Trends in Organizational Form and their Relationship to Performance: The Case of Foreign Securities Subsidiaries of U.S. Banking Organizations

Debate about the effects of permitting U.S. commercial banks to expand their range of activities has intensified in recent years. Some observers worry that banks with access to a federal safety net have strong incentives to use new opportunities to take greater risks and increase their likelihood of failure at possible cost to the FDIC and taxpayers. Others fear that the safety net might give banks a competitive advantage relative to nonbank rivals. A key element of this debate is whether a holding company structure does a significantly better job of mitigating against these potential problems than a bank subsidiary alternative and should be made mandatory for banking organizations that want to engage in nontraditional activities. Unfortunately, hard, current empirical evidence on the benefits and costs of alternative structures generally is lacking. The purpose of this paper is to provide this sort of evidence. In the study, annual financial data for the 1987–1997 period for an unbalanced panel of foreign securities subsidiaries of U.S. banking organizations are used to investigate two questions: What factors influence how bank holding companies organize securities activities when they have a choice? And are the observed differences in organizational form related to significant differences in key measures of subsidiary performance? This sort of study is possible because U.S. banking organizations can and do engage in securities activities through subsidiaries of the bank as well as holding company affiliates. These subsidiaries also file financial reports with bank regulators. A probit model is used to empirically identify important factors influencing structural choice. Univariate and multivariate statistical techniques are used to determine whether or not differences in subsidiary structure are related to differences in subsidiary risk, funding costs, and efficiency. Simultaneity is investigated to a limited extent. In brief, the empirical results do not support the position of the holding company proponents. Safety net subsidy incentives don’t appear to be a primary determinant of structural choice. The evidence does not indicate that bank-owned securities subsidiaries tend to be more risky than holding company securities subsidiaries. Bank securities subsidiaries also do not appear to enjoy any funding advantage relative to holding company subsidiaries. These two results are particularly noteworthy because section 23A and 23B restrictions on intracompany funding currently do not apply to transactions between banks and their direct and indirect bank subsidiaries. Finally, some evidence indicates that bank subsidiaries tend to be more efficient.     

Geographic diversification in banking,market share changes,and the viability of small independent banks

The prospect of unlimited nationwide banking raises a question about the viability of small independent banks in competition with large, geographically diversified banking organizations. This study addresses the issue of small bank viability by focusing on the relative performance of independent banks and bank holding company subsidiaries in a regime of intrastate banking, where performance is measured by the cumulative change in a bank's local market share over time. Two regression equations of the same general form are estimated using the same sample of independent and affiliated banks, albeit for different time periods to distinguish between the short-term and long-term effects of affiliation. Regression results indicate that affiliation with a geographically diversified bank holding company generally provides no significant long-term competitive advantage (in terms of market share accumulation) for holding company subsidiaries over independent banks. The only exception is a modest benefit afforded to banks with relatively small pre-acquisition market shares that are acquired by larger bank holding companies as initial entry vehicles into new markets.An earlier version of this article was presented at the 1988 meetings of the Southern Economic Association, San Antonio, Texas.     

Evidence on the role of holding company acquisitions in the management of bank capital

This article addresses the issue of the impact of bank acquisitions on the capital positions of acquired banks. The hypothesis tested is that acquisition-related capital changes reflect divergent capital-related acquisition motives which induce significant infusion of capital into some acquired banks and significant withdrawals from others.This study confirms that,on average, bank holding company acquisitions reduce the relative capital position of acquired banks, but it also indicates that this average effect masks evidence that acquisitions contribute to relative increases in capital in a significant subset of acquired banks. The results herein demonstrate that results of prior studies regarding the impact of acquisition and/or holding company affiliation on bank capital positions suffer from misspecification.The finding that there are divergent implications of acquisition for capital growth is consistent with the notion that acquisitions by bank holding companies may be providing important financial synergies to the banking industry by serving as a mechanism for relatively efficient reallocation of equity capital among affiliated banks.The authors wish to acknowledge helpful comments and suggestions of Harold Black, Tom Boehm, Ronnie Clayton, Stephen Rhoades, and anonymous referees.     

Are Banks Affiliated with Bank Holding Companies More Efficient Than Independent Banks? The Recent Experience Regarding Japanese Regional BHCs

Few studies have investigated whether Japanese banks affiliated with bank holding companies are more efficient and profitable than independent banks. The present paper tests this hypothesis by using both a stochastic frontier approach and a market valuation approach. First, our results suggest that banks affiliated with bank holding companies are not more cost-efficient than are independent banks. Because of the brief history of Japanese BHCs, it is fair to conclude that the formation of regional bank holding companies has not achieved efficiency gains so far. Second, we find that banks affiliated with bank holding companies are more profit-efficient than are independent banks. This is particularly apparent when the establishment of the bank holding companies increases market power in regional markets. This supports the Financial Services Agency’s policy to increase the profitability of regional banks through bank consolidation. Finally, based on standard event study methodology, we find that the market did not regard news about the establishment of bank holding companies as significant events.JEL Classification: G21     

The Effects of Banking Mergers on Loan Contracts

This paper studies the effects of banking mergers on individual business borrowers. Using information on individual loan contracts between banks and companies, I analyze the effect of banking consolidation on banks' credit policies. I find that in-market mergers benefit borrowers if these mergers involve the acquisition of banks with small market shares. Interest rates charged by the consolidated banks decrease, but as the local market share of the acquired bank increases, the efficiency effect is offset by market power. Mergers have different distributional effects across borrowers. When banks become larger, they reduce the supply of loans to small borrowers.     

Affiliated Bank Performance and the Simultaneity of Financial Decision-Making

The remarkable growth of bank holding companies (BHCs) during the last decade has aroused a great deal of interest and controversy among academic economists and bank regulators. One of the important issues discussed has been the impact of holding company affiliation on the operating performance of the acquired banks. Subsequent empirical testing of the question has produced a wide array of results. Nevertheless, a recent survey of the literature by the staff of the Federal Reserve Board [18] concluded that while not entirely unambiguous, the findings are “relatively consistent and conclusive.” Such a sweeping generalization seems premature at best. In a recent issue of this Journal [4], we proposed an empirical model designed to test the interdependency between financial decision-making and bank performance. The purpose of this note is to examine the implications of that investigation for the BHC performance issue. The impact of affiliation on bank performance has been analyzed in several different ways; however, no study has considered the important theoretical and statistical implications of the simultaneity question.     

Evaluating the Nordea experiment: Evidence from market and accounting data

This paper discusses results and difficulties of comparing banks’ performance based on publicly available data for the case of Nordea, a pan-Nordic bank created through mergers of important national banks. The objective is to determine whether Nordea’s unique strategy of functional integration across four countries can be advantageous. For stock-market data, however, Nordea does not have stable betas on risk factors, and thus the comparables method must be used with great care. The Nordea holding company performed about as well as the comparables, both in terms of stock-market and accounting data. Nordea banks in individual countries outperformed comparable holding companies; by arithmetic, Nordea non-bank operations are not as profitable as its bank operations. In event studies, the data lend only the weakest support to the hypothesis that the market viewed Nordea’s acquisitions as adding value.     

Community bank mergers and their impact on small business lending

There have been increasing concerns about the potential of larger banks acquiring community banks and the declining number of community banks, which would significantly reduce small business lending (SBL) and disrupt relationship lending. This paper examines the roles and characteristics of U.S. community banks in the past decade, covering the recent economic boom and downturn. We analyze risk characteristics of acquired community banks, compare pre- and post-acquisition performance, and investigate how the acquisitions have affected SBL. Contrary to the concerns, our analysis shows that the overall amount of SBL increases more after a merger when a community bank is acquired by a large bank. Data also suggest an overall (regardless of mergers) declining SBL trend for all bank size groups. In fact, the decline in the SBL ratio, on average, has been more severe among community banks, relative to large banks. Our results indicate that mergers involving community bank targets over the past decade have enhanced the overall safety and soundness of the banking system without adversely impacting SBL.     

Bank holding company affiliation and market share performance

This study examines the effect of bank holding company affiliation on the market share performance of banks acquired from 1968–1978. The principal focus of the analysis is on banks acquired in markets without other representation by the parent holding company. Among such banks, holding company affiliation appears to have increased the market share of ‘foothold’ banks (i.e., those with relatively small market share) but reduced the market share of large banks. In both cases, however, the quantitative effect of affiliation is estimated to be very small. Thus, bank regulators may not wish to distinguish on the basis of expected market share performance between ‘foothold’ entry and acquisition of a dominant bank when ruling on market-extension acquisition/merger cases.     

金融控股公司控制下的上市银行绩效及其协同效应分析

本文首先从理论角度论述金融控股公司与全能银行以及经营单一业务的金融企业相比具有比较优势;并构建“税前经营现金流收益率”指标,对金融控股公司控制下的上市银行绩效进行评估,并对这一指标进行分解和进一步分析。结果显示兴业银行表现较优,而中信银行和招商银行经营绩效逊于单一经营的银行平均值,显示两家银行未能有效实现金融控股公司内部的协同效应。     

Who acquires whom among stand-alone commercial banks and bank holding company affiliates?

This paper presents the difference in the likelihood of being targets or acquirers among stand-alone banks, single-bank holding company (SBHC) affiliates and multi-bank holding company (MBHC) affiliates. Using a sample of U.S. commercial bank data from 1997 to 2012, we find that MBHC affiliates exhibit a greater likelihood of being targets than do stand-alone commercial banks, while stand-alone banks have a greater probability of becoming targets than do SBHC affiliates. Our findings show that MBHC affiliates tend to have a greater likelihood of being acquirers than do SBHC affiliates, which again have a greater probability of being acquirers than do stand-alone banks. Those banks that acquire another bank within the same MBHC structure tend to be smaller and more financially constrained than those banks acquiring outside the same MBHC structure, whereas targets that are acquired by another bank within the same MBHC structure tend to be smaller, higher profitability and capital than targets that are acquired by banks from outside the MBHC structure. Our results suggest that the MBHC parent attempts to discipline distressed, poorly performing and smaller affiliates by involving them in mergers and acquisitions.     

Accounting for distress in bank mergers

Most bank merger studies do not control for hidden bailouts, which may lead to biased results. In this study we employ a unique data set of approximately 1000 mergers to analyze the determinants of bank mergers. We use undisclosed information on banks’ regulatory intervention history to distinguish between distressed and non-distressed mergers. Among merging banks, we find that improving financial profiles lower the likelihood of distressed mergers more than the likelihood of non-distressed mergers. The likelihood to acquire a bank is also reduced but less than the probability to be acquired. Both distressed and non-distressed mergers have worse CAMEL profiles than non-merging banks. Hence, non-distressed mergers may be motivated by the desire to forestall serious future financial distress and prevent regulatory intervention.     

Can the “Single Point of Entry” strategy be used to recapitalize a systemically important failing bank?

The Single Point of Entry (SPOE)—the FDIC strategy to implement its new Dodd–Frank Orderly Liquidation Authority (OLA)—promises to reduce the financial market turmoil caused by the failure of a large complex financial institution by using parent holding company resources to recapitalize its large failing subsidiary banks. We identify legal and financial impediments that may prevent the use of a SPOE strategy for this purpose. Dodd–Frank does not authorize bank recapitalizations through SPOE or otherwise, and the OLA cannot be invoked unless the failure of a subsidiary puts the parent in danger of default. The imprecise legislative language that authorizes OLA creates a new source of systemic risk. Regulations required to operationalize SPOE will require bank holding companies to issue a substantial volume of new subordinated debt, increasing these institutions’ leverage and financial fragility. Unless the Dodd–Frank Act is amended, OLA could well magnify and not reduce market instability in the next financial crisis.     

INTERSTATE BANK MERGERS: THE EARLY EVIDENCE

This study examines the wealth effects of interstate bank mergers to both the acquired and acquiring firms' shareholders. While the overall results are consistent with the findings of research on nonfinancial mergers — that acquired firms' shareholders gain and acquiring firms' shareholders break even — there is evidence that the acquiring banks cannot be considered a homogeneous group. Specifically, banks involved in relatively large acquisitions earn positive and statistically significant abnormal returns and significantly outperform those involved in relatively smaller mergers. The results suggest there are differential opportunities for gain from interstate mergers, dependent upon the relative size of the acquisition and the degree to which it expands the geographic market served by the bank.     

SOME EVIDENCE THAT BANKS USE INTERNAL CAPITAL MARKETS TO LOWER CAPITAL COSTS

To the extent raising external capital is especially costly for banks (as the preceding article suggests), bank managers have incentives to manage their internal cash flow in ways that minimize their need to raise external equity. One way to accomplish this is to establish bank holding companies that set up internal capital markets for the purpose of allocating scarce capital across their various subsidiaries. By “internal capital market” the authors mean a capital budgeting process in which all the lending and investment opportunities of the different subsidiaries are ranked according to their risk-adjusted returns; and all internal capital available for investment is then allocated to the highestranked opportunities until either the capital is exhausted or returns fall below the cost of capital, whichever comes first. As evidence of the operation of internal capital markets in bank holding companies, the authors report the following set of findings from their own recent studies:

• ? For large publicly traded bank holding companies, growth rates in lending are closely tied to the banks' internal cash flow and regulatory capital position.
• ? For the subsidiaries of bank holding companies, what matters most is the capital position and earnings of the holding companies and not of the subsidiaries themselves.
• ? The lending activity of banks affiliated with multiple bank holding companies appears to be less dependent on their own earnings and capital than the lending of unaffiliated banks.

The authors also report that, after being acquired, previously unaffiliated banks increase their lending in local markets. This finding suggests that, contrary to the concerns of critics of bank consolidation, geographic consolidation may make banks more responsive to local lending opportunities.     

A New Application of Sustainable Growth: A Multi‐Dimensional Framework for Evaluating the Long Run Performance of Bank Mergers

Abstract:   We study the mergers of US publicly traded bank holding companies during 1987–2000 and find that the acquiring firm's sustainable growth rate is an important determinant of the cross‐sectional variation in the merged entity's long‐term operating and stock performance. The most economically significant determinants of the merged bank's abnormal stock return performance are the acquiring bank's estimated sustainable growth rate prior to the acquisition, as well as post‐acquisition changes in this growth rate, and the bank's dividend payout ratio. Our findings are robust even after controlling for several potentially confounding factors.     

Governance mechanisms in Spanish banks. Does ownership matter?

This paper examines the governance of Spanish banks regarding two main issues. First, does poor economic performance activate governance interventions that favor the removal of executive directors and the merger of non-performing banks? And, second, does the relationship between governance intervention and economic performance vary with the ownership form of the bank? We find a negative relationship between performance and governance intervention for banks, but the results change for each form of ownership and each type of intervention. Internal-control mechanisms work for Independent Commercial banks, but Savings banks show weaker internal mechanisms of control and the only significant relationship between performance and governance intervention that appears is for mergers. The Spanish Savings banks, with a peculiar form of ownership that, in fact, implies a lack of ownership, give voice to several stakeholder groups with no clear allocation of property rights. Nevertheless, their economic performance is not generally affected. Product-market competition compensates for those weaker internal governance mechanisms, and non-performing banks are not fully protected from disappearing.     

Inherited or earned? Performance of foreign banks in Central and Eastern Europe

In this study, using a combination of propensity score matching and difference-in-difference techniques, we investigate the impact of foreign bank ownership on the performance and market power of acquired banks operating in Central and Eastern Europe. This approach allows us to control for a selection bias as larger but less profitable banks were more likely to be acquired by foreign investors. We show that during 3 years after takeover, banks become more profitable owing to cost minimization and better risk management. They also gained market share due to passing their lower cost of funds to borrowers in terms of lower lending rates. Previous studies failed to note the improvements in the performance of takeover banks because they did not account for the selection bias.     

Bank Mergers,REIT Loan Pricing and Takeover Likelihood

The impact of bank mergers on Real Estate Investment Trust (REIT) loan pricing and takeover likelihood is assessed. REITs that lose their primary banking relationship due to bank mergers pay higher interest rates on future borrowings. Bank consolidation reduces bank competition for REIT loans which affects loan pricing. Moreover, based on randomly matched samples of REITs, the results imply that firms losing their agent banks due to bank mergers and those with limited access to bank debt are more likely to be acquired while REITs associated with acquiring banks are more likely to acquire other firms. Additional analysis of the 92 merged REITs reveals that 33% of the target REITs’ banks are merged with their REIT acquirers’ banks prior to the REIT mergers while 67% of the target REITs share at least one major bank with their acquirer.