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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 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:
Failures, intra-company mergers of affiliate banks, and inter-company mergers and acquisitions together account for the disappearance of more than 4000 bank charters since 1987. This process of consolidation is beneficial if it drives inefficient banking organizations from the market and if it facilitates increased efficiency in the banking organizations that survive. In this paper, we consider the findings reported in previous studies and present results from new research of our own in an attempt to determine the impact of consolidation on banking industry efficiency. New evidence presented here suggests that failed banks are significantly less efficient than their peers 5 to 6 years prior to failure and that this performance differential often becomes evident before the appearance of major loan quality problems. Consistent with existing evidence, new evidence drawn from an event study indicates that intra-company consolidation is likely to have a small but significantly positive impact on holding company efficiency and profitability. Finally, both new and existing research on inter-company bank mergers finds that many of these transactions have a potential for efficiency gains that is not systematically exploited postmerger, results that suggest a non-efficiency motivation for bank mergers. When considered together, the results presented here suggest that efficiency is a useful indicator of a bank's competitive viability, and the intra- and inter-company mergers, at least within states, afford demonstrate that regulatory restrictions on geographic expansion and organizational form impose costs on banks that should be consciously considered by policy makers.

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:
This study introduces a general intuitive framework for analyzing start-up firms with internet-based business plans, and estimates the framework for internet-only banks and thrifts in the U.S. internet-only banks historically have underperformed branching banks, leading some to conclude that this business model is not viable. But automated production technologies like the internet are likely to exhibit substantial scale economies - so although internet-only banks tend to grow fast, most are still relatively small operations, and thus may be operating below efficient scale. The empirical analysis demonstrates that profitability gaps do shrink as internet-only banks get larger, and that (regardless of scale) the more successful internet-only banks are the ones that practice basic cost control. The results offer a number of insights for e-commerce firms in general, and more specifically suggest that internet-only banking models may be viable when executed efficiently.

Abstract:
This study introduces a general intuitive framework for analyzing start-up firms with Internet-based business plans, and estimates the framework for Internet-only banks and thrifts in the U.S. Internet-only banks historically have underperformed branching banks, leading some to conclude that this business model is not viable. But automated production technologies like the Internet are likely to exhibit substantial scale economies - so although Internet-only banks tend to grow fast, most are still relatively small operations, and thus may be operating below efficient scale. The empirical analysis demonstrates that profitability gaps do shrink as Internet-only banks get larger, and that (regardless of scale) the more successful Internet-only banks are the ones that practice basic cost control. The results offer a number of insights for e-commerce firms in general, and more specifically suggest that Internet-only banking models may be viable when executed efficiently.

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 review how deregulation, technological advance, and increased competitive rivalry have affected the size and health of the United States community banking sector and the quality and availability of banking products and services. We then develop a simple theoretical framework for analyzing how these changes have affected the competitive viability of community banks. Empirical evidence presented in this paper is consistent with the model's prediction that regulatory and technological change has exposed community banks to intensified competition on the one hand, but on the other hand has left well-managed community banks with a potentially exploitable strategic position in the industry. We also offer an analysis of how the number and distribution of community banks may change in the future.

Community banks, small business lending, banking industry consolidation

Abstract:
The large majority of banks and savings institutions are small and community-based. But advances in information technology, new financial instruments, innovations in bank production processes, deregulation, and increased competition have created a less hospitable environment for community banks. The number of community banks is shrinking, along with their shares of loan and deposit markets. By some measures both the number and market share of community banks in the U.S. have approximately halved since 1980. Given these trends, it is natural to wonder if the community bank business model will continue to be viable in the future. The specter of a declining, or perhaps a disappearing, community banking sector has potentially serious implications for local communities, small businesses seeking credit, and by extension the U.S. economy.

This paper presents a comprehensive view of the community banking sector in the U.S. in three parts. Each of these three sections includes numerous citations to the recent academic literature, and each is supported by a variety of data from the U.S. banking industry.

First, we review the past three decades of change in the U.S. banking system, with a special focus on how deregulation, technological advance, and increased competitive rivalry have affected the size and health of the community banking sector. Second, we use a strategic map approach to develop a theory of how deregulation and technological change have affected the competitive viability of community banks. The theory suggests that this change (a) has exposed community banks to intensified competition that is likely to force many more of them out of the industry, but (b) has also left well-managed community banks with a potentially exploitable strategic position. We show that U.S. banking data over the past three decades supports these theoretical conclusions.

Third, we consider the number of community banks that will remain viable in the future. Projecting the future number and size distribution of commercial banks after the U.S. banking industry has fully adjusted to deregulation is a treacherous exercise, and we do not pretend to be able to make accurate point estimates. Rather, we consider the recent financial performance of community banks relative to large banks, and, based on straightforward market principles, suggest which types of community banks, and how many of each type, are most at risk and least at risk going forward.

Community bank, small business lending, banking industry consolidation

Abstract:
We construct a degree-of-total-leverage framework to test whether and how shifts in product mix affect earnings volatility at 472 U.S. commercial banks between 1988 and 1995. Our framework, which accounts for cost and revenue synergies not captured in most previous studies, conceptually links earnings volatility to revenue volatility, expense fixity, and product mix. We find that replacing traditional lending activities with fee-based activities - an ongoing trend that may be strengthened by recent financial modernization - is associated with both higher revenue volatility and higher total leverage, which in this framework implies higher earnings volatility.

Commercial banks, degree of total leverage, earnings volatility, fee-based actitivities, product mix.

Abstract:
We construct a degree-of-total-leverage framework to test whether and how shifts in product mix affect earnings volatility at 472 U.S. commercial banks between 1988 and 1995. Our framework, which accounts for cost and revenue synergies not captured in most previous studies, conceptually links earnings volatility to revenue volatility, expense fixity, and product mix. We find that replacing traditional lending activities with fee-based activities - an ongoing trend that may be strengthened by recent financial modernization - is associated with both higher revenue volatility and higher total leverage, which in this framework implies higher earnings volatility.

Commercial banks, degree of total leverage, earnings volatility, fee-based actitivities, product mix

Abstract:
An important question for bank regulatory policy is whether supervisory examinations of large commercial banking firms - institutions that are already actively followed by many investors and their private sector agents - produce useful information that is not already reflected in market prices. We investigate this question using a new research methodology and a unique data set of national bank exam ratings and subordinated debt risk spreads for their parent holding companies. We find that government exams do produce significant new information that is value-relevant to financial markets; that debenture prices do not fully reflect this new information until several quarters after an exam; and that on net markets price the likely regulatory actions implied by this new information. These results have implications for the balance of market vs. regulatory discipline at large banking firms, and for proposals to make subordinated debt issues mandatory for these firms.

Commercial banks, bank exam ratings, subordinated debt, market efficiency

Abstract:
An important question for bank regulatory policy is whether supervisory examinations of large commercial banking firms - institutions that are already actively followed by many investors and their private sector agents - produce useful information that is not already reflected in market prices. We investigate this question using a new research methodology and a unique data set of national bank exam ratings and subordinated debt risk spreads for their parent holding companies. We find that government exams do produce significant new information that is value-relevant to financial markets; that debenture prices do not fully reflect this new information until several quarters after an exam; and that on net markets price the likely regulatory actions implied by this new information. These results have implications for the balance of market vs. regulatory discipline at large banking firms, and for proposals to make subordinated debt issues mandatory for these firms.

Commercial banks, bank exam ratings, subordinated debt, market efficiency

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:
We develop a theoretical model of decision-making under risk and uncertainty in which bank lenders have both imperfect information about loan applications and imperfect ability to make decisions based on that information. We test the loan-default implications of the model for a large random sample of small business loans made by U.S. banks between 1984 and 2001 under the SBA 7(a)loan program. As predicted by our model, both borrower-lender distance and credit-scoring contribute to greater loan defaults; the former finding suggests that distance interferes with information collection and monitoring, while the latter finding implies production efficiencies that encourage credit-scoring lenders to make riskier loans at the margin. However, we also find that credit-scoring dampens the harmful effects of distance, consistent with the conjecture that information generated by credit scoring models improves the ability of lenders to assess and price default risk.

borrower-lender distance, credit scoring, small business loans

Abstract:
Deregulation and technological change are transforming U.S. commercial banking from an industry dominated by thousands of small, locally focused banks into an industry where a handful of large banks could potentially span the nation and control the majority of its bank deposits. This paper examines the comparative strengths and weaknesses of large and small banks in this new environment, and outlines the strategic opportunities and threats that new technology especially the Internet pose for U.S. banks. Although the number of small banks will almost certainly continue to decline, we conclude that well-run small banks should be able to adjust their business strategies to the new environment and profitably co-exist with large, globally focussed banks.

Abstract:
Deregulation and technological change are transforming U.S. commercial banking from an industry dominated by thousands of small, locally focused banks into an industry where a handful of large banks could potentially span the nation and control the majority of its bank deposits. This paper examines the comparative strengths and weaknesses of large and small banks in this new environment, and outlines the strategic opportunities and threats that new technology especially the Internet pose for U.S. banks. Although the number of small banks will almost certainly continue to decline, we conclude that well-run small banks should be able to adjust their business strategies to the new environment and profitably co-exist with large, globally focussed banks.

Abstract:
This study introduces a general intuitive framework for analyzing start-up firms with innovative business plans, and uses it to investigate the performance of Internet-only banks and thrifts in
the U.S. Internet-only banks historically have underperformed branching banks, leading some to conclude that the business model is not viable. But the automated production and distribution methods used by Internet-only banks are likely to exhibit substantial scale economies, and most Internet-only banks are still small. The empirical analysis confirms this proposition, and demonstrates that profitability gaps shrink as Internet-only banks get larger. In general, the results suggest that the Internet-only banking model may well be viable when executed efficiently.

Banks, Innovation, Internet, Learning, Scale Economies

Abstract:
We offer a new explanation for why academic studies typically fail to find value creation in bank mergers. Our conjectures are predicated on the idea that, until recently, large bank acquisitions were a new phenomenon, with no best practices history to inform bank managers or market investors. We hypothesize that merging banks, and investors pricing bank mergers, "learn-by-observing" information that spills over from previous bank mergers. We find evidence consistent with these conjectures for 216 M&As of large, publicly traded U.S. commercial banks between 1987 and 1999. These findings are consistent with semi-strong stock market efficiency.

Mergers, learning, information spillover, banks, market efficiency

Abstract:
When economists analyze an industry, they typically do so at arms length, using a combination of theoretical models and large amounts of statistical data. The theoretical models describe the interplay between the structure of the industry and the competitive behavior of the firms that populate the industry. The statistical data - which may include financial ratios, industry trends, and peer group comparisons - serve to personalize the sterile, one-size-fits-all nature of the theoretical models. But most industry studies never get especially close to the people most responsible for the industry data: the managers and owners who make long-run strategic plans that shape the data, who make short-run competitive decisions in response to the data, and whose careers and companies are ultimately defined by the data. In this article, we analyze the U.S. community banking sector - a sector populated by small firms that hold a shrinking share of an increasingly competitive and technology-based financial services industry - but we rely on an atypical approach to perform the analysis. We use numerous first-hand observations made by individual community bankers, collected during a Federal Reserve survey in August 2001 (Federal Reserve Bank of Chicago, 2002), to complement the usual data-intensive industry analysis. Although the survey itself was an effort to learn about the evolving payments services needs of community banks, the surveyed bankers also made wide-ranging observations on a variety of other topics, including the fundamental mission of community banks; the threats and opportunities posed by large banks; perceptions that the playing field is not always level; and the growing tension between traditional high-touch relationship banking and potentially more efficient high-tech banking. Augmenting systematic industry data with bankers' anecdotal observations humanizes our analysis. The bankers tended to be more optimistic about the future viability of the community banking business model than many industry observers and, not surprisingly, they tended to be less sanguine about the regulatory and technological changes that have increased the competitive pressures on community banks. But aside from these and a few other differences, the assessments of the two groups were quite consistent - despite being stated from different perspectives and arrived at using different (and in the case of the bankers implicit) analytic frameworks. The consensus view is that industry consolidation and technological change are providing opportunities as well as posing threats for community banks; that community banks can profitably coexist with large multi-state banks in the future; but, to do so, community banks must be efficiently operated, well-managed, and must continue to innovate.

Abstract:
Newly chartered banks provide an additional credit source for small businesses, but the staying power of new banks can be weak. A multi-state exit model is estimated for U.S. commercial banks chartered between 1980 and 1985, and for a benchmark sample of small established banks. The determinants of failure are similar for both samples, but new bank failure is more sensitive to adverse environmental conditions. The timing of new bank exit-by-failure follows a life-cycle pattern, but the timing of new bank exit-by-acquisition does not. There is mixed evidence on the effectiveness of regulations aimed at reducing new bank fragility.

De novo banks, Market entry, Market exit

Abstract:
Newly chartered banks provide an additional credit source for small businesses, but the staying power of new banks can be weak. A multi-state exit model is estimated for U.S. commercial banks chartered between 1980 and 1985, and for a benchmark sample of small established banks. The determinants of failure are similar for both samples, but new bank failure is more sensitive to adverse environmental conditions. The timing of new bank exit-by-failure follows a life-cycle pattern, but the timing of new bank exit-by- acquisition does not. There is mixed evidence on the effectiveness of regulations aimed at reducing new bank fragility.

De novo banks, Market entry, Market exit

Abstract:
Despite operating under substantial regulatory constraints, we find that commercial banks manage their investments largely consistent with the predictions of portfolio choice models with capital market imperfections. Based on 1990-2002 data for small (assets less than $1 billion) U.S. commercial banks, net new lending to the business, real estate, and consumer sectors increased with expected sector profitability, tended to decrease with the illiquidity of existing (overhanging) loan stocks, and was responsive to correlations in cross-sector returns. Small banks are most appropriate for this study, because they make illiquid loans and manage risk via on-balance sheet (non-hedged) diversification strategies.

commercial banks, loans, portfolio choice, risk overhang

Abstract:
We test whether the gains from hiring an outside manager exceed the principal-agent costs of owner-manager separation at 266 small, closely held U.S. commercial banks. Our results suggest that hiring an outside manager can improve a bank's profit efficiency, but that these gains depend on aligning the hired managers with owners via managerial shareholdings. We find that over-utilizing this control mechanism results in entrenchment, while under-utilization is costly in terms of foregone profits. This study provides a relatively unfettered test of mitigating principal-agent costs, because these small banks cannot rely on market forces or blocks of outside investors to monitor managers.

Abstract:
We estimate the pricing determinants for 35,098 payday loans originated in Colorado between 2000 and 2006, and generate a number of results with implications for public policy. We find evidence consistent with classical price competition early in the sample, but as time passed these competitive effects faded and the data become more consistent with a variety of strategic pricing practices. On average, loan prices moved upward toward the legislated price ceiling over time, consistent with implicit collusion facilitated by price focal points. Large multi-store payday firms tended to charge higher prices than independent single-store operators, but were less likely to exploit inelastic demand near military bases and in largely minority neighborhoods. Of the three loan pricing measures used in our analysis, the annual percentage interest rate (APR) favored by regulators and analysts performed poorly.

payday lending, price ceilings, strategic pricing

Abstract:
We examine the financial performance of 1,664 commercial banks chartered between 1980 and 1985, a period of intense chartering activity just preceding the banking recession of the late-1980s. We compare new banks to a benchmark sample of 2,047 small established banks. Using a split population duration model, we estimate the probability distribution of long-run failure for both sets of banks over a 14 year period, and assess how regulatory, environmental, and bank specific conditions affect that probability distribution. We find that the fragility of a new bank varies over time in a fairly regular 'life cycle' pattern, but that how this basic life cycle pattern is positioned vis a vis the business cycle also matters. On average, new banks are initially less likely to fail than established banks; after about four years they become more likely to fail than stablished banks; and as time passes and new banks mature they fail at rates similar to established banks. But banks chartered just prior to the banking recession failed at the highest rates, and their estimated hazard functions followed an extreme life cycle shape. State laws restricting the acquisition of de novo banks are associated with higher rates of new bank failure, but easy-entry chartering policies are not. We find that de novo failure is more sensitive to capital levels than established bank failure, evidence that Justifies recent increases in minimum capital requirements for de novo banks. Finally, our results suggest that early warning signals may be easier to identify for de novo banks than for established banks, perhaps because banks in the early stages of their life cycles are less heterogeneous and hence simpler to model than mature banks.

Market entry and exit, bank failure, de novo banks, bank chartering policy

Abstract:
We derive five hypotheses regarding market competition, price, and advertising from a theoretical model of a profit maximizing depository institution, and test these conjectures in a simultaneous system of deposit interest rates and advertising expenditures for a data panel of 1,867 thrift institutions that offer 13 different deposit products in 666 local markets in the U.S. between 1994 and 2000. We find some support for each of our hypotheses - branding, information, Dorfman-Steiner, structure-advertising, and structure-price - with the strength of the results often depending on the attributes of the deposit products or the characteristics of the thrifts.

Advertising, depository institutions, structure-performance

Abstract:
The number of newly chartered, or 'de novo,' commercial banks in the U.S. has increased every year since 1994. These new banks are potentially important for preserving competition and providing credit in consolidating banking markets. However, like other new business ventures, newly chartered banks can be prone to failure. To investigate the long-run financial viability of newly chartered banks, we estimate a 'split-population' duration model for 656 commercial banks chartered in 1984 and 1985. To provide a benchmark, we estimate a similar model for 1,288 small established banks located in the same geographic markets. Our results are consistent with a 'life-cycle' theory of bank failure. Because new banks are heavily capitalized and hold portfolios of unseasoned loans, they are initially less likely to fail than established banks. But rapid asset growth, subpar profitability, and declining loan quality gradually erode their capital stocks. De novo failure rates catch up with, and then surpass, established bank failure rates within five years. After seven years, de novo banks are twice as likely to fail as established banks. We find similar determinants of failure for de novo and established banks, including adverse economic conditions, rapid asset growth, concentrations of risky and illiquid investments, large amounts of purchased funds, and excess overhead spending. For de novo banks that eventually fail, we find that failure is accelerated by concentrations of business loans, large amounts of purchased funds, low capital ratios, and excess overhead spending; failure was delayed by fast asset growth, holding company affiliation, and holding a federal charter. We find no significant evidence that de novo national banks were more likely to fail than de novo state chartered banks, which suggests that the OCC's relatively lenient chartering policies increased local market competition without materially increasing new bank failure. We find that low capital ratios accelerate failure for de novo banks that do fail, but we find that capital ratios do not significantly predict which new banks will eventually fail. Thus, requiring higher levels of capital for young banks does not reduce their probability of failure, but rather serves as a buffer that provides extra time to resolve young banks should they become troubled institutions.

Abstract:
We study recent changes in the geographic distances between small businesses and their bank lenders, using a large random sample of loans guaranteed by the Small Business Administration. Consistent with extant research, we find that small borrower-lender distances generally increased between 1984 and 2001, with a rapid acceleration in distance beginning in the late-1990s. We also document a new phenomenon: a fundamental reordering of borrower-lender distance by the borrowers' neighborhood income and race characteristics. Historically, borrower-lender distance tended to be shorter than average for historically underserved (for example, low-income and minority) areas, but by 2000 borrowers in these areas tended to be farther away from their lenders on average. This structural change is coincident in time with the adoption of credit scoring models that rely on automated lending processes and quantitative information, and we find indirect evidence consistent with this link. Our findings suggest that there has been increased entry into local markets for small business loans and this should help allay fears that movement toward automated lending processes will reduce small businesses' access to credit in already underserved markets.

small business loans, borrower-lender distance, credit scoring

Abstract:
This paper address the relationship between the aging process at new and relatively young banks and the tendency of banks to make loans to small businesses. Defining small business loans as C&I loans that are under $1 million in size, we analyze a sample of banks that had assets of less than %500 million in assets for the years 1993-1996 and that were 25 years of age or younger.

Abstract:
Traditional asset-liability management techniques limit banks' abilities to structure their balance sheets-but more recently, financial innovations have allowed banks the chance to manage interest rate risk without constraining their asset-liability choices. Using canonical correlation analysis, we examine how the relationships between asset and liability accounts at U.S. commercial banks changed between 1990 and 2005. Importantly, we show that asset-liability linkages are weaker for banks that are intensive users of risk-mitigation strategies such as interest rate swaps and adjustable loans. Perhaps surprisingly, we find that asset-liability linkages are stronger at large banks than at small banks, although these size-based differences have diminished over time, both because of increased asset-liability linkages at small banks and decreased linkages at large banks.

asset-liability management, canonical correlation, commercial banks, deregulation, technological change

Abstract:
We derive five hypotheses regarding market competition, price, and advertising from a theoretical model of a profit maximizing depository institution, and test these conjectures in a simultaneous system of deposit interest rates and advertising expenditures for a data panel of 1,867 thrift institutions that offer 13 different deposit products in 666 local markets in the US between 1994 and 2000. We find some support for each of our hypotheses - branding, information, Dorfman-Steiner, structure-advertising, and structure-price - with the strength of the results often depending on the attributes of the deposit products or the characteristics of the thrifts.

Advertising, depository institutions, structure-performance

Abstract:
Noninterest income now accounts for over 40% of operating income in the U.S. commercial banking industry. This paper demonstrates a number of empirical links between bank noninterest income, business strategies, market conditions, technological change, and financial performance between 1989 and 2001. The results indicate that well-managed banks expand more slowly into noninterest activities, and that marginal increases in noninterest income are associated with poorer risk-return tradeoffs on average. These findings suggest that noninterest income is coexisting with, rather than replacing, interest income from the intermediation activities that remain banks' core financial services function.

Banks, noninterest income, deregulation

Abstract:
Small closely held corporations cannot rely on market forces or outside monitors to discipline hired managers. For such firms, managerial shareholdings may be a disproportionately important tool for controlling principal-agent problems. We study a random sample of 266 small, closely held U.S. commercial banks with a broad range of ownership and management arrangements. Our results suggest that hiring an outside manager can improve a bank's profitability, but these gains depend on aligning the hired managers with owners via managerial shareholdings. We find that over-utilizing this control mechanism results in entrenchment, while under-utilization is costly in terms of foregone profits.

Agency costs, commercial banks, corporate governance, profit efficiency, small business

Abstract:
Foreign-owned U.S. banks have been chronically unprofitable for more than a decade. We employ a profit efficiency model introduced by Berger, Hancock, and Humphrey (1993), modified to be less sensitive to variations in asset size, to estimate the relative profit efficiency of 62 foreign-owned and 240 U.S.-owned banks between 1985 and 1990. Our results indicate that foreign-owned banks were significantly less profit-efficient than were U.S.-owned banks, primarily due to foreign banks' reliance on expensive purchase funds. For foreign-owned banks, the results are consistent with a strategy of sacrificing profits in exchange for fast growth and increase market share during the 1980s.