Large Lending and U.S Banks’ Performance. Is There Any Link?

Abstract

Large lending in the banking industry has sparked concerns about banks’ efficiency performance, particularly as it related to their credit risk as trade credit, provided by large, creditworthy firms. We provide evidence at a rather neglected issue regarding the impact of large lending on banks’ efficiency using production, cost and profit stochastic functions. A unique dataset was constructed concerning all USA banks collected from the Statistics on Depository Institutions report compiled by the Federal Deposit Insurance Corporation. Our sample contains 7960 banks and tracked yearly for the period 2010 -2017, creating an unbalanced panel of year observations. An econometric framework based on nested non-neutral frontiers, was developed to estimate the influence and the decomposition of large lending on the three banks' performance aspects. Moreover, different types of frontiers aiming at the cost, profit, and production side have been investigated and the associated elasticities have been calculated. The empirical findings reveal that the large lending plays a crucial role on banks' technical efficiency. Variations among different frontier models, type of bank and size, banks’ ownership structure and macroeconomic conditions appear to be present. By considering all Capital Adequacy Asset Quality Management Earnings Liquidity parameters, we notice that banks’ financial strength affects banks’ efficiency. Some policy implications are derived based on the empirical evidence supporting a safer and sounder banking system can be emerged as banks finance large firms, increasing the willingness of people to save and bank’s attitude to finance profitable investments projects that rise firm’s value and promote economic growth.