Holding company affiliation versus branching by independent banks: A cost analysis for interstate banking

Prohibition of interstate branching forced nearly all banks interested in interstate expansion to establish holding company affiliations. But it is not clear whether holding-company affiliation or branching by independent banks is preferable for consumers. By contrasting 1994 data of consolidated multibank holding companies with that of independent banks with branches, we assess their relative scale economies and cost advantages by asset size. Our analysis supports the assertion of the U. S. Department of Treasury that expansion through interstate branching would provide immediate cost savings and increase consumer benefits.     

Shareholder wealth effects of interstate banking: The case of Delaware's Financial Center Development Act

The Financial Center Development Act (FCDA) of Delaware was signed into law in March 1981, to permit out-of-state bank holding companies (BHCs) to establish special purpose banking subsidiaries within the state of Delaware. The FCDA can be viewed as part of the growing national trend toward interstate banking. If interstate banking is to succeed, the benefits from BHCs establishing interstate subsidiaries must be consistent with the welfare of the BHCs shareholders. The purpose of this study is to determine the impact on shareholder wealth of the decision by BHCs to establish subsidiaries within the state of Delaware. Using event study methodology, the results from this study show that the decision to establish a special purpose banking subsidiary within the state of Delaware under the FCDA is consistent with the maximization of shareholder wealth.Funding for this research was made available by the University of Delaware General Research Fund. The authors thank Paul Horvitz, Kevin Scanlon, Ron Watson, and David Walker for helpful comments.     

The identification of acquisition targets in the EU banking industry: An application of multicriteria approaches

In this paper we develop classification models for the identification of acquisition targets in the EU banking industry, incorporating financial variables that are mostly unique to the banking industry and originate from the CAMEL approach. A sample of 168 non-acquired banks matched with 168 acquired banks is used over the period 1998-2002, covering 15 EU countries. We compare and evaluate the relative efficiency of three multicriteria approaches, namely MHDIS, PAIRCLAS, and UTADIS, with all models developed and tested using a 10-fold cross validation approach. We find that the importance of the variables differs across the models. However, on the basis of univariate test and the results of the models we could state that in general after adjusting for the country where banks operate, acquired banks are less well capitalized and less cost and profit efficient. The results show that the developed models can achieve higher classification accuracies than a naïve model based on random assignments. Nevertheless, there is fair amount of misclassification that is hard to avoid given the nature of the problem, showing that as in previous studies for non-financial firms, the identification of acquisitions targets in banking is a difficult task.     

Returns to bidders and targets in the acquisition process: Evidence from the banking industry

This article examines the effects of acquisition announcements of publicly traded banks on stockholder wealth using event-study methodology and an updated and enlarged sample of such banking organizations. The findings imply that on average, acquisitions in the banking industry result in a wealth transfer from the shareholders of bidding firms to the shareholders of target firms, with no overall gain to the shareholders of the two firms combined. Of the characteristics examined, only capitalization of the target firm is found to distinguish between combinations with positive and negative combined wealth effects.     

State passage of interstate banking legislation: An analysis of firm,legislative, and economic characteristics

Forty-nine states and the District of Columbia enacted legislation reducing interstate banking restrictions between July 1982 and April 1993. For these 50 banking bills, deregulation increased the average price of bank stocks. Returns vary cross-sectionally by firm characteristics, regulatory features, and economic conditions. Returns are positively related to the characteristics of acquisition targets. Furthermore, returns are positively related to legislative features that increase the bargaining power of potential targets and economic conditions that are likely to encourage bank acquisition. These findings are consistent with the relaxation of geographic restrictions increasing activity in the corporate control market.     

The effects of antitakeover provisions on acquisition targets

This study provides large sample evidence on the effects of antitakeover provisions (ATPs) on takeover probability and premia in modern takeover contests. Despite the fact that hostile bids are uncommon during the 1990s–2000s, some ATPs have strong but opposing effects on takeover outcomes. Consistent with recent theory, the staggered board-poison pill combination is the strongest antitakeover mechanism. Takeover compensation arrangements reduce managerial resistance to takeovers, and many commonly used ATPs are irrelevant in modern takeover battles. Furthermore, compensation plans are associated with higher takeover premia. Although individual ATPs have significant effects on takeover outcomes, the G-Index, which does not account for the diverse effects of ATPs, is not significant in predicting the firm's takeover probability or the size of takeover premia.     

The impact of banking regulations on banks' cost and profit efficiency: Cross-country evidence

This paper uses stochastic frontier analysis to provide international evidence on the impact of the regulatory and supervision framework on bank efficiency. Our dataset consists of 2853 observations from 615 publicly quoted commercial banks operating in 74 countries during the period 2000-2004. We investigate the impact of regulations related to the three pillars of Basel II (i.e. capital adequacy requirements, official supervisory power, and market discipline mechanisms), as well as restrictions on bank activities, on cost and profit efficiency of banks, while controlling for other country-specific characteristics. Our results suggest that banking regulations that enhance market discipline and empower the supervisory power of the authorities increase both cost and profit efficiency of banks. In contrast, stricter capital requirements improve cost efficiency but reduce profit efficiency, while restrictions on bank activities have the opposite effect, reducing cost efficiency but improving profit efficiency.     

The effect of relationship banking on firm efficiency and default risk

Does relationship bank oversight reduce firm default risk and improve firm operational efficiency? I find that a new loan from a relationship bank reduces the default probability and increases the efficiency of a borrowing firm, benefiting both banks and borrowers. Moreover, inefficient and less creditworthy firms experience the highest reductions in their default risks and improvements in their efficiencies in the years following new relationship bank loans. Further, these benefits are disrupted when the relationship bank is acquired.     

Regulatory arbitrage and the efficiency of banking regulation

We study the efficiency of banking regulation under financial integration. Banks freely choose the jurisdiction where to locate their activities and have private information about their efficiency level. Regulators non-cooperatively offer any regulatory contract that satisfies information and participation constraints of banks. We show that the unique Nash equilibrium of the regulatory game is a simple pooling contract: financial integration is characterized by the inability for regulators to discriminate between banks with different efficiency levels. This result is driven by the endogenous restriction caused by regulatory arbitrage on the capacity of regulators to use several regulatory instruments.     

Environmental factors affecting Hong Kong banking: A post-Asian financial crisis efficiency analysis

This paper examines the evolution of Hong Kong banks' technical efficiency during the period 2000–2006 through the prism of the intermediation and production approaches. Using a modified slacks-based model and purging efficiency scores of random errors, we analyse trends in bank efficiency and identify ‘environmental’ factors that affect the scores. Analysis reveals that Hong Kong banks suffered a severe downturn in technical efficiency during 2001 but recovered by 2006. Finally, private housing rent and the net export of goods and services are found to be negatively correlated with bank efficiency, while private consumption is shown to be positively correlated.     

Bank acquisition of mortgage firms and stockholders' wealth: An empirical analysis

This paper examines the behavior of the returns on the securities of bank holding companies (BHCs) acquiring mortgage firms after the announcement of such an acquisition and the release of the Federal Reserve Board's decision. The stockholders of acquiring BHCs do not realize abnormal returns following the announcement of the acquisition of a mortgage firm. This reconfirms previous findings in unregulated industries and is consisten with the hypothesis that any economic rent which is generated by such an acquisition is captured by the acquired mortgage firm: This implies that there exist BHCs — other than the acquiring one — that could also affect a profitable merger with the mortgage firm. Another finding is that stockholders of BHCs that were 3enied permission to acquire mortgage firms sustained significant losses during the five weeks following the Board's decision.     

The accounting implication of banking deregulation: an event study of Gramm-Leach-Bliley Act (1999)

Bank regulation has undergone almost a complete circle from the Glass-Steagall Act (GSA, 1933), through a period of deregulation since 1980s, culminating in the repeal of GSA by the Gramm-Leach-Bliley Act (GLBA, 1999), to the Dodd-Frank Wall Street Reform and Consumer Protection Act (DFA, 2010), which attempted to restore some of the rules under GSA. The GLBA allowed the largest U.S. bank holding companies to expand into more market-sensitive business activities, which contributed to a significant increase in their market, operating and accounting risks. Despite increasing reporting requirements, bank accounting information decreased in value relevance in terms of both earnings quality and Statistical Cost Relationship during the post-GLBA period. The increasing opaqueness in the bank accounting information weakened market efficiency and had a negative impact on the effectiveness of regulatory supervision. Lessons learned from the repeal of GSA are timely and relevant to the implementation of DFA.     

Financial reforms and technical efficiency in Indian commercial banking: A generalized stochastic frontier analysis

In this study we estimate technical efficiency of Indian commercial banks from 1989 to 2009, using a multiple-output generalized stochastic production frontier and analyze the effects of financial reforms on estimated efficiency. The generalized method estimates technical efficiency in the presence of multiple outputs, filling a gap in the existing literature. Our results show that Indian commercial banks were operating with 64% efficiency on average during the sample period. The initial phase of reform had a positive impact on while the later phase adversely affected technical efficiency of banks. Public sector banks show higher efficiency levels compared to private and foreign banks.     

The transparency of the banking system and the efficiency of information-based bank runs

In this paper, we investigate the relationship between the transparency of banks and the fragility of the banking system. We show that information-based bank runs may be inefficient because the deposit contract designed to provide liquidity induces depositors to have excessive incentives to withdraw. An improvement in the transparency of a bank may reduce depositor welfare by increasing the chance of an inefficient contagious run on other banks. A deposit insurance system in which some depositors are fully insured and the others are partially insured can ameliorate this inefficiency. Under such a system, bank runs can serve as an efficient mechanism for disciplining banks. We also consider bank managers' control over the timing of information disclosure, and find that bank managers may use their influence to eliminate both inefficient and efficient bank runs.     

The contribution of product mix versus efficiency and technical change in US banking

Similar to a Du Pont analysis, this paper divides the changes in returns on assets of US commercial banks for the period from 2000 to 2005 into conventional measures of bank performance. The contribution of product mix is significant and offsets losses from technical change and operating efficiency. Banks respond to changes in the business environment by switching towards more lucrative traditional and nontraditional products. Large banks are found to benefit more than community banks from the switch to an optimal output portfolio mix including new products spawned by recent financial innovations and deregulation.     

Bank modelling methodologies: A comparative non-parametric analysis of efficiency in the Japanese banking sector

This study examines the efficiency of the Japanese banking system utilising the slacks-based measure. In addition, we also extend the comparative bank modelling methodology literature by utilising both the intermediation and production approaches, together with the profit/revenue-based approach, proposed in [Berger, A.N., Mester, L.J., 2003. Explaining the dramatic changes in performance of US banks: technological change, deregulation, and dynamic changes in competition. J. Financial Intermed. 12, 57–95]. We find that, across the three methodologies, there are marked differences in: mean efficiency scores; the dispersion of efficiency scores; and the ranking of banks and bank sectors. Hence, the results demonstrate a very high degree of modelling dependence, which has importance in the context of policy responses.     

North-South : The implications for multinational banking

International finance should be of great value to developing countries because their potential growth paths are ‘out of step’ with the world economy and because the gambles they must take to develop are much more diversifiable in the context of the world economy than locally. However, the actual benefits of North-South finance have been limited by an overreliance on non-specific bank credit with the inherent limitations and by errors in judgement by both borrowers and lenders. In fact, the current crisis threatens to reverse many of the earlier gains. While the current crisis is primarily the result of the world recession, the severity of its effects on lenders and borrowers reflects three key aspects of bank credits: (1) its perverse real repayment patterns, (2) its specific nature which implies that risks are transferred only through generalized non-performance with its attendant deadweight costs, and (3) its concentration in a small but critical segment of capital markets. These characteristics would be serious even with ideal behavior by lenders and borrowers, but they also can lend to inappropriate and possibly erratic behavior. Specific suggestion for restructuring the system of North-South finance are given including (1) smoothing repayment patterns, (2) increasing repayment flexibility, (3) increasing risk-bearing non-specific finance, (4) increasing non-recourse financing, and (5) increasing project-specific risk capital.     

Islamic vs. conventional banking: Business model,efficiency and stability

How different are Islamic banks from conventional banks? Does the recent crisis justify a closer look at the Sharia-compliant business model for banking? When comparing conventional and Islamic banks, controlling for time-variant country-fixed effects, we find few significant differences in business orientation. There is evidence however, that Islamic banks are less cost-effective, but have a higher intermediation ratio, higher asset quality and are better capitalized. We also find large cross-country variation in the differences between conventional and Islamic banks as well as across Islamic banks of different sizes. Furthermore, we find that Islamic banks are better capitalized, have higher asset quality and are less likely to disintermediate during crises. The better stock performance of listed Islamic banks during the recent crisis is also due to their higher capitalization and better asset quality.     

The impact of macroeconomic and regulatory factors on bank efficiency: A non-parametric analysis of Hong Kong’s banking system

This paper assesses the relative technical efficiency of institutions operating in a market that has been significantly affected by environmental and market factors in recent years, the Hong Kong banking system. These environmental factors are specifically incorporated into the efficiency analysis using the innovative slacks-based, second stage Tobit regression approach advocated by Fried et al. [Fried, H.O., Schmidt, S.S., Yaisawarng, S., 1999. Incorporating the operating environment into a nonparametric measure of technical efficiency. Journal of Productivity Analysis 12, 249–267]. A further innovation is that we also employ Tone’s [Tone, K., 2001. A slacks-based measure of efficiency in data envelopment analysis. European Journal of Operational Research 130, 498–509] slacks-based model (SBM) to conduct the data envelopment analysis (DEA), in addition to the more traditional approach attributable to Banker, Charnes and Cooper (BCC) [Banker, R.D., Charnes, A., Cooper, W.W., 1984. Some models for estimating technical and scale efficiencies in data envelopment analysis. Management Science 30, 1078–1092].The results indicate: high levels of technical inefficiency for many institutions; considerable variations in efficiency levels and trends across size groups and banking sectors; and also differential impacts of environmental factors on different size groups and financial sectors. Surprisingly, the accession of Hong Kong to the People’s Republic of China, episodes of financial deregulation, and the 1997/1998 South East Asian crisis do not seem to have had a significant independent impact on relative efficiency. However, the results suggest that the impact of the last-mentioned may have come via the adverse developments in the macroeconomy and in the housing market.