too big to be efficient the impact of implicit subsidies on estimates of scale economies for banks we examine whether too big to fail tbtf factors affect estimates of scale economies for large banks from a standard model of bank production that does not control for any tbtf factors we find evidence of scale economies for our sample of large banks we then control for tbtf factors by using a measure of the implicit subsidy that emerges from a reduction in tbtf banks funding costs due to investor expectations of government support we do this in two ways first we estimate scale economies from an augmented model of bank production that employs a proxy for the counterfactual price of debt that banks would face in the absence of any tbtf funding cost advantage second we estimate scale economies from a model of bank production that is estimated only for a sample of banks considered unlikely to be tbtf after controlling for tbtf factors using either method we no longer find evidence of scale economies for our sample of large banks these results suggest that estimated scale economies for large banks are affected by tbtf factors

the social costs and benefits of too big to fail banks a bounding exercise while the policy of too big to fail has received wide attention in the literature there is little agreement regarding economies of scale for financial firms we take the stand that systemic risk increases when the larger players in the financial sector have a larger share of output calculations indicate that the cost to the macro economy due to increased systemic risk is always much larger than the potential benefit due to scale economies when distributional and intergenerational issues are considered the potential benefits to economies of scale are unlikely to ever exceed the potential costs due to increased risk of a banking crisis

economic cost scale efficiency and competitive viability in banking this paper addresses the issue of the competitive viability of banks of different scales and scopes of operation and the implications that this may have for the evolving structure of the banking and financial services industry unlike previous papers this paper is the first to include both production and opportunity costs in an empirical evaluation of bank efficiency no consistent evidence is reported to suggest that banking organizations can achieve further gains in either production or economic efficiency by expanding beyond 2 billion dollars of total assets thus it is likely that smaller less diversified banking organizations will remain competitively viable copyright 1996 by ohio state university press

intra industry trade in financial services abstract intra industry trade iit has been central to increasing the variety of products available to consumers unlike traditional trade theories the recent trade theories have placed an emphasis on the role of foreign direct investment fdi in generating trade and increasing the volume of iit this study is the first study of intra industry trade in banking services in which the key elements of the new trade theories of iit have been taken into account in measuring the determinants of iit in banking services the empirical results of the determinants of iit in banking services indicate that factor endowments average per capita income fdi in banking economies of scale in the banking sector trade intensity between the us and its partners and market openness make a positive contribution to the volume of iit in banking services furthermore the empirical results indicate that intra trade activities amongst the us multinational corporations reduce the level of iit in banking services for the us

the impact of sukuk on the insolvency risk of conventional and islamic banks abstractthis paper investigates the impact of sukuk market development on bank insolvency risk using a sample comprising 72 islamic banks ibs and 145 conventional banks cbs spanning 15 countrie

controlling for the use of extreme weights in bank efficiency assessments during the financial crisis we propose a method for bank efficiency assessment based on weight restricted dea that limits banks abilities to use extreme weights corresponding to extreme judgements of the risk adjusted prices on funding sources and assets based on a data set comprising the largest european banks during the financial crisis we illustrate the impact of the proposed weight restrictions in two different efficiency models one related to banks funding mix and one related to their asset mix the results show that using a more balanced set of weights tend to reduce the estimated efficiency scores more for those banks which were bailed out during the crisis which confirms the potential bias within standard dea that does not control for extreme weights applied by highly risky banks we discuss the use of the proposed method as a regulatory tool to constrain discretion when complying with regulatory capital benchmarks such as the basel regulatory capital ratios

bank size and macroeconomic shock transmission does the credit channel operate through large or small banks in this paper i use u s call report data to construct a larger panel dataset with bank level observations i find that larger banks lending is considerably more sensitive to the strength of their borrowers and their own balance sheets compared to smaller banks and that the sensitivities to borrower balance sheets are larger in magnitude compared to lender balance sheets when i incorporate various macroeconomic shocks identified by an estimated dsge model into the empirical model i similarly find that the transmission of shocks to the real economy operates mostly through large bank lending and borrower balance sheets

stakeholder rights and economic performance the profitability of nonprofits abstract this paper explores whether ownership matters in a fundamental sense by comparing the performance of stockholder owned firms with the much less analyzed nonprofit firms no stakeholder has residual cash flow rights in nonprofit firms and the control rights are held by customers employees and community citizens accounting for differences in size and risk and comparing only firms in the same industry we find that stockholder owned firms do not outperform nonprofit firms this result is consistent with the notin that the monitoring function of stockholders may be successfully replaced by other mechanisms we find evidence that product market competition may play this role as a substitute monitoring mechanism

on the estimation of returns to scale using variable cost functions abstract this paper compares two methods of estimating returns to scale based on variable cost functions it shows specifically how the methods differ and indicates why it is important to select an appropriate method when drawing inferences about policy

banks buffer capital how important is risk abstract most banks hold a capital to asset ratio well above the required minimum defined by the present capital adequacy regulation basel i using bank level panel data from norway important hypotheses concerning the determination of this buffer capital are analyzed focus is on the importance of i risk ii the buffer as an insurance iii the competition effect iv supervisory discipline and v economic growth a negative or non significant risk effect is found which suggests that introducing a more risk sensitive capital regulation basel ii is likely to affect norwegian banks support is found for the hypothesis that buffer capital serves as an insurance against failure to meet the capital requirements

efficiency and risk in taiwan banking sbm super dea estimation in this study we adopt the two data envelopment analysis dea methods including banker charnes cooper bcc and slacks based measure sbm super efficiency to investigate whether a bank s technical efficiency index s results incorporating account risk and not incorporating account risk differ significantly the information is obtained from 43 taiwanese banks for the period 1998 to 2002 we also employ the nonradial and slacks based malmquist total factor productivity tfp index to measure the impact of productivity change on the panel data our empirical results from the dea approach are summarized as follows 1 loan quality factors have an impact on a bank s efficiency in general the bank with a higher degree of problem loans drops down its efficiency by incorporating account risk however the bank with a lower degree of problem loans increases its efficiency by incorporating account risk 2 super efficiency provides a good framework for ranking efficient units 3 based on the nonradial an

how significant is the alleged unfair advantage enjoyed by state owned banks in germany the european commission argues that the state owned banks in germany enjoy an unfair advantage over the private sector banks in the cost of borrowing funds in the financial markets because of state guarantees that public sector banks are perceived to enjoy this note demonstrates that the blame for the comparatively poor profitability of private sector banks in germany cannot be laid at the door of the relatively cheaper funds that the public sector banks can raise in the wholesale markets copyright 2006 oxford university press

tariff behavior in five european countries abstract this paper examines the time series properties of average tariff rates for denmark france sweden switzerland and the united kingdom for all five countries the tariff series contains a unit root however a complete description of the tariff rate series for each country suggests that tariff changes may have quite different effects on macroeconomic variables such as the trade balance in each of the five countries studied

markets and institutions global perspectives abstract the purpose of this paper is to highlight some of the key developments of markets and institutions at the global level over the past few decades by referring to the evolution of institutions from the government led system to a market led system the paper argues that innovation and deregulation in the financial sector led to acceleration of the process of globalisation in which both markets and institutions are becoming increasingly integrated and more efficient the paper highlights the role of trade liberalisation in financial services as a way of increasing efficiency and better use of national resources the paper also highlights the role of consolidation of financial institutions as one of the ingredients of the new developments of markets and institutions the paper also provides brief highlights of six other papers in this special issue that analyse and discuss some of the global aspects of markets and institutions

deposit insurance regulation and moral hazard in the thrift industry evidence from the 1930 s this paper compares risk taking of insured and uninsured thrifts operating under strict and less strict regulatory regimes during the 1930 s analysis of balance sheet data indicates that while newly insured thrifts undertook less risk than their uninsured counterparts possibly because of screening by deposit insurance authorities moral hazard emerged gradually insured institutions operating under relatively permissive regulatory regimes were more prone to undertake risky lending activities than their more tightly regulated counterparts possibly because of screening by deposit insurance authorities moral hazard emerged gradually insured institutions operating under relatively premissive regulatory regimes were more prone to undertake risky lending activities than their more tightly regulated counterparts given the current system of deposit insurance the results suggest that effective regulation and supervision will play a key role in maintaining thrift stability in the 1990s copyright 1992 by american economic association

are scale economies in banking elusive or illusive evidence obtained by incorporating capital structure and risk taking into models of bank production abstract this paper explores how to incorporate banks capital structure and risk taking into models of production in doing so the paper bridges the gulf between 1 the banking literature that studies moral hazard effects of bank regulation without considering the underlying microeconomics of production and 2 the literature that uses dual profit and cost functions to study the microeconomics of bank production without explicitly considering how banks production decisions influence their riskiness various production models that differ in how they account for capital structure and in the objectives they impute to bank managers cost minimization versus value maximization are estimated using u s data on highest level bank holding companies modeling the bank s objective as value maximization conveniently incorporates both market priced risk and expected cash flow into managers ranking and choice of production plans estimated scale economies are found to depend critically on how banks capital structure and risk taking are modeled in particular when equity capital in addition to debt is included in the production model and cost is computed from the value maximizing expansion path rather than the cost minimizing path banks are found to have large scale economies that increase with size moreover better diversification is associated with larger scale economies while increased risk taking and inefficient risk taking are associated with smaller scale economies

do large banks have lower costs new estimates of returns to scale for u s banks this paper presents new fully nonparametric estimates of ray scale and expansion path scale economies for u s banks based on a model of bank costs unlike prior studies that use models with restrictive parametric assumptions or limited samples our methodology uses local polynomial estimators and data on all u s banks over the period 1984 2006 our estimates indicate that as recently as 2006 most u s banks faced increasing returns to scale suggesting that scale economies are a plausible but not necessarily only reason for the growth in average bank size and that the tendency toward increasing scale is likely to continue unless checked by government intervention

output allocative and technical efficiency of banks abstract in this paper we calculate output allocative and technical efficiency for a sample of small banks operating in 1982 we do so by estimating a shephard type output distance function as a deterministic frontier in general we find that the banks in our sample are output inefficient

the performance of universal banks evidence from switzerland abstract this paper examines the performance of swiss banks from 1996 to 1999 using a broad definition of bank output we find evidence of large relative cost and profit inefficiencies in swiss banks a more narrow definition that focuses on only traditional activities leads to efficiency estimates that are even lower we also find evidence of economies of scale for small and mid size banks but little evidence that significant scale economies remain for the very largest banks finally evidence on scope economies is weak for the largest banks that are involved in a wide variety of financial activities taken together these results suggest few obvious benefits from the trend toward larger universal banks in switzerland

the role of demandable debt in structuring optimal banking arrangements demandable debt finance by banks warrants explanation because it entails costs of bank suspension liquidation and idle reserve holdings an explanation is developed in which demandable debt provides incentive compatible intermediation where the banker has comparative advantage in allocating investment funds but may act against the interests of uninformed depositors demandable debt attracts funds by giving depositors an option to force liquidation its usefulness in transacting follows from information sharing between monitors and nonmonitors copyright 1991 by american economic association

bank capitalization and cost evidence of scale economies in risk management and signaling we amend the standard cost model to account for the role of financial capital in banking the cost function is conditioned on the level of capital but we model the demand for financial capital so that it can serve as a cushion against insolvency for potentially risk averse managers and as a signal of risk for less informed outsiders scale economies are then computed without assuming that the bank chooses a level of capitalization that minimizes cost we find evidence of substantial scale economies and that bank managers are risk averse and use the level of financial capital to signal the level of risk

economies of scale in banking indeterminacy and monetary policy this paper investigates economies of scale es in financial intermediation as a source of equilibrium indeterminacy consumption in the model can be purchased with currency and deposits and es in intermediation implies that deposit costs are decreasing in aggregate deposits the results suggest that indeterminacy does not depend on a large degree of es nor a large intermediation sector but on monetary policy and the determination of nominal interest rates monetary policies not targeting nominal rates allow for indeterminacy to arise for any degree of es while policies targeting nominal rates eliminates indeterminacy for all degrees of es

deregulation and bank financial policy the standard view that banks can value maximize by exploiting non risk rated deposit insurance ignores the potential loss of a valuable bank charter due to insolvency recognition of this effect changes the bank s optimal financial policy and can induce extreme risk averting as well as risk taking behavior however as the value of the bank charter falls the risk taking strategy is more apt to dominate therefore current deregulation of the banking industry by easing entry and devaluing charters holds the potential for increases in the incidence of insolvency unless offsetting policies are instituted

de novo bank exit newly chartered banks provide an additional credit source for small businesses but the staying power of new banks can be weak a multi state exit model is estimated for u s commercial banks chartered between 1980 and 1985 and for a benchmark sample of small established banks the determinants of failure are similar for both samples but new bank failure is more sensitive to adverse environmental conditions the timing of new bank exit by failure follows a life cycle pattern but the timing of new bank exit by acquisition does not there is mixed evidence on the efficacy of regulations aimed at reducing new bank fragility

measuring competition using the boone relative profit difference indicator this paper suggests a method for implementing the theoretical relative profit difference test for intensity of competition due to boone 2008 an empirical illustration is given for banking systems in emerging economies

the risk of financial intermediaries this paper reconsiders the formal estimation of bank risk using the variability of the profit function in our model point estimates of the variability of profits are derived from a model where this variability is endogenous to other bank characteristics such as capital and liquidity we estimate the new model on the entire panel of us banks spanning the period 1985q1 2012q4 the findings show that bank risk was fairly stable up to 2001 and accelerated quickly thereafter up to 2007 we also establish that the risk of the relatively large banks and banks that failed in the subprime crisis is higher than the industry s average thus we provide a new leading indicator which is able to forecast future solvency problems of banks

competition in fragmented markets new evidence from the german banking industry in the light of the subprime crisis abstract of all of the eu member states germany has the largest banking market however not all german banking institutions necessarily face fierce competition because the industry is highly fragmented strict separation of the three existing banking pillars may impede competition with negative effects on financial stability we assess the competitive stances of 1 888 universal banks from 2001 to 2009 by using the panzar rosse revenue test we find evidence that measuring competition at an average country level does not necessarily generate valid evaluations of fragmented markets in addition we find no clear indication that either the particular objectives of cooperative and savings banks or the legal protection of these institutions impedes competition or discriminates against private banks therefore as long as the relationship between competition and financial stability is dubious the overall effect and the social costs or benefits of political measures that influence the structure of the german banking market are at least questionable

on endogenous growth with physical and human capital this paper presents a class of models in which agents may devote part of their nonleisure activities to going to school so as to increase the efficiency units of labor they supply to the firms and the wages they receive the interaction among the technology of human capital accumulation and agents preferences will determine endogenously the economy s rate of growth given a constant returns to scale technology for physical capital accumulation we characterize the set of steady states as a ray from the origin and show the global convergence of every off balanced path to some point on this ray further properties concerning the dynamic evolution of the state and control variables around the ray of steady states are also established our analysis is useful to understand the role played by the technologies of physical and human capital in the process of accumulation and to evaluate the impact of policies geared toward attaining higher levels of capital our results highlight the importance of human capital

the demise of community banks local economic shocks are not to blame the number of us community banks is falling rapidly is this reduction being driven in part by banks desire to geographically diversify to reduce their vulnerability to local economic shocks a comparison of the performance of banks in counties that suffered economic shocks in the 1990s with similar banks in counties that did not suffer economic shocks shows that banks withstand local economic shocks quite well this result suggests that the geographic concentration risk that community banks must bear to focus on relationship lending is small and is not an important factor contributing to the decline of community banks

incorporating risk input into the analysis of bank productivity application to the taiwanese banking industry abstract this study reappraises banks productivity by using 42 taiwanese banks during 1999 2007 as observations it introduces an input oriented generalized metafrontier malmquist productivity index i gmmpi while considering the latent effect of risk taking behavior in the analytic framework we learn that public and private banks should face separate short term technological frontiers while the econometric model considering risk input can portray banks operating frontiers better moreover neglecting the influence of risk input would bring about distortions of efficiency technology and tfp dynamic estimations for banks meanwhile the degree of scale economies would also be overestimated the paper concludes that neglecting the risk taking essence in bank performance evaluation is equal to allowing banks to barter risk bearing as the term for further output growth consequently the potential cost is that banks may excessively aggrandize their scales of business implying the possibility of another financial crisis

the identification of technology regimes in banking implications for the market power fragility nexus neglecting the existence of different technologies in banking can contaminate efficiency market power and other performance measures by simultaneously estimating i technology regimes conditional on exogenous factors ii efficiency conditional on risk management and iii lerner indices of german banks we identify three distinct technology regimes public retail small specialized and universal relationship system estimation at the regional level reveals that greater bank market power increases bank profitability but also fosters corporate defaults corporate defaults in turn lead to higher probabilities of bank distress which supports the market power fragility hypothesis c 2009 elsevier b v all rights reserved

commercial policy and aggregate employment under rational expectations commercial policy is often advocated as a useful tool for combating such macroeconomic ills as unemployment and chronic balance of payments deficits this paper examines the role of expectations in determining the output and employment effects of various commercial policies in a rational expectations framework in which workers have incomplete information it is shown that i the shortrun output and employment effects of commercial policy changes depend crucially on the correlation between real and nominal wages and that ii the use of commercial policy as an instrument of short run stabilization policy cannot be divorced from its long run effects on real wages output and employment i introduction one of the most persistent arguments against free trade is that tariffs import quotas and other protectionist devices are useful tools for combating such macroeconomic ills as unemployment and chronic balance of payments deficits for example it has been and still is argued that by shifting demand from foreign to domestic goods a tariff will increase employment and improve the balance of payments it was this kind of reasoning that led the u s congress to enact the smoot hawley tariffs in 1930 during the early stages of the great depression and that two years later resulted in great britain ending almost a century of free trade by adopting the import duties act in recent years these sentiments have perhaps been part of the intellectual foundation for the new protectionism in light of this it is important to reassess the theoretical basis of these macroeconomic arguments for protection the employment argument for protectionist policies has been discussed by mundell 1961 tower 1973 boyer 1977 chan 1978 eichengreen 1981 and krugman 1982 one common element of all these papers with the exception of eichengreen 1981 and krugman 1982 is that they do not discuss the role if any played by expectations in determining the output and employment effects of commercial policy the importance of expectations for macroeconomic stabilization policy has been the

does risk aversion affect bank output loss the case of the eurozone abstract we propose a new model to infer the evolution of bank specific output losses due to the uncertainty in bank output prices losses are based on bank risk aversion with micro foundations tethered to the uncertainty regarding prices our model allows us to measure time varying bank specific output losses and risk aversion while taking into account all bank cross sectional heterogeneity we employ a panel data set to estimate the input and output elasticities with both parametric and non parametric techniques we are the first to document that increasing risk aversion among eurozone banks during the financial crisis resulted in sizable output losses although subdued thereafter losses have been resurging in recent years both conventional and unconventional monetary policy responses by the european central bank ecb mitigated uncertainty in bank output prices though unequally so across countries certain measures of unconventional monetary policy may have even enhanced bank risk aversion and thereby output losses but mainly so for large countries

a dynamic model of tariffs output and employment under flexible exchange rates abstract a portfolio balance model of the open economy with imperfectly flexible wages and rational expectations is used to analyze the macroeconomic effects of commercial policy previous analyses have led to the counterintuitive and almost inconceivable conclusion that under flexible exchange rates a tariff is contractionary by considering a tariff in a dynamic setting and focusing on the process of adjustment it is shown that there may exist a tradeoff between a tariffs short run and long run effects in certain circumstances a tariff imposed under flexible exchange rates increases output and employment initially while reducing them subsequently

testing for expense preference behavior mutual versus stock savings and loans this article investigates expense preference behavior in the savings and loan industry previous studies used an intercept test and in general concluded that managers of mutual s ls exhibit expense preference behavior i derive the necessary and sufficient conditions on cost functions for the intercept test to be valid these restrictions are rejected for the savings and loan industry stock and mutual s ls have different cost structures and both have non cobb douglas production technologies i derive a new more general test for expense preference behavior that does not require the restrictive assumptions of the intercept test the results of this test do not support earlier conclusions of managerial expense preferences

pre recession efficiencies and input allocation decisions of agricultural and critically insolvent banks abstractthe late 2000s economic recession is considered the longest economic downturn since the 1930s great depression declining real estate values ignited an increase in loan defaults and mortgage foreclosures that led to a surge of bank failures at a rate not experienced by the u s banking industry since the 1980s a total of 509 bank failures were recorded by the fdic from january 2007 december 2014 with nearly 60 of these failures occurring in 2009 and 2010 in contrast there were only 24 bank failures in the u s during the 7 year period prior to 2007 this study analyzed certain components of operating decisions made by banks that either survived or became critically insolvent during the late 2000s financial crisis using an input distance stochastic frontier function to estimate the technical efficiency te and allocative efficiency ae between agricultural banks and non agricultural banks this efficiency analysis was applied to a 7 year pre recession period and is designed to final out any