Search Results
Working Paper
Are credit unions too small?
Since 1985, the share of U.S. depository institution assets held by credit unions has nearly doubled, and the average (inflation-adjusted) size of credit unions has increased over 600 percent. We use a non-parametric local-linear estimator to estimate a cost relationship for credit unions and derive estimates of ray-scale and expansion-path scale economies. We employ a dimension-reduction technique to reduce estimation error, and bootstrap methods for inference. We find substantial evidence of increasing returns to scale across the range of sizes observed among credit unions, suggesting that ...
Working Paper
Technical progress, inefficiency and productivity change in U.S. banking, 1984-1993
Numerous studies have found that US commercial banks are quite inefficient, and we find that, on average, banks became more technically inefficient between 1984 and 1993. Our analysis of productivity change, however, shows that technological improvements adopted by a few banks pushed out the efficient frontier, and that, on average, commercial banks experienced productivity gains. For banks with assets less than 0 million, however, technological improvement was insufficient to offset increased inefficiency, and thus productivity declined over the period. Our findings suggest that increasing ...
Working Paper
New Estimates of the Lerner Index of Market Power for U.S. Banks
The Lerner index is widely used to assess firms' market power. However, estimation and interpretation present several challenges, especially for banks, which tend to produce multiple outputs and operate with considerable inefficiency. We estimate Lerner indices for U.S. banks for 2001-18 using nonparametric estimators of the underlying cost and profit functions, controlling for inefficiency, and incorporating banks' off-balance-sheet activities. We find that mis-specification of cost or profit functional forms can seriously bias Lerner index estimates, as can failure to account for ...
Working Paper
New evidence on returns to scale and product mix among U.S. commercial banks
Numerous studies have found that banks exhaust scale economies at low levels of output, but most are based on the estimation of parametric cost functions which misrepresent bank cost. Here we avoid specification error by using nonparametric kernal regression techniques. We modify measures of scale and product mix economies introduced by Berger et al. (1987) to accommodate the nonparametric estimation approach, and estimate robust confidence intervals to assess the statistical significance of returns to scale. We find that banks experience increasing returns to scale up to approximately $500 ...
Working Paper
Robust, dynamic nonparametric benchmarking: the evolution of cost-productivity and efficiency among U.S. credit unions
This paper develops a new methodology for estimating cost-productivity and efficiency change that benchmarks the performance of individual firms against an estimated a-quantile. We adapt the estimators of Daouia and Simar (2007) and Wheelock and Wilson (2008a) to the estimation of cost efficiency where input prices and some outputs are fixed. Theoretical results demonstrate that our new estimator retains the root-n convergence, asymptotic normality, and other desirable properties of the original estimators. We show how the estimator can be used to construct a cost analog of the widely-used ...
Journal Article
Trends in the efficiency of Federal Reserve check processing operations
The Monetary Control Act of 1980 requires the Federal Reserve to charge customers for financial services, with the intent of improving the efficiency with which Fed offices deliver those services. Prior studies found little improvement in the efficiency of Fed check processing operations after pricing was implemented in 1982. This article examines the efficiency of Fed check operations using a longer sample period (1980:Q1?2003:Q3) than previous studies and new methods for estimating efficiency. The authors find that the median office became somewhat less efficient when pricing was ...
Working Paper
The Evolution of Scale Economies in U.S. Banking
Continued consolidation of the U.S. banking industry and a general increase in the size of banks has prompted some policymakers to consider policies that discourage banks from getting larger, including explicit caps on bank size. However, limits on the size of banks could entail economic costs if they prevent banks from achieving economies of scale. This paper presents new estimates of returns to scale for U.S. banks based on nonparametric, local-linear estimation of bank cost, revenue and profit functions. We report estimates for both 2006 and 2015 to compare returns to scale some seven ...
Working Paper
The contribution of on-site examination ratings to an emprircal model of bank failures
This paper investigates how well regulator examinations predict bank failures, and how best to incorporate examination information into an econometric model of time-to-failure. We estimate proportional hazard models with time-varying covariates and find that examiner ratings help explain the failure hazard. Both the overall rating of a bank's condition and management, i.e., the composite CAMELS rating, and ratings of specific components contain information. In addition, we find that the marginal "effect" of ratings is non-linear, in that the impact of a rating downgrade on the probability ...
Working Paper
Non-parametric, unconditional quantile estimation for efficiency analysis with an application to Federal Reserve check processing operations
This paper examines the technical efficiency of U.S. Federal Reserve check processing offices over 1980?2003. We extend results from Park et al. (2000) and Daouia and Simar (2007) to develop an unconditional, hyperbolic, a-quantile estimator of efficiency. Our new estimator is fully non-parametric and robust with respect to outliers; when used to estimate distance to quantiles lying close to the full frontier, it is strongly consistent and converges at rate root-n, thus avoiding the curse of dimensionality that plagues data envelopment analysis (DEA) estimators. Our methods could be used by ...
Working Paper
Explaining bank failures: deposit insurance, regulation, and efficiency
This paper uses micro-level historical data to examine the causes of bank failure. For state charactered Kansas banks during 19 10-28, time-to-failure is explicitly modeled using a proportional hazards framework. In addition to standard financial ratios, this study includes membership in the voluntary state deposit insurance system and measures of technical efficiency to explain bank failure. The results indicate that deposit insurance system membership increased theprobability of failure and banks which were technically inefficient were more likely to fail than technically efficient banks.