The diversification and financial performance of US credit unions

For US credit unions, revenue from non-interest sources has increased significantly in recent years. We investigate the impact of revenue diversification on financial performance for the period 1993–2004. The impact of a change in strategy that alters the share of non-interest income is decomposed into a direct exposure effect, reflecting the difference between interest and non-interest bearing activities, and an indirect exposure effect which reflects the effect of the institution’s own degree of diversification. On both risk-adjusted and unadjusted returns measures, a positive direct exposure effect is outweighed by a negative indirect exposure effect for all but the largest credit unions. This may imply that similar diversification strategies are not appropriate for large and small credit unions. Small credit unions should eschew diversification and continue to operate as simple savings and loan institutions, while large credit unions should be encouraged to exploit new product opportunities around their core expertise.     

Investigating the cost performance of UK credit unions using radial and non-radial efficiency measures

This paper examines the relative efficiency of UK credit unions. Radial and non-radial measures of input cost efficiency plus associated scale efficiency measures are computed for a selection of input output specifications. Both measures highlighted that UK credit unions have considerable scope for efficiency gains. It was mooted that the documented high levels of inefficiency may be indicative of the fact that credit unions, based on clearly defined and non-overlapping common bonds, are not in competition with each other for market share. Credit unions were also highlighted as suffering from a considerable degree of scale inefficiency with the majority of scale inefficient credit unions subject to decreasing returns to scale. The latter aspect highlights that the UK Government's goal of larger credit unions must be accompanied by greater regulatory freedom if inefficiency is to be avoided. One of the advantages of computing non-radial measures is that an insight into potential over- or under-expenditure on specific inputs can be obtained through a comparison of the non-radial measure of efficiency with the associated radial measure. Two interesting findings emerged, the first that UK credit unions over-spend on dividend payments and the second that they under-spend on labour costs.     

The evolution of cost-productivity and efficiency among US credit unions

Advances in information-processing technology have eroded the advantages of small scale and proximity to customers that traditionally enabled small lenders to thrive. Nonetheless, the membership and market share of US credit unions have increased, though their average size has also risen. We investigate changes in the efficiency and productivity of US credit unions during 1989–2006 by benchmarking the performance of individual firms against an estimated order-α quantile lying “near” the efficient frontier. We construct a cost analog of the Malmquist productivity index, which we decompose to estimate changes in cost and scale efficiency, and changes in technology. We find that cost-productivity fell on average across all credit unions but especially among smaller credit unions. Smaller credit unions confronted a shift in technology that increased the minimum cost required to produce given amounts of output. All but the largest credit unions also became less scale efficient over time.     

Detecting abnormal credit union performance

Credit unions are an important financial intermediary, but little credit union research is done. A primary reason for the lack of research is the cooperative nature of the industry, making traditional methods of detecting abnormal performance inappropriate. This paper proposes two methods of detecting abnormal performance, one parametric, the other non-parametric. Instead of testing the efficiency of the institution, this paper proposes testing the return vector, as indicated in the theoretical objective function of the member. Simulations demonstrate that both methods are correctly specified and powerful.     

Bank credit risk and structural credit models: Agency and information asymmetry perspectives

This work investigates the effects of agency and information asymmetry issues embedded in structural form credit models on bank credit risk evaluation, using American bank data from 2001 to 2005. Findings show that both the agency problem and information asymmetry significantly cause deviations in the credit risk evaluation of structural form models from agency ratings. Five independent factors explain a deviation of 42.6–78.3% and should be incorporated into future credit risk modeling. Additionally, both the effects of information asymmetry and debt-equity agency positively relate to the deviation while that of management-equity agency relates to it negatively.     

Counter-cyclical substitution between trade credit and bank credit

This paper explores the substitution relationship between trade credit and bank credit, and its counter-cyclic dynamic pattern through economic cycles. We propose a new theoretical model, using a mechanism design method, which predicts the substitution between the two credits and its counter-cyclic behavior, subject to the condition of technological efficiency not less than one. This model also helps explain the somewhat contradictory evidence in the literature, on the relationship between the two credits. We present empirical evidence on the substitution effect and its counter-cyclic behavior, by using a balanced panel data set of 284 listed Chinese companies for the period 1998-2006. We further find that the substitution behaves counter-cyclically with respect to the coincident macroeconomic indicator, namely, GDP. Our empirical analysis also has some new features such as treating endogeneity carefully and incorporating the lag-effect of trade credit coherently.     

Banks’ capital buffer,risk and performance in the Canadian banking system: Impact of business cycles and regulatory changes

Using quarterly financial statements and stock market data from 1982 to 2010 for the six largest Canadian chartered banks, this paper documents positive co-movement between Canadian banks’ capital buffer and business cycles. The adoption of Basel Accords and the balance sheet leverage cap imposed by Canadian banking regulations did not change this cyclical behavior of Canadian bank capital. We find Canadian banks to be well-capitalized and that they hold a larger capital buffer in expansion than in recession, which may explain how they weathered the recent subprime financial crisis so well. This evidence that Canadian banks ride the business and regulatory periods underscores the appropriateness of a both micro- and a macro-prudential “through-the-cycle” approach to capital adequacy as advocated in the proposed Basel III framework to strengthen the resilience of the banking sector.     

Irish credit unions: Differential regulation based on business model complexity

This study examines the business model complexity of Irish credit unions using a latent class approach to measure structural performance over the period 2002 to 2013. The latent class approach allows the endogenous identification of a multi-class framework for business models based on credit union specific characteristics. The analysis finds a three class system to be appropriate with the multi-class model dependent on three financial viability characteristics. This finding is consistent with the deliberations of the Irish Commission on Credit Unions (2012) which identified complexity and diversity in the business models of Irish credit unions and recommended that such complexity and diversity could not be accommodated within a one size fits all regulatory framework. The analysis also highlights that two of the classes are subject to diseconomies of scale. This may suggest credit unions would benefit from a reduction in scale or perhaps that there is an imbalance in the present change process. Finally, relative performance differences are identified for each class in terms of technical efficiency. This suggests that there is an opportunity for credit unions to improve their performance by using within-class best practice or alternatively by switching to another class.     

Bank CEO incentives and the credit crisis

We investigate whether bank performance during the recent credit crisis is related to chief executive officer (CEO) incentives before the crisis. We find some evidence that banks with CEOs whose incentives were better aligned with the interests of shareholders performed worse and no evidence that they performed better. Banks with higher option compensation and a larger fraction of compensation in cash bonuses for their CEOs did not perform worse during the crisis. Bank CEOs did not reduce their holdings of shares in anticipation of the crisis or during the crisis. Consequently, they suffered extremely large wealth losses in the wake of the crisis.     

The impact of regulatory reforms on cost structure,ownership and competition in Indian banking

This paper evaluates the impact of financial sector reforms on the cost structure characteristics and on the ownership–cost efficiency relationship in Indian banking. It also examines the impact of reforms on the dynamics of competition in the lending market. We find evidence that deregulation improves banks performance and fosters competition in the lending market. Results suggest technological progress, once Indian commercial banks have adjusted to the new regulatory environment. This, however, does not translate in efficiency gains. There is also evidence of an ownership effect on the level and pattern of efficiency change. Finally, competition keeps building pace even in the re-regulation period and technological improvements are not hampered by the tightening of prudential norms.     

Lending competition and credit availability for new firms: Empirical study with the price cost margin in regional loan markets

In this paper, I present statistical evidence of the impact of lending competition on credit availability for new firms. A discrete-time duration analysis with respect to the years from the start-up to the first loan approval by a commercial bank or a cooperative bank, which is collected from survey data in Japan, shows that the higher price cost margin (PCM) of banks, which reflects the existence of a quasi-rent for a bank, improves the credit availability for younger firms. Additional analysis to detect the regional determinants of the PCM of banks shows that the share of larger banks in each local credit market has a negative and significant impact on the PCM. In light of the existing empirical finding that smaller banks are more likely to provide relationship banking, these findings provide indirect evidence for the hypothesis that the intensity of relationship banking in each local credit market increases the PCM and this encourages banks to extend a loan to new firms so that they can pre-empt the opportunity to establish lending relationships that are expected to yield such quasi-rents.     

Financial and economic performance of major Brazilian credit cooperatives

The credit union's main functions are the provision of individual financial loans based on collective savings, reaching up to provide full banking services, with expansion of its social function. Cooperatives are an alternative to supply a credit demand in the market, because a third of the municipalities have no bank branches. Although the participation of cooperatives in credit operations is still small compared to the Brazilian national banking system, its continued growth demonstrates the importance of this sector. In this sense, the analysis of the performance of these cooperatives becomes relevant to the extent that incentives to industry expansion differ from other financial institutions. In this context, this study aimed to analyze which the financial and economic performance of Brazil's largest credit unions. This performance analysis was performed using the indicators proposed by the CAMEL model, then the data envelopment analysis (DEA). It can be seen that there is a positive relationship between the use of variables in the model and the measurement of financial performance of credit unions. Moreover, according to the results, it can be observed that Uniprime Northern Paraná, Sicoob Cocred and Sicredi North RS/SC were cooperatives that stood out as efficient.     

Capital requirements under the credit risk-based framework

This work aims to study the hypothesis of lower capitalization of banks under the risk-based rules introduced in Basel II. In this sense, an assessment of the impact of these rules on the capital requirements for non-financial firms’ credit risk is performed. A comparison with Basel I is presented and intervals of variation for the risk drivers such that capital requirements exceed the ones under Basel I are established. Data for a European country supports the hypothesis of a smaller capitalization of banks under the risk-based framework, as far as credit risk in concerned.     

Relationship lending,hierarchical distance and credit tightening: Evidence from the financial crisis

This paper examines the firms’ credit availability during the 2007–2009 financial crisis using a dataset of 5331 bank–firm relationships provided by borrowers’ credit folders of three Italian banks. It aims to test whether a strong lender–borrower relationship can produce less credit rationing for borrowing firms even during a credit crunch period. The results show that exclusivity of the relationship can mitigate the firm credit rationing. We also verify the influence of lending organizational structure during crisis. A new measure of distance in lending technologies has been introduced: the hierarchical distance calculated as the distance between the branch that originates the loan and the location of the hierarchical level responsible for financing decision. Our findings document a negative impact of distance on credit availability, consistent with the idea that proximity facilitates the transmission of soft information.     

The impact of securitization on the expansion of subprime credit

This paper investigates the relationship between securitization activity and the extension of subprime credit. The analysis is motivated by two sets of compelling empirical facts. First, the origination of subprime mortgages exploded between the years 2003 and 2005. Second, the securitization of subprime loans increased substantially over the same time period, driven primarily by the five largest independent broker/dealer investment banks. We argue that the relative shift in the securitization activity of investment banks was driven by forces exogenous to factors impacting lending decisions in the primary mortgage market and resulted in lower ZIP code denial rates, higher subprime origination rates, and higher subsequent default rates. Consistent with recent findings in the literature, we provide evidence that the increased securitization activity of investment banks reduced lenders' incentives to carefully screen borrowers.     

The economics of credit cards,debit cards and ATMs: A survey and some new evidence

This paper provides a critical survey of the large and diffuse literature on credit cards, debit cards and ATMs. We argue that because there are still many outstanding issues and questions about the pricing, use and substitutability of these payment mechanisms, that there are significant further opportunities for research in these areas. A large number of questions are examined in this survey, including the pricing of credit cards, the impact of networks on the provision and pricing of ATMs, as well as the tradeoffs that consumers make between different types of payment mechanism, including debit cards, credit cards and ATMs. Importantly, this paper is also amongst the first to provide new evidence on this latter question from bank level data (from Spain). We conclude that point of sale (debit card) and ATM transactions are substitutes, and that ATM surcharges impacts point of sale volume significantly.     

Board quality and the cost of debt capital: The case of bank loans

We analyze the relation between comprehensive measures of board quality and the cost as well as the non-price terms of bank loans. We show that firms that have higher quality boards with a greater advisory presence borrow at lower interest rates. This relation exists even after controlling for ownership structure, CEO compensation policy, and shareholder protection, as well as the size and financial characteristics of the borrower and of the loan. We also show evidence that board quality and other governance characteristics influence the likelihood that loans have covenant requirements, but the relations differ by covenant type. When we combine the direct and indirect costs of bank loans we find that firms with large, independent, experienced, and diverse boards and lower institutional ownership borrow more cheaply. Overall, the evidence indicates that board quality impacts the cost of bank debt.     

Loan managers’ trust and credit access for SMEs

Research on relationship lending pays only marginal attention to the role of loan managers’ trust in the managers of SMEs. Trust literature suggests that trust reduces agency costs. Thus, trust is expected to be positively related to the amount of short-term credit granted and negatively related to SMEs’ risk of being credit constrained. Results from six banks characterised by a German culture and three banks characterised by an Italian culture suggest that this is indeed the case: SMEs that enjoy a high level of trust from loan managers obtain more credit and are less credit constrained.     

Liquidity risk management and credit supply in the financial crisis

Liquidity dried up during the financial crisis of 2007-2009. Banks that relied more heavily on core deposit and equity capital financing, which are stable sources of financing, continued to lend relative to other banks. Banks that held more illiquid assets on their balance sheets, in contrast, increased asset liquidity and reduced lending. Off-balance sheet liquidity risk materialized on the balance sheet and constrained new credit origination as increased takedown demand displaced lending capacity. We conclude that efforts to manage the liquidity crisis by banks led to a decline in credit supply.