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Working Paper
New evidence on returns to scale and product mix among U.S. commercial banks
Numerous studies have found that banks exhaust scale economies at low levels of output, but most are based on the estimation of parametric cost functions which misrepresent bank cost. Here we avoid specification error by using nonparametric kernal regression techniques. We modify measures of scale and product mix economies introduced by Berger et al. (1987) to accommodate the nonparametric estimation approach, and estimate robust confidence intervals to assess the statistical significance of returns to scale. We find that banks experience increasing returns to scale up to approximately $500 ...
Working Paper
Are credit unions too small?
Since 1985, the share of U.S. depository institution assets held by credit unions has nearly doubled, and the average (inflation-adjusted) size of credit unions has increased over 600 percent. We use a non-parametric local-linear estimator to estimate a cost relationship for credit unions and derive estimates of ray-scale and expansion-path scale economies. We employ a dimension-reduction technique to reduce estimation error, and bootstrap methods for inference. We find substantial evidence of increasing returns to scale across the range of sizes observed among credit unions, suggesting that ...
Working Paper
Non-parametric, unconditional quantile estimation for efficiency analysis with an application to Federal Reserve check processing operations
This paper examines the technical efficiency of U.S. Federal Reserve check processing offices over 1980?2003. We extend results from Park et al. (2000) and Daouia and Simar (2007) to develop an unconditional, hyperbolic, a-quantile estimator of efficiency. Our new estimator is fully non-parametric and robust with respect to outliers; when used to estimate distance to quantiles lying close to the full frontier, it is strongly consistent and converges at rate root-n, thus avoiding the curse of dimensionality that plagues data envelopment analysis (DEA) estimators. Our methods could be used by ...
Working Paper
Robust nonparametric estimation of efficiency and technical change in U.S. commercial banking
This paper examines the performance of the U.S. commercial banking industry over 1984-2002. Rather than measuring performance relative to the unknown (and difficult-to-estimate) boundary of the production set, performance for a given bank is measured relative to expected maximum output among m banks using no more of each input than the given bank. This approach permits fully non-parametric estimation with vn-consistency avoiding the usual curse of dimensionality that plagues traditional non-parametric efficiency estimators. The resulting estimates are robust with respect to outliers and noise ...
Working Paper
Robust, dynamic nonparametric benchmarking: the evolution of cost-productivity and efficiency among U.S. credit unions
This paper develops a new methodology for estimating cost-productivity and efficiency change that benchmarks the performance of individual firms against an estimated a-quantile. We adapt the estimators of Daouia and Simar (2007) and Wheelock and Wilson (2008a) to the estimation of cost efficiency where input prices and some outputs are fixed. Theoretical results demonstrate that our new estimator retains the root-n convergence, asymptotic normality, and other desirable properties of the original estimators. We show how the estimator can be used to construct a cost analog of the widely-used ...
Working Paper
Robust non-parametric quantile estimation of efficiency and productivity change in U.S. commercial banking, 1985-2004
This paper describes a non-parametric, unconditional, hyperbolic quantile estimator that unlike traditional non-parametric frontier estimators is both robust to data outliers and has a root-n convergence rate. We use this estimator to examine changes in the efficiency and productivity of U.S. banks between 1985 and 2004. We find that larger banks experienced larger efficiency and productivity gains than small banks, consistent with the presumption that recent changes in regulation and information technology have favored larger banks.
Working Paper
Why do banks disappear? The determinants of U.S. bank failures and acquisitions
This paper examines the determinants of individual bank failures and acquisitions in the United States during 1984-1993. We use bank-specific information suggested by examiner CAMEL-rating categories to estimate competing-risks hazard models with time-varying covariates. We focus especially on the role of management quality, as reflected in alternative measures of x-efficiency and find the inefficiency increases the risk of failure, while reducing the probability of a bank's being acquired. Finally, we show that the closer to insolvency a bank is, as reflected by a low equity-to-assets ratio, ...
Working Paper
Consolidation in US banking: which banks engage in mergers?
The number of U.S. commercial banks has declined by some 40 percent since 1984, primarily through mergers of solvent institutions. The relaxation of legal impediments to branching has enabled this consolidation, but specific characteristics of banks that engage in mergers reflect the regulatory process and market structure, as well as the bank's own condition. This paper seeks to quantify the regulatory, market, and financial characteristics that affect the probability of a bank engaging in mergers and the volume of banks it absorbs over time. We examine separately consolidation within ...