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Conference Paper
Measuring the efficiency of capital allocation in commercial banking
Working Paper
Measuring the efficiency of capital allocation in commercial banking
Commercial banks leverage their equity capital with demandable debt that participates in the economy's payments system. The distinctive nature of this debt generates an unusual degree of liquidity risk that can, at times, threaten the payments system. To reduce this threat, insurance protects deposits; and to reduce the moral hazard problems of the debt contract and deposit insurance, bank regulation constrains risk-taking and defines standards of capital adequacy. The inherent liquidity risk of demandable debt as well as potential regulatory penalties for poor financial performance creates ...
Working Paper
Is Bigger Necessarily Better in Community Banking?
SIPERSEDED BY WP 18-11 We investigate the relative performance of publicly traded community banks (those with assets less than $10 billion) versus larger banks (those with assets between $10 billion and $50 billion). A body of research has shown that community banks have potential advantages in relationship lending compared with large banks, although newer research suggests that these advantages may be shrinking. In addition, the burdens placed on community banks by the regulatory reforms mandated by the Dodd-Frank Wall Street Reform and Consumer Protection Act and the need to increase ...
Working Paper
A primer on market discipline and governance of financial institutions for those in a state of shocked disbelief
Self regulation encouraged by market discipline constitutes a key component of Basel II?s third pillar. But high-risk investment strategies may maximize the expected value of some banks. In these cases, does market discipline encourage risk-taking that undermines bank stability in economic downturns? This paper reviews the literature on corporate control in banking. It reviews the techniques for assessing bank performance, interaction between regulation and the federal safety net with market discipline on risk-taking incentives and stability, and sources of market discipline, including ...
Working Paper
Who said large banks don't experience scale economies? Evidence from a risk-return-driven cost function
Earlier studies found little evidence of scale economies at large banks; later studies using data from the 1990s uncovered such evidence, providing a rationale for very large banks seen worldwide. Using more recent data, the authors estimate scale economies using two production models. The standard risk-neutral model finds little evidence of scale economies. The model using more general risk preferences and endogenous risk-taking finds large scale economies. The authors show that these economies are not driven by too-big-to-fail considerations. They evaluate the cost implications of breaking ...
Working Paper
Do bankers sacrifice value to build empires? managerial incentives, industry consolidation, and financial performance
Bank consolidation is a global phenomenon that may enhance stakeholders? value if managers do not sacrifice value to build empires. We find strong evidence of managerial entrenchment at U.S. bank holding companies that have higher levels of managerial ownership, better growth opportunities, poorer financial performance, and smaller asset size. At banks without entrenched management, both asset acquisitions and sales are associated with improved performance. At banks with entrenched management, sales are related to smaller improvements while acquisitions are associated with worse performance. ...
Working Paper
Who said large banks don’t experience scale economies? Evidence from a risk-return-driven cost function
The Great Recession focused attention on large financial institutions and systemic risk. We investigate whether large size provides any cost advantages to the economy and, if so, whether these cost advantages are due to technological scale economies or too-big-to-fail subsidies. Estimating scale economies is made more complex by risk-taking. Better diversification resulting from larger scale generates scale economies but also incentives to take more risk. When this additional risk-taking adds to cost, it can obscure the underlying scale economies and engender misleading econometric estimates ...
Conference Paper
Recovering banking technologies when managers are not risk-neutral.