Adapting to Changing Prices before and after the Crisis: The Case of US Commercial Banks

37 Pages Posted: 27 Oct 2016

See all articles by Laura Spierdijk

Laura Spierdijk

University of Groningen

Sherrill Shaffer

University of Wyoming

Tim James Considine

University of Wyoming

Date Written: October 26, 2016

Abstract

For banks, cost management has gained importance in the current environment of low interest rates. In this environment, banks’ revenues from interest are under pressure, leading to renewed interest in the substitutability of banks’ input factors. Substitution elasticities typically depend on two factors: cost technology and economic conditions (relative input prices or cost shares). Technological shifts and policy changes are therefore expected to affect firms’ elasticities of substitution. This study estimates U.S. commercial banks’ substitution elasticities during the 2000–2013 period. It analyzes the total effects of the technological shifts and policy changes on banks’ substitution elasticities during that period. An endogenous-break test divides the sample into a precrisis period (2000–2008) and a crisis period (2009–2013). During the pre-crisis period, banks’ inputs are inelastic substitutes. After the onset of the crisis, especially the long-run substitutability of most input factors decreases to even lower levels due to changes in both cost technology and economic conditions. At the same time, banks’ response to input price changes becomes more sluggish. The results indicate that the availability of substitutes is substantially worse during the (post-) crisis period, which limits banks’ possibilities for cost management.

Keywords: Financial Crisis, Substitution Elasticities, US Commercial Banks

JEL Classification: G21, D24, C30

Suggested Citation

Spierdijk, Laura and Shaffer, Sherrill and Considine, Tim James, Adapting to Changing Prices before and after the Crisis: The Case of US Commercial Banks (October 26, 2016). CAMA Working Paper No. 64/2016 . Available at SSRN: https://ssrn.com/abstract=2859850 or http://dx.doi.org/10.2139/ssrn.2859850

Laura Spierdijk

University of Groningen ( email )

PO Box 800
Groningen, 9700 AV
Netherlands

Sherrill Shaffer (Contact Author)

University of Wyoming ( email )

P.O. Box 3985
Laramie, WY 82071-3985
United States
307-766-2173 (Phone)
307-766-5090 (Fax)

Tim James Considine

University of Wyoming ( email )

Box 3434 University Station
Laramie, WY 82070
United States

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