The Efficiency of US Community Banks

60 Pages Posted: 1 Apr 2020

See all articles by Athina Petropoulou

Athina Petropoulou

University of Bath

Vasileios Pappas

University of Kent, Kent Business School

Steven Ongena

University of Zurich - Department of Banking and Finance; Swiss Finance Institute; KU Leuven; Centre for Economic Policy Research (CEPR)

Dimitrios Gounopoulos

University of Bath

Richard J. Fairchild

University of Bath - School of Management

Date Written: March 7, 2020

Abstract

Using a novel method to separate US community banks over the 1984-2013 period from their non-community counterparts we compare the two bank types on the basis of cost efficiency. We decompose cost efficiency into a persistent and a residual component; the former capturing the market structure and regulatory changes, the latter reflecting managerial performance. Our estimates show community banks to exhibit a 4.9% higher efficiency compared to their non-community counterparts. The decomposition further reveals that community banks benefit from superior managerial capabilities and from developments at the regulatory front. Size is non-linearly related to efficiency and large community banks are the most efficient. A strong positive link between profitability and efficiency exists for community banks, with the effect being muted in non-community banks. Participation in bank holding companies is harmful for community banks’ efficiency. Liquidity creation is positively (negatively) related to efficiency of (non-)community banks, and highlights the distinctiveness of the business models and the need for differentiated regulatory supervision. Community banks efficiency is positively (negatively) related to liquidity (credit) risk. Our results are robust to a series of salient checks.

Keywords: Bank business model, Community banks, Liquidity creation, Persistent efficiency, Residual efficiency, Stochastic Frontier Analysis

JEL Classification: G14, G21, G38

Suggested Citation

Petropoulou, Athina and Pappas, Vasileios and Ongena, Steven R. G. and Gounopoulos, Dimitrios and Fairchild, Richard J., The Efficiency of US Community Banks (March 7, 2020). Available at SSRN: https://ssrn.com/abstract=3550458 or http://dx.doi.org/10.2139/ssrn.3550458

Athina Petropoulou

University of Bath ( email )

Claverton Down
Bath, BA2 7AY
United Kingdom

Vasileios Pappas (Contact Author)

University of Kent, Kent Business School ( email )

Canterbury, Kent CT2 7PE
United Kingdom

Steven R. G. Ongena

University of Zurich - Department of Banking and Finance ( email )

Schönberggasse 1
Zürich, 8001
Switzerland

Swiss Finance Institute

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

KU Leuven ( email )

Oude Markt 13
Leuven, Vlaams-Brabant 3000
Belgium

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Dimitrios Gounopoulos

University of Bath ( email )

School of Management,
Wessex House, Claverton Down
Bath, BA2 7AY
United Kingdom

Richard J. Fairchild

University of Bath - School of Management ( email )

Claverton Down
Bath, BA2 7AY
United Kingdom
01225 323456 (Phone)
01225 323902 (Fax)

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