The interstate banking and branching efficiency act of 1994: A wealth event for acquisition targets

The Interstate Banking and Branching Efficiency Act (IBBEA) represented a significant step in the deregulation of interstate banking and branching. The IBBEA's passage had a positive wealth effect on a sample of large Bank Holding Companies (BHCs). Cross-sectional tests of abnormal returns reveal that BHCs having characteristics associated with acquisition targets and BHCs headquartered in states that prohibited interstate branching experienced significantly higher returns. Collectively, the evidence suggests that investors anticipated that the IBBEA would provide for increased corporate control activities among banks and that a large portion of the BHC gains stems from the relaxation of interstate branching restrictions.     

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.     

Changes in Interstate Banking Laws: The Impact on Shareholder Wealth

This study examines the impact on shareholder wealth of changes in interstate banking laws. The research demonstrates that changes in state statutes which allow interstate banking have a positive impact on the stock prices of regional banking organizations and a negative impact on the stock prices of money center banks. Interstate banking statutes initially exclude those states in which the money center banks are headquartered. The findings provide evidence that, by excluding money center banks from expansion across state lines, the competition from the regional banks may have an adverse competitive effect on the money center banks.     

The Effect of Bank Debt Downgrades on Stock Prices of Other Banks

We find that debt downgrades of money center banks elicit negative stock price responses in nondowngraded money center banks. Stock prices of larger regional banks also react to these downgrades. Although downgrades of regional banks evoke negative stock price responses for regional banks in the same geographic region, the importance of geographic region as a factor determining the extent of intra‐industry reactions has diminished since 1989. Our results indicate that the merger and expansion activities triggered by interstate banking have blurred differences between regional and money center banks as interstate banking activity has moved towards nationwide banking     

U.S. financial deregulation : Upheaval and promise

Financial deregulation in the U.S. has ample ramifications for international banking. For U.S. based international banks, the deregulation shifts the emphasis back to the now deregulated U.S. market. For foreign banks in the U.S. deregulation is a mixed blessing. One aspect of the deregulation is interstate banking, another is merger across industry lines. Thus Parker, a pen manufacturer, owns several financial institutions including a bank. All this functional integration may be exaggerated. Banks will continue to operate more or less as they have done in the past. The changes will be evolutionary rather than revolutionary in nature, and they will lead our industry from the production of banking services to the production of financial services.     

The Impact of Internet-Banking on Brick and Mortar Branches: The Case of Turkey

The increased adoption and infiltration of the Internet has recently redefined the playground for retail banks. Retail banks are now offering their services primarily through their Internet banking branches. The repercussions of this change to “brick and mortar” banks have been studied in the context of developed market economies. In this paper, we contribute to the literature by studying the impact of Internet banking adoption on banks’ deposit collection, lending activities, and performance in an emerging market setting. By using a panel of 18 retail banks that operate in Turkey from 1990–2008, we demonstrate that Internet banking adoption has a positive impact on the level of profits, deposits and loans per branch. As operational activities are now provided via Internet branches, Internet banking facilitates banking activities in branches that require more human input. We also find that Internet banking adoption has a negative impact on bank profitability after 2 years of adoption as Internet banking increases competition and results in lower interest income. Accordingly, Internet banking complements brick and mortar branches.     

Scale economies,X-efficiency,and convergence of productivity among bank holding companies

Are the less productive banks catching up to the more productive ones and, if so, how quickly and by what means? The objective of this study is to answer these questions by looking for convergence in productivity among bank holding companies (BHCs) in the US Past research has identified two major factors governing productivity in the banking sector – scale economies and X-efficiency. If the gains from scale economies decline with firm size and if the only difference between BHCs lies in their initial size, then the initially smaller BHCs should eventually catch up to the initially larger ones because the former tend to grow more quickly. However, the findings from this study do not support this hypothesis of “absolute convergence”. Indeed, the findings show strong evidence for “conditional convergence”, which means that the steady-state productivity to which a BHC is converging is conditional on the BHCs own level of X-efficiency. Conditional convergence implies that initial differences in X-efficiency among BHCs can, between them, create permanent differences in steady-state productivity.     

Branching,scale economies,and banking costs

In this paper, we develop and estimate a model of bank costs based on a theory of the branch cost function. First, we show that convenient branch location is important to banking customers and implies that banks do not necessarily operate branches at minimum average cost. This theoretical result provides a rationale for including branch variables in the bank cost function. Second, we estimate a statistical cost equation derived explicitly from assumptions about the branch cost function and including branch output variables. Our empirical results suggest substantial economies of scale at the branch level, but no economies from expansion by branching. Finally, we show that the resulting cost structure of the banking industry does not imply that a highly concentrated banking structure is necessary for efficiency. Thus, economies of scale would not be expected to force small banks out of the market, even if current restrictions on interstate banking are liberalized.     

The Relaxation of Entry Barriers in the Banking Industry: An Empirical Investigation

Until recently, state laws restricted entry into local banking markets in many states by limiting both branching and multibank holding company (MBHC) operations. To the extent that these laws impeded entry into local banking markets, the removal or relaxation of the restrictions should have reduced barriers to entry, leading to more competitive price levels in the affected markets. This paper tests for such effects by examining the changes in deposit interest rates offered by banks operating in markets affected by liberalization of state banking law relative to the changes in deposit interest rates offered during the same time period by banks operating in markets not affected by such liberalization. We find evidence that liberalization of state laws restricting intrastate MBHC operations, interstate branches, and interstate MBHC operations caused deposit interest rates to become more competitive. We, however, find no evidence of such effects associated with the removal of restrictions on intrastate branching.     

Bank selection and share of wallet among SMEs: Apparent differences between Hong Kong and Australia

This paper examines the factors that small- to medium-sized enterprises (SMEs) in Hong Kong consider when selecting a banking partner, and the extent to which they use different banks (share of wallet). The findings are contrasted with those from another study of Australian business. The results show that firms in both countries view a bank's willingness to accommodate their banking and credit needs as being important. Hong Kong firms appear to give this factor higher priority when making their bank selection, while Australian firms appear to place higher emphasis on long-term relationships. Australian firms appear to have a more stable relationship with their primary bank as compared to the firms in Hong Kong where switching behaviours are found to be common. While ‘guanxi’ is often seen as critical in maintaining a business relationship in the Asian context, this study suggests it has limited impact for SMEs in Hong Kong in increasing share of wallet. The findings offer marketing implications for banks that are operating, or are planning to operate, business banking in both places.     

The Diversification and Cost Effects of Interstate Banking

This study examines recent interstate bank geographic diversification inside the United States. More than 80 holding companies that gradually evolved into interstate banking companies were tested for significant linkages to risk and efficiency indicators. The study finds that while geographic expansion frequently is associated with increases in risk, when banking firms were grouped by threshold levels of geographic diversification more highly diversified interstate banks appear to achieve reductions in risk exposure and operating costs. The study's results suggest the spread of interstate banking may change the industry's risk and cost profile significantly with profound implications for the future of the deposit insurance fund.     

Mergers and Long-Term Corporate Performance: Evidence from Cross-Border Bank Acquisitions

We provide evidence on operating performance changes at a sample of U.S. banks acquired by non-U.S. banking organizations over the 1980–2001 period. Our sample allows us to compare directly the preacquisition performance of the targets with their postacquisition performance, a comparison that has not been possible in prior studies. We find that these cross-border acquisitions produce improved target performance. Cash flow profitability at the target increases, labor utilization improves, and loan losses do not rise. We also find evidence that the improvement in target operating performance primarily takes place for those acquisitions that occur following passage of the Reigle–Neal interstate branching legislation.     

Competition in markets with dominant firms: A note on the evidence from the Italian banking industry

In this paper we consider the Italian banking industry, where the eight largest firms operate at a national level, manage about a half of total loans, and have a notably larger dimension than the other competitors. We estimate a structural model containing a behavioural parameter, in order to assess the market conduct of the largest banks for the period 1988–2000. Our finding is that, in spite of their noteworthy size and significant market share, these banks have been characterised by a more competitive conduct than the Bertrand–Nash outcome: this is in line with the results of the latest literature of the field, for which in the banking industry there is often no conflict between competition and concentration.     

The relative contributions of equity and subordinated debt signals as predictors of bank distress during the financial crisis

Bank supervisors utilize early warning signals to predict which banks are likely to become distressed. Previous research has found that market discipline signals do not significantly improve out-of-sample forecasts relative to accounting-based signals. Most of that evidence, however, comes from periods in the 1990s when the U.S. economy and banking system were healthy, potentially neutralizing an advantage of market signals to incorporate new information quickly. For the period between the fourth quarters of 2006 and 2012, we assess the accuracy of two market signals – expected default frequency (EDF) and subordinated note and debenture (SND) yield spreads – relative to accounting-based signals in forecasting which publicly traded BHCs would become distressed. In 2008, EDF signals were relatively more accurate, but they did not lead to economically significant reductions in missed distress events relative to other signals. Supervisors would have been better off devoting slack resources to monitor BHCs with high commercial real estate concentrations. As the crisis subsided, a failure probability model developed from bank failures in the 1980s and early 1990s was consistently the most accurate signal. For the two dozen BHCs with actively traded SNDs, yield spreads over Treasuries were extremely poor predictors of distress because the spreads were distorted by too-big-to-fail subsidies. The Tier 1 leverage ratio was the most accurate distress signal for these large BHCs. In sum, the evidence to justify systematic reliance on market signals by supervisory agencies to forecast bank distress remains weak.     

Is spin-off policy an effective way to improve performance of Islamic banks? Evidence from Indonesia

Indonesia has adopted a dual banking system in which both conventional and Islamic banks operate. Most of the sharia-based banks, however, are still operating Islamic windows within their conventional entity. To strengthen the role of Islamic banking in the intermediation system, the government issued Islamic Banking Law No. 21/2008 to encourage Islamic windows of conventional banks to become a legal entity separate from their parent company. Because some Islamic windows have spun off in this fashion, we can employ a difference-in-difference approach to examine the effect of such a spin-off on Islamic banks’ performance, efficiency, and risk. Our study covers all Islamic commercial banks (including Islamic windows of conventional banks) in Indonesia from 2008–2019. We find that the performance and efficiency of full-fledged Islamic banks are significantly lower compared with Islamic windows of conventional banks. Moreover, our results show that financing risk increases after the spin-off. The inferior performance of full-fledged Islamic banks persists for four years after the spin-off. We also find that a conversion strategy results in better outcomes, particularly for profitability and efficiency, than a pure spin-off strategy.     

Credit supply and capital structure adjustments

Using the staggered deregulation of the U.S. banking industry as a series of exogenous shocks, I study the effect of the credit supply on the speed of capital structure adjustment. I find robust evidence that interstate and intrastate banking deregulation are positively associated with leverage adjustments. Specifically, the speeds of adjustment to target leverage are faster in the postderegulation periods. I also find that the positive effect is driven by firms that are financially constrained, are financially dependent on banks, and have less access to the public debt market and by deregulated banks’ ability to geographically diversify the credit risk.     

Credit supply and corporate innovation

We present evidence that banking development plays a key role in technological progress. We focus on manufacturing firms' innovative performance, measured by patent-based metrics, and employ exogenous variations in banking development arising from the staggered deregulation of banking activities across US states during the 1980s and 1990s. We find that interstate banking deregulation had significant beneficial effects on the quantity and quality of innovation activities, especially for firms highly dependent on external capital and located closer to entering banks. Furthermore, we find that these results are strongly driven by a greater ability of deregulated banks to geographically diversify credit risk.     

The profitability of small single-market banks in an era of multi-market banking

This paper examines the relationship between the profitability of small single-market banks and the presence in the market of large banking organizations and banking organizations that operate primarily outside of the local banking market. We find that, in rural banking markets, the profitability of small single-market banks is significantly related to the presence of both large and small primarily-out-of-market banks. We also find that an increased presence of large or small primarily-out-of-market banks in rural banking markets reduces the positive effect of an increase in concentration on small single-market bank profits. This finding is consistent with theoretical predictions reported in the recent literature and has important implications for antitrust policy. In urban banking markets, we find little evidence of any relationship between the profitability of small single-market banks and the presence of large or primarily-out-of-market banks.     

The Gains from Takeover Deregulation: Evidence from the End of Interstate Banking Restrictions

This paper uses interstate banking deregulation to explore the benefits of takeover deregulation and how these benefits are distributed across different firms. We find large and significant abnormal returns around the Interstate Banking and Branching Efficiency Act of 1994 which imply it created $85 billion of value in the banking industry. Consistent with an active market for corporate control allowing beneficial consolidation and providing needed discipline, there is a strong negative relationship between banks' abnormal returns and their prior performance. Consistent with managerial entrenchment limiting takeover discipline, banks with higher insider ownership, lower outside block ownership, and/or less independent boards have lower abnormal returns.     

Market concentration and bank competition in emerging asian countries over pre and post the 2008 global financial crisis

This paper examines the relationships between market concentration, bank competition, and efficiency in banking across six emerging Asian countries namely Bangladesh, India, Indonesia, Malaysia, the Philippines and Vietnam over the period 2005 to 2012. The countries selected for this study operate commercial banking activities with a comparatively large number of both publicly listed and private commercial banks providing a broad range of commercial banking services. For example, banks in Bangladesh, India and Vietnam used to be predominantly state-owned. But over the last few decades, governments have been issuing licenses to private owners. The methodological approach taken by our study provides an important and original contribution to the extant literature by testing various hypothesis that investigate the relationship between competition and efficiency across banks from a select group of Asian countries. We find that market concentration has a positive effect whereas competition has a negative effect on the efficiency of banks operating in these countries. This finding conveys a critically important message to the regulators of banks in these countries: there is a trade-off between quantity and quality. Our analyses also reveal that the effect of bank size on efficiency is positive whereas the effect of liquidity risk on efficiency is negative. This again supports the conventional wisdom that large banks are in a position to provide cost efficient services because they have the ability to attain economies of scale and scopes. Here again, the regulators have very important roles to play: while they have to put in place effective mechanism preventing big banks from being an oligarchy; at the same time, they should make sure that banks get liquidity support as funding pressure builds up.