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Working Paper
Who's minding the store? motivating and monitoring hired managers at small, closely held firms: the case of commercial banks
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 ...
Journal Article
The financial performance of pure play Internet banks
In theory, banks that conduct all their business over the Internet will have low overhead expenses. If these saving materialize, Internet banks could use them to fuel fast growth while still earning normal profits. This article analyzes a small sample of "pure lay" Internet banks launched during the late 1990s. Compared with young branching banks, these young Internet banks have low physical overhead and grow fast--but they earn low profits due to high labor expenses, low noninterest income, and low core deposits.
Working Paper
The effects of geographic expansion on bank efficiency
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 ...
Working Paper
Efficiency barriers to the consolidation of the European financial services industry
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 the 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. ...
Working Paper
Product mix and earnings volatility at commercial banks: evidence from a degree of leverage model
Commercial banks? lending and deposit-taking business has declined in recent years. Deregulation and new technology have eroded banks? comparative advantages and made it easier for nonbank competitors to enter these markets. In response, banks have shifted their sales mix toward noninterest income ? by selling ?nonbank? fee-based financial services such as mutual funds; by charging explicit fees for services that used to be ?bundled? together with deposit or loan products; and by adopting securitized lending practices which generate loan origination and servicing fees and reduce the need for ...
Journal Article
Community banks: what is their future and why does it matter?
The U.S. banking system has undergone a dramatic restructuring since the 1970s. One of the biggest changes is the reduced number and market share of community banks. The number of banks with less than $1 billion in assets ? a common definition of community bank ? has declined from approximately 14,000 in 1980 to about 7,000 today. Concurrently, the proportion of assets held by the ten largest bank holding companies increased from less than 25 percent to more than 75 percent, while community banks? share fell from about one third of the market to well under one fifth
Conference Paper
Comments on: bank products and efficiency
Working Paper
Problem loans and cost efficiency in commercial banks
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 measured 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 ...