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Working Paper
Why do banks disappear? The determinants of U.S. bank failures and acquisitions
This paper examines the determinants of individual bank failures and acquisitions in the United States during 1984-1993. We use bank-specific information suggested by examiner CAMEL-rating categories to estimate competing-risks hazard models with time-varying covariates. We focus especially on the role of management quality, as reflected in alternative measures of x-efficiency and find the inefficiency increases the risk of failure, while reducing the probability of a bank's being acquired. Finally, we show that the closer to insolvency a bank is, as reflected by a low equity-to-assets ratio, ...
Working Paper
New evidence on the Fed's productivity in providing payments services
As the dominant provider of payments services, the efficiency with which the Federal Reserve provides such services in an important public policy issue. This paper examines the productivity of Federal Reserve check-processing offices during 1980-1999 using non-parametric estimation methods and newly developed methods for non-parametric inference and hypothesis testing. The results support prior studies that found little initial improvement in the Fed's efficiency with the imposition of pricing for Federal Reserve services in 1982. However, we find that median productivity improved ...
Working Paper
Are U.S. banks too large?
The number of commercial banks in the United States has fallen by more than 50 percent since 1984. This consolidation of the U.S. banking industry and the accompanying large increase in average (and median) bank size have prompted concerns about the effects of consolidation and increasing bank size on market competition and on the number of banks that regulators deem ?too big to fail.? Agency problems and perverse incentives created by government policies are often cited as reasons why many banks of pursued acquisitions and growth, though bankers often point to economies of scale. This paper ...
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
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
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
Robust nonparametric estimation of efficiency and technical change in U.S. commercial banking
This paper examines the performance of the U.S. commercial banking industry over 1984-2002. Rather than measuring performance relative to the unknown (and difficult-to-estimate) boundary of the production set, performance for a given bank is measured relative to expected maximum output among m banks using no more of each input than the given bank. This approach permits fully non-parametric estimation with vn-consistency avoiding the usual curse of dimensionality that plagues traditional non-parametric efficiency estimators. The resulting estimates are robust with respect to outliers and noise ...
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
Nonparametric Estimation of Lerner Indices for U.S. Banks Allowing for Inefficiency and Off-Balance Sheet Activities
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 ...