of persistence. Our analysis suggests that different processes underlie persistent performance at the high and low ends of the distribution. Our tests suggest that impediments to competition and informational opacity continue to be strong determinants of performance; that the reduction in geographic regulatory restrictions had little effect on competitiveness; and that performance remains sensitive to regional/macroeconomic shocks. The findings also suggest reasons for the recent record profitability of the industry.

Abstract:
The authors investigate the sources of recent changes in the performance of U.S. banks using concepts and techniques borrowed from the cross-section efficiency literature. Their most striking result is that during 1991-1997, cost productivity worsened while profit productivity improved substantially, particularly for banks engaging in mergers. The data are consistent with the hypothesis that banks tried to maximize profits by raising revenues as well as reducing costs, and that banks provided additional services or higher service quality that raised costs but also raised revenues by more than the cost increases. The results suggest that methods that exclude revenues may be misleading.

Abstract:
We test the implications of Flannery's (1986) and Diamond's (1991) models concerning the effects of risk and asymmetric information in determining debt maturity, and we examine the overall importance of informational asymmetries in debt maturity choices. We employ data on over 6,000 commercial loans from 53 large U.S. banks. Our results for low-risk firms are consistent with the predictions of both theoretical models, but our findings for high-risk firms conflict with the predictions of Diamond's model and with much of the empirical literature. Our findings also suggest a strong quantitative role for asymmetric information in explaining debt maturity.

Debt maturity, risk, asymmetric information, banks, credit scoring

Abstract:
Cross-border consolidation of financial institutions within Europe has been relatively limited, possibly reflecting efficiency barriers to operating across borders, including distance; differences in language, culture, currency, and regulatory/supervisory structures; and explicit or implicit rules against foreign competitors. EU policies such as the Single Market Programme and European Monetary Union attenuate some but not all of these barriers. The evidence is consistent with the hypothesis that these barriers offset most of any potential efficiency gains from cross-border consolidation. Banks headquartered in other EU nations have slightly lower average measured efficiency than domestic banks and non-EU-based foreign banks.

Banks, Mergers, Efficiency, Europe, Financial institutions

Abstract:
We test some predictions about the effects of technological progress on geographic expansion using data on banks in U.S. multibank holding companies over 1985-1998. Specifically, we test whether over time (a) parental control over affiliate banks has increased, and (b) the agency costs associated with distance from the parent have decreased. The data suggest that banking organizations exercise significant control over affiliates that has been increasing over time, and that the agency costs associated with distance have decreased somewhat over time. The findings are consistent with the hypothesis that technological progress has facilitated the geographic expansion of the banking industry.

Banks, efficiency, mergers, productivity, technological progress

Abstract:
We study the effects of structural changes in banking markets on the supply of credit to small businesses. Specifically, we examine whether bank mergers and acquisitions (M&As) and entry have "external" effects on small business loans by other banks in the same local markets. The results suggest modest positive external effects from these dynamic changes in competition, except that large banks may reduce small business lending in reaction to entry. We confirm bank size and age as important determinants of this lending, and show that the measured age effect does not appear to be driven bylocal market M&A activity.

Bank, Mergers, Small Business

Abstract:
We study the effects of structural changes in banking markets on the supply of credit to small businesses. Specifically, we examine whether bank mergers and acquisitions (M&As) and entry have "external" effects on small business loans by other banks in the same local markets. The results suggest modest positive external effects from these dynamic changes in competition, except that large banks may reduce small business lending in reaction to entry. We confirm bank size and age as important determinants of this lending, and show that the measured age effect does not appear to be driven by local market M&A activity.

Bank, mergers, small business

Abstract:
We study the effects of structural changes in banking markets on the supply of credit to small businesses. Specifically, we examine whether bank mergers and acquisitions (M&As) and entry have "external" effects on small business loans by other banks in the same local markets. The results suggest modest positive external effects from these dynamic changes in competition, except that large banks may reduce small business lending in reaction to entry. We confirm bank size and age as important determinants of this lending, and show that the measured age effect does not appear to be driven by local market M&A activity.

Bank, mergers, small business

Abstract:
We try to contribute to both the finance-growth literature and the community banking literature by testing the effects of the relative health of community banks on economic growth, and investigating potential transmission mechanisms for these effects using data from 1993-2000 on 49 nations. Data from both developed and developing nations suggest that greater market shares and efficiency ranks of small, private, domestically-owned banks are associated with better economic performance, and that the marginal benefits of higher shares are greater when the banks are more efficient. Only mixed support is found for hypothesized transmission mechanisms through improved financing for SMEs or greater overall bank credit flows. Data from developing nations are also consistent with favorable economic effects of foreign-owned banks, but unfavorable effects from state-owned banks.

Banks, community banking, SMEs, financial development, economic growth, international

Abstract:
Berger, Hasan, and Klapper contribute to both the finance-growth literature and the community banking literature by testing the effects of the relative health of community banks on economic growth, and investigating potential transmission mechanisms for these effects using data from 1993-2000 on 49 nations. Data from both industrial and developing nations suggest that greater market shares and efficiency ranks of small, private, domestically-owned banks are associated with better economic performance, and that the marginal benefits of higher shares are greater when the banks are more efficient. Only mixed support is found for hypothesized transmission mechanisms through improved financing for small and medium enterprises or greater overall bank credit flows. Data from developing nations are also consistent with favorable economic effects of foreign-owned banks, but unfavorable effects from state-owned banks.

This paper - a product of Finance, Development Research Group - is part of a larger effort in the group to study international banking.

Abstract:
This paper examines technological progress and its effects in the banking industry. Banks are intensive users of both IT and financial technologies, and have a wealth of data available that may be helpful for the general understanding of the effects of technological change. The research suggests improvements in costs and lending capacity due to improvements in "back-office" technologies, as well as consumer benefits from improved "front-office" technologies. The research also suggests significant overall productivity increases in terms of improved quality and variety of banking services. In addition, the research indicates that technological progress likely helped facilitate consolidation of the industry.

technological progress, productivity, banks, mergers, efficiency

Abstract:
The authors investigate the effects of technological change, deregulation, and dynamic changes in competition on the performance of U.S. banks. The authors' most striking result is that during 1991-1997, cost productivity worsened while profit productivity improved substantially, particularly for banks engaging in mergers. The data are consistent with the hypothesis that banks tried to maximize profits by raising revenues as well as reducing costs. Banks appeared to provide additional or higher quality services that raised costs but also raised revenues by more than the cost increases. The results suggest that methods that exclude revenues when assessing performance may be misleading.

Bank, productivity, efficiency, cost, profit

Abstract:
We formulate and test hypotheses about the role of bank ownership type - foreign, state-owned, and private domestic banks - in banking relationships. Our application uses data from India, an important developing nation. The empirical results are consistent with all of our hypotheses with regard to foreign banks. First, these banks tend to establish relationships with relatively transparent firms. Second, firms that have relationships with foreign banks are more likely to enter into multiple banking relationships and to maintain a larger number of such relationships. Finally, firms banking with foreign banks are more likely than others to diversify relationships across bank ownership types. The data are also consistent with the hypotheses that firms with relationships with state-owned banks are relatively unlikely to maintain multiple banking relationships, tend to interact with a smaller number of banks, and less often diversify across ownership types.

Banks & Banking Reform, Financial Intermediation, Financial Crisis Management & Restructuring, Banking Law, Economic Theory & Research

Abstract:
We provide evidence on the validity of the conglomeration hypothesis versus the strategic focus hypothesis for financial institutions using data on U.S. insurance companies. We distinguish between the hypotheses using profit scope economies, which measures the relative efficiency of joint versus specialized production, taking both costs and revenues into account. The results suggest that the conglomeration hypothesis dominates for some types of financial service providers and the strategic focus hypothesis dominates for other types. This may explain the empirical puzzle of why joint producers and specialists both appear to be competitively viable in the long run.

Abstract:
We test three hypotheses regarding changes in supervisory "toughness" and their effects on bank lending. The data provide modest support for all three hypotheses that there was an increase in toughness during the credit crunch period (1989-1992), that there was a decline in toughness during the boom period (1993-1998), and that changes in toughness, if they occurred, affected bank lending. However, all of the measured effects are small, with 1% or less of loans receiving harsher or easier classification, about 3% of banks receiving better or worse CAMEL ratings, and bank lending being changed by 1% or less of assets.

Bank, lending, supervision, regulation, credit crunch

Abstract:
We test three hypotheses regarding changes in supervisory "toughness" and their effects on bank lending. The data provide modest support for all three hypotheses that there was an increase in toughness during the credit crunch period (1989-1992), that there was a decline in toughness during the boom period (1993-1998), and that changes in toughness, if they occurred, affected bank lending. However, all of the measured effects are small, with 1% or less of loans receiving harsher or easier classification, about 3% of banks receiving better or worse CAMEL ratings, and bank lending being changed by 1% or less of assets.

Bank, lending, supervision, regulation, credit crunch

Abstract:
Large banking organizations in the U.S. hold significantly more equity capital than the minimum required by bank regulators. This capital cushion has built up during a period of unusual profitability for the banking system, leading some observers to argue that the capital merely reflects recent profits. Others contend that the banks deliberately choose target capital levels based on their risk exposures and their counterparties' sensitivities to default risk. In either case, the existence of "excess" capital makes it difficult to observe how banks manage their capital levels, particularly in response to regulatory changes (such as Basel II). We propose several hypotheses to explain this "excess" capital, and test these hypotheses using annual panel data for large, publicly traded U.S. bank holding companies (BHCs) from 1992 through 2006, and an innovative partial adjustment approach that allows both the target capital ratios and the speed of adjustment toward those targets to vary with firm-specific characteristics. We find evidence to suggest that large BHCs actively managed their capital ratios during our sample period. Our tests suggest that large BHCs choose target capital levels substantially above well-capitalized regulatory minima; that these targets increase with BHC risk but decrease with BHC size; that BHCs adjust toward these targets relatively quickly; and that adjustment speeds are faster for poorly capitalized BHCs, but slower (ceteris paribus) for BHCs under severe regulatory pressure.

Banks, Capital management, Capital regulation, Partial adjustment models

Abstract:
Under the traditional "competition-fragility" view, more bank competition erodes market power, decreases profit margins, and results in reduced franchise value that encourages bank risk taking. Under the alternative "competition-stability" view, more market power in the loan market may result in greater bank risk as the higher interest rates charged to loan customers make it more difficult to repay loans and exacerbate moral hazard and adverse selection problems. But even if market power in the loan market results in riskier loan portfolios, the overall risks of banks need not increase if banks protect their franchise values by increasing their equity capital or engaging in other risk-mitigating techniques. The authors test these theories by regressing measures of loan risk, bank risk, and bank equity capital on several measures of market power, as well as indicators of the business environment, using data for 8,235 banks in 23 developed nations. The results suggest that - consistent with the traditional "competition-fragility" view - banks with a greater degree of market power also have less overall risk exposure. The data also provide some support for one element of the "competition-stability" view - that market power increases loan portfolio risk. The authors show that this risk may be offset in part by higher equity capital ratios.

Banks & Banking Reform, Debt Markets, Access to Finance, Markets and Market Access

Abstract:
China is reforming its banking system, partially privatizing and permitting minority foreign ownership of three of the dominant 'big four' state-owned banks. This paper seeks to help predict the effects of this change by analysing the efficiency of virtually all Chinese banks in the years 1994-2003. Our findings suggest the big four banks are by far the least efficient and foreign banks the most efficient while minority foreign ownership is associated with significantly improved efficiency. We present corroborating robustness checks and offer several credible mechanisms through which minority foreign owners can increase Chinese bank efficiency. These findings suggest that minority foreign ownership of the big four is likely to significantly improve performance.

China, foreign banks, efficiency, foreign ownership

Abstract:
Stylized facts suggest that bank lending behavior is highly procyclical. We test a new hypothesis that may help explain why this occurs. The institutional memory hypothesis is driven by deterioration in the ability of loan officers over the bank's lending cycle that results in an easing of credit standards. This easing of standards may be compounded by simultaneous deterioration in the capacity of bank management to discipline its loan officers and reduction in the capacities of external stakeholders to discipline bank management. We test the empirical implications of this hypothesis using data from individual U.S. banks over the period 1980-2000. We employ over 200,000 observations on commercial loan growth measured at the bank level, over 2,000,000 observations on interest rate premiums on individual loans, and over 2,000 observations on credit standards and bank-level loan spreads from bank management survey responses. The empirical analysis provides support for the hypothesis.

Banks, Lending, Business Cycles

Abstract:
We offer and test two competing hypotheses for the consolidation trend in banking using U.S. banking industry data over the period 1982-2000. Under the efficiency hypothesis, technological progress improved the performance of large, multimarket firms relative to small, single-market firms, whereas under the hubris hypothesis, consolidation was largely driven by corporate hubris. Our results are consistent with an empirical dominance of the efficiency hypothesis over the hubris hypothesis on net, technological progress allowed large, multimarket banks to compete more effectively against small, single-market banks in the 1990s than in the 1980s. We also isolate the extent to which technological progress occurred through scale versus geographic effects and how they affected the performance of small, single-market banks through revenues versus costs. The results may shedlight as well on some of the research and policy issues related to community banking, and on the question of how community banks should be defined.

Banks, Community Banking, Bank Size, Multimarket Banks, Technological Progress

Abstract:
We offer and test two competing hypotheses for the consolidation trend in banking using U.S. banking industry data over the period 1982-2000. Under the efficiency hypothesis, technological progress improved the performance of large, multimarket firms relative to small, single-market firms, whereas under the hubris hypothesis, consolidation was largely driven by corporate hubris. Our results are consistent with an empirical dominance of the efficiency hypothesis over the hubris hypothesis - on net, technological progress allowed large, multimarket banks to compete more effectively against small, single-market banks in the 1990s than in the 1980s. We also isolate the extent to which technological progress occurred through scale versus geographic effects and how they affected the performance of small, single-market banks through revenues versus costs. The results may shed light as well on some of the research and policy issues related to community banking, and on the question of how community banks should be defined.

Banks, Community Banking, Bank Size, Multimarket Banks, Technological Progress

Abstract:
An important theoretical literature motivates collateral as a mechanism that mitigates adverse selection, credit rationing, and other inefficiencies that arise when borrowers hold ex ante private information. There is no clear empirical evidence regarding the central implication of this literature — that a reduction in asymmetric information reduces the incidence of collateral. We exploit exogenous variation in lender information related to the adoption of an information technology that reduces ex ante private information, and compare collateral outcomes before and after adoption. Our results are consistent with this central implication of the private-information models and support the empirical importance of this theory.

collateral, asymmetric information, banks, small business, credit scoring

Abstract:
"Old Europe" - the developed nations of continental Europe - averages only about 15% foreign bank ownership, whereas "New Europe" - the transition nations of Eastern Europe - averages about 70%. Similar findings hold elsewhere in the world - developed nations tend to have much lower foreign bank ownership shares than developing nations. We examine the causes of the differences within Europe with an eye toward more general conclusions. Our findings suggest that the low foreign bank shares in "Old Europe" - and perhaps developed nations more generally - may primarily result from net comparative disadvantages for foreign banks and relatively high implicit government entry barriers. The high foreign penetration in "New Europe" - and perhaps developing nations more generally - may be due to net comparative advantages for foreign banks and low government entry barriers, particularly in nations that reduced their state bank ownership.

Banks, Europe, Globalization, Cross-border

Abstract:
This paper analyzes how different levels of debtor protection across U.S. states affect small firms' access to credit, as well as the price and non-price terms of their loans. We use a measure of debtor protection that has its maximum value when the borrower's home equity is lower than the state homestead exemption (the debtor's home equity is fully protected), and is decreasing in the difference between the home equity and the homestead exemption (the amount that the creditor can seize). We find that the unlimited liability small businesses (sole proprietorships and most partnerships) have lower access to credit in states with more debtor-friendly bankruptcy laws. In addition, these businesses face harsher loan terms - they are more likely to pledge business collateral, have shorter maturities, pay higher rates, and borrow smaller amounts. For limited liability small businesses (corporations and limited liability partnerships), we also find a reduction in credit availability but of smaller magnitude, together with an increase in the loan rate, and decrease in loan amounts. Our results also suggest that the personal bankruptcy law especially affects firm owners with low home equity values.

Debtor protection, bankruptcy, small business, credit availability, agency problems

Abstract:
We examine the contention that as banks become larger and more organizationally complex i.e., more like universal banks they may reduce the supply of credit to small business borrowers. This would be consistent with an effort to reduce Williamson-type managerial diseconomies in providing services for large and small borrowers jointly. We investigate the empirical association of loan price and quantity with bank size and complexity, using a data set with over 900,00 bank loans. The data support the proposition that larger, more complex banks may reduce the supply of small business lending, although other institutions may replace many of these loans.

bank, universal, loan, collateral

Abstract:
We use a dataset of small and medium-sized enterprises (SMEs) in Italy, Germany, and the UK to focus on the strength of the bank-firm relationship and how this affects firms’ use of venture capital. Specifically, we test if firms substitute venture capital for multiple bank relationships to avoid the rent-extracting behavior of the main bank. Our empirical findings are consistent with this hypothesis, and are robust to changes in specification, estimation method, and sample. Employing matching estimators based on propensity scores, we also conduct a ‘horserace’ to establish if firm performance differs between firms that use venture capital and those firms that rely on single or multiple bank relationships. We find that the use of venture capital positively affects firm performance in terms of growth and R&D spending. However, such performance effects do not arise when firms rely on single or multiple bank relationships.

relationship banking, small business financing, venture capital

Abstract:
We try to identify which small businesses are most "debt sensitive," or most likely to be affected by banking market conditions. For our primary debt sensitivity categories, we hypothesize that bank conditions are most likely to have significant effects on firms in size classes and industries that are "on the bubble" for credit availability (probability of credit close to 0.50), rather than those with "relatively easy" or "relatively difficult" access to credit (probability much higher or lower, respectively). Our secondary classifications also require that loans fund a substantial proportion of assets for the firms in the category that have loans. We test the hypotheses by using a comprehensive data set of U.S. small businesses by size class and industry matched with variables measuring bank market power, market structure, and efficiency in the firm's local markets. We find the data to be consistent with the hypotheses, but not all of the bank conditions are significant. The support for the hypotheses is strongest using the secondary classifications.

Banks, Small Business, Concentration, Community Banking, Efficiency

Abstract:
Explores the role of bank-borrower relationships in small firm finance. Focus is on the availability and terms of lines of credit approved by banks. Data were obtained from the U.S. National Survey of Small Business Finances conducted in 1988-89. Telephone interviews were conducted with executives from approximately 3,400 firms, of which 863 reported having lines of credit. The variables used can be classified into five categories: line of credit contract characteristics, firm financial characteristics, firm governance characteristics, industry characteristics, and information/relationship characteristics. The analysis of loan rates shows that the relationship between the banker and the borrower impacts the pricing of the loans. These results are consistent with models that hold that there is a negative correlation between loan rates and the length of the relationship between the lender and the borrower. The requirement that a firm pledge collateral is less likely for older firms who have had long relationships with the bank. Overall, the analysis shows that the longer the relationship between the banker and the borrower, the easier the loan terms are for the borrower. These findings support the proposition that bank-borrower relationships provide important information about borrower quality. (SRD)

U.S. National Survey of Small Business Finances, Lines of credit, Bank-borrower relations, Interest rates, Bank loans, Credit, Banks, Access to capital, Interest (finance), Collateral, Firm financing

Abstract:
This paper examines the role of relationship lending in small firm finance. We examine price and nonprice terms of bank lines of credit (L/C) extended to small firms. Our focus on bank L/Cs allows us toe examine a type of loan contract in which the bank-borrower relationship is likely to be an important mechanism for solving asymmetric information problems associated with financing small enterprises. We find that borrowers with longer banking relationships pay lower interest rates and are less likely to pledge collateral. These results are consistent with theoretical arguments that relationship lending generates valuable information about borrower quality.

Abstract:
This article examines the role of relationship lending in small firm finance. We examine price and nonprice terms of bank lines of credit (L/C) extended to small firms. Our focus on bank L/Cs allows us to examine a type of loan contract in which the bank-borrower relationship is likely to be an important mechanism for solving asymmetric information problems associated with financing small enterprises. We find that borrowers with longer banking relationships pay lower interest rates and are less likely to pledge collateral. These results are consistent with theoretical arguments that relationship lending generates valuable information about borrower quality.

Abstract:
The literature has documented a positive relationship between the use of credit scoring for small business loans and small business credit availability, broadly defined. However, this literature is hampered by the fact that all of the studies are based on a single 1998 survey of the very largest U.S. banking organizations. This paper addresses a number of deficiencies in the extant literature by employing data from a new survey on the use of credit scoring in small business lending, primarily by community banks. The survey evidence suggests that the use of credit scores in small business lending by community banks is surprisingly widespread. Moreover, the scores employed tend to be the consumer credit scores of the small business owners rather than the more encompassing small business credit scores that include data on the firms as well as on the owners. Our empirical analysis suggests that credit scoring is associated with increased small business lending after a learning period, with no material change in the quality of the loan portfolio. However, these quantity and quality results appear to vary depending on the way in which credit scores are implemented in the underwriting process.

banks, small business, credit scoring

Abstract:
We examine the effects of bank M&As on small business lending using data on over 6,000 recent U.S. bank M&As. We are the first to decompose the impact of M&As into static effects from simply melding the antecedent institutions, and dynamic effects associated with post-M&A refocusing of the consolidated institution. We are also the first to estimate the dynamic reactions of other local banks. We find that the static effects of consolidation reduce small business lending, but are mostly offset by the reactions of other banks, and in some cases also by refocusing efforts of the consolidating institutions themselves.

Bank, Mergers, Small Business

Abstract:
We examine the effects of bank M&As on small business lending. Our methodology permits empirical analysis of the vast majority of U.S. bank M&As since the late 1970s -- over 6,000 M&As involving over 10,000 banks (some active banks are counted multiple times). We are the first to decompose the impact of M&As on small business lending into static effects associated with a simple melding of the antecedent institutions and dynamic effects associated with post-M&A refocusing of the consolidated institution. We are also the first to estimate the reactions of other banks in local markets to M&As. We find that the static effects of consolidation which reduce small business lending are mostly offset by the reactions of other banks in the amrket, and in some cases also by refocusing efforts of the consolidating institutions themselves.

Abstract:
This paper examines the effects of over 6,000 recent U.S. bank mergers and acquisitions (M&As) on small business lending. It is the first to decompose the impact of M&As into static effects from simply combining the institutions into a pro forma larger organization, and dynamic effects associated with post-M&A refocusing of the consolidated institution. It is also the first to estimate the external effect -- the dynamic reactions of other local banks. It is found that the static effects of M&As tend to reduce small business lending, but are mostly offset by the reactions of other banks, and in some cases also by refocusing efforts of the consolidating institutions themselves.

Abstract:
We test the implications of Flannery's (1986) and Diamond's (1991) models concerning the effects of risk and asymmetric information in determining debt maturity, and we examine the overall importance of informational asymmetries in debt maturity choices. We employ data on over 6,000 commercial loans from 53 large U.S. banks. Our results for low-risk firms are consistent with the predictions of both theoretical models, but our findings for high-risk firms conflict with the predictions of Diamond's model and with much of the empirical literature. Our findings also suggest a strong quantitative role for asymmetric information in explaining debt maturity.

Debt, Risk premium, Banks, Credit, Economic models

Abstract:
The banking industry around the globe has been transformed in recent years by unprecedented consolidation and cross-border activities. However, international consolidation has been considerably less than might have been expected in developed nations - such as long-term members of the EU - where barriers to entry have been significantly lowered. In contrast, foreign-owned banks have generally achieved much higher penetration in developing nations. We investigate the extent to which these differences may be related to bank efficiency concerns by reviewing and critiquing over 100 studies that compare bank efficiencies across nations. The studies are in three distinct categories: (1) comparisons of bank efficiencies in different nations based on the use of a common efficient frontier, (2) comparisons of bank efficiencies in different nations using nation-specific frontiers, and (3) comparisons of efficiencies of foreign-owned versus domestically owned banks within the same nation using the same nation-specific frontier. The research - particularly the findings in the third category - is generally consistent with the hypothesis that efficiency differences help to explain the consolidation patterns. The efficiency disadvantages of foreign-owned banks relative to domestically owned banks tend to outweigh the efficiency advantages in developed nations on average, and this situation is generally reversed in developing nations, with notable exceptions to both findings. We also stress the need for further research in this area.

Abstract:
We study the dynamics of market entry following mergers and acquisitions (M&As), and the behavior of recent entrants in supplying output that might be withdrawn by the consolidating firms. The data, drawn from the banking industry, suggests that M&As are associated with subsequent increases in the probability of entry. The estimates suggest that M&As explain more than 20% of entry in metropolitan markets, and more than 10% ofentry in rural markets. Additional results suggest that bank age has a strong negative effect on the small business lending of small banks, but that M&As have little influence on this lending.

Entry, Barriers to Entry, Bank, Mergers, Small Business

Abstract:
Changes in the economic environment where banks and small businesses operate have raised questions about the availability of credit to small businesses. Small businesses have fewer alternatives to external finance than do large companies. A brief overview of small firm financing is offered, emphasizing the important role of financial institutions in providing external finance to small businesses. Lending is categorized into four separate technologies: financial-statement lending, asset-based lending, credit scoring, and relationship lending; lending is compared with the other technologies in terms of how they are implemented and whom they are targeted to. Next, organizational issues associated with structuring the lending function are examined, and a simple model of bank-lending is proposed. The model is used to examine the impact of shocks to the economic environment in which banks and small businesses function on the availability of credit to small business, including technical innovationssuch as credit scoring, regulatory regime shifts such as toughened bank supervision, shifts in competitive conditions such as banking industry consolidation, and changes in the macroeconomic environment such as monetary policy shocks. The proposed model identifies three key features of relationship lending: (1) it depends on 'soft' information about the firm, its owner, and the local community; (2) the loan officer has the most important relationships with the firm, owner and community; and (3) an agency problem appears between the loan officer and bank management because of the soft nature of relationship information. The joint solution to these problems helps assess the capacity of the bank to deliver relationship lending. (CBS)

Relationship lending, Theoretical, Lending policies, Organizational structures, Banking industry, Banking industry, Credit, Business conditions, Financing, Loans

Abstract:
While large firms are financed through public, visible institutions such as the stock market, private firms are financed through less visible, information scarce means – e.g., private equity or debt financing. At different points in a firm's financial growth cycle – at different stages of firm size and age – forms of financing will vary. This analysis reviews the literature on small firm finance, discusses macroeconomic and public policy implications, and identifies a research agenda. Newly available data sources on small business finance, especially for the United States, are discussed. These new tools allow empirical testing of previous theories, resulting in changes in previous thought about such issues as the role of insider vs external sources of finance. The authors note that sources of finance are interconnected and complementary.

Credit rationing, Growth cycle, Venture capital, Firm financing, Private equity, Debt financing, Banking industry, Economic research, Datasets, Capital structure

Abstract:
Unlike previous research that focused on how technology influences asset ownership, the focus here is on how the environment of a firm impacts its business procedures and business activities.Also explored are several models that hypothesize about the lending habits of small and large banks. Although many of these models are based on theoretical support, this research seeks to find empirical support for them.Previous literature is reviewed, with this research serving as the basis for the hypotheses concerning bank size, and the willingness to accept hard or soft information. To test these hypotheses, data were collected from the Federal Reserve’s 1993 National Survey of Small Business Finance.Bank and market characteristics and firm and contract characteristics were analyzed.The findings indicate that large banks tend to lend to larger firms with good accounting records.Compared to small banks, large banks also have a tendency to lend across a larger distance, to interact more impersonally with borrowers, to have shorter, less restricted relationships, and to ineffectively deal with credit limitations.Small banks make riskier loans based on soft information.Policy issues are discussed, as are areas for further research. (AKP)

FDIC Summary of Deposits, FDIC Consolidated Reports of Condition & Income, Survey of Small Business Finances (Federal Reserve Board), Banking industry, Bank loans, Banks, Credit, Startups, Credit discrimination, Information assessment, Lending policies, Public policies

Abstract:
Although the modern theory of financial intermediation portrays liquidity creation as an essential role of banks, comprehensive measures of bank liquidity creation do not exist. We construct four measures and apply them to data on virtually all U.S. banks from 1993 to 2003. We find that bank liquidity creation increased every year and exceeded $2.8 trillion in 2003. Large banks, multibank holding company members, retail banks, and recently merged banks created the most liquidity. Bank liquidity creation is positively correlated with bank value. Testing recent theories of the relationship between capital and liquidity creation, we find that the relationship is positive for large banks and negative for small banks.

G32, G28, G21

Abstract:
Contrary to conventional wisdom, bank capital-asset ratios are positively related to returns on equity in the 1980s. We find that higher capital Granger-causes higher earnings and vice versa using data on U.S. banks, 1983-1989. The Granger-causation from earnings to capital suggests that banks often retain marginal increases in earnings, which is not surprising. The positive Granger-causation from capital to earnings, which is surprising, occurs primarily through lower interest rates paid on uninsured purchased funds. This is consistent with the hypothesis that expected bankruptcy costs for banks increased substantially in the 1980s, raising optimal capital ratios.

Abstract:
This study measures the efficiency of the branching network of a large U.S. commercial bank over 1989-1991. We find that branches are on average about half of cost-efficient level, so that there are about twice as many branches as would minimize costs. This 'overbranching' raises operating costs by about 14%, which may be partially or fully offset by additional bank-wide revenues from providing extra customer convenience. X-inefficiencies are larger, about 20% to 25% of operating costs. These findings may help explain some efficiency results commonly found in bank-level analysis, and also have implications regarding bank mergers, market values of branches, and management of branching networks.

Abstract:
This paper summarizes research on U.S. bank cost and profit functions, and their policy implications. The purpose is to provide a backdrop for the likely implications of European financial integration. Scale and scope economies in banking are not found to be important, except for the smallest banks. X-efficiency, or managerial ability to control costs, is of much greater magnitude -- at least 20% of banking costs. Mergers have no significant predictable effect on efficiency -- some mergers raise efficiency but others lower it. Market concentration results in slightly less favorable prices for customers, but has little effect on profitability.

Abstract:
Theory suggests that banks hold substantial private information. The main purpose of bank examinations is to acquire some of this information. We use event study methodology to explore whether bank examinations are associated with abnormal stock market returns. We identify three types of information effects from examinations--the net auditing effect of verifying the bank's books, the regulatory discipline effect of changing regulatory treatment and the private information effect of revealing information about bank condition. The only strong effect found is that examination downgrades appear to reveal unfavorable private information about bank condition.

Abstract:
Theory suggests that banks hold substantial private information. The main purpose of bank examinations is to acquire some of this information. We use event study methodology to explore whether bank examinations are associated with abnormal stock market returns. We identify three types of information effects from examinations--the net auditing effect of verifying the bank's books, the regulatory discipline effect of changing regulatory treatment and the private information effect of revealing information about bank condition. The only strong effect found is that examination downgrades appear to reveal unfavorable private information about bank condition.

Abstract:
Property-liability insurance is distributed by independent agents, who represent several insurers, and exclusive agents, who represent only one insurer. The independent agency system is known to have higher costs than the exclusive agency system. The market imperfections hypothesis attributes the coexistence of the two systems to impediments to competition, while the product quality hypothesis holds that independent agents provide higher quality services. We measure both profit efficiency and cost efficiency for a sample of property-liability insurers and find strong support for the product quality hypothesis. The data are consistent with a higher quality of output for independent agency insurers that is rewarded with additional revenues.

Abstract:
Traditional concerns about concentration in product markets have centered on the social losses associated with the mispricing that occur when market power is exercised. This paper focuses on a potentially greater loss from market power -- a reduction in cost efficiency brought about by the lack of market discipline in concentrated markets. We employ data from the commercial banking industry, which produces very homogeneous products in multiple markets with differing degrees of market concentration. We find the estimated efficiency cost of concentration to be several times larger than the social losses from mispricing as traditionally measured by the welfare triangle.