The relationship between bank mergers and acquisitions and local commercial bank lending to agriculture: a county-level analysis

In this paper we examine the effect of competition in the market for bank acquisitions on the acquirers' stock returns. Bank acquisitions are examined because federal and state regulations greatly facilitate the identification of potential bidders and alternative targets in an acquisition. We find that the gain to acquirers is positively related to the number of alternative target firms available and negatively related to the number of other potential bidders. These results provide some insights into the sources of gains from bank acquisitions.

PurposeThe survivorship of firms under extreme weather poses an essential question about the local economy's health. Over 90% of agricultural banks are categorized as community banks, which are important financial institutions promoting local growth. While previous studies suggest that climate change and weather shocks adversely impact community banks' resiliency, studies on whether these institutions engage in risk-reducing management strategies have been limited. In this study, the authors examine strategic choices of local community banks when facing flood events which include (1) safety net increase, (2) portfolio diversification, and (3) branch opening. These strategic choices are the coping mechanisms banks can take to survive while affecting the local competitive lending market.Design/methodology/approachThe authors use panel-fixed effect regressions based on the storm data from National Oceanic and Atmospheric Administration (NOAA)'s National Weather Service (NWS) and the call reports from the Federal Deposit Insurance Corporation (FDIC). The authors focus on community banks' account variable characteristics and the number of offices to examine whether community banks take an active role in managing flood risk.FindingsResults suggest that community banks do employ the selected strategic choices to a certain degree, as it is found that there is an increase in the core capital that absorbs shocks and portfolio diversification. However, the magnitudes of these activities are rather small and not large enough to fully mitigate the climate risk. Also, the authors do not find any evidence of branch expansion associated with local floods.Originality/valueThis study contributes to the literature by examining different strategic choices of community banks in the face of natural uncertainty. Even though concerns of climate risk have been raised in the regulatory setting, a lack of guidance or assessment tools could contribute to the passive action of these community banks, even though climate risks can have a significant economic impact. Thus, the evidence documented from this study calls for further guidelines and the importance of highlighting climate risks on community banks so that they can actively engage in risk-reducing strategies.

Why Does the FDIC Sue?

I would like to take the opportunity to discuss one of those challenging issues--the orderly resolution of systemically important financial institutions (SIFIs). The Dodd-Frank Wall Street Reform and Consumer Protection Act provided important new authority to the Federal Deposit Insurance Corporation (FDIC) to resolve SIFIs. Prior to the recent crisis, the FDIC's receivership authority was limited to federally insured banks and thrift institutions. There was no authority to place the holding company or affiliates of an insured institution or any other nonbank financial company into an FDIC receivership to avoid systemic consequences. The lack of this authority severely constrained the ability of the government to resolve a SIFI. This authority has now been provided to the FDIC under the Dodd-Frank Act. The question is whether the FDIC can develop the operational capability to utilize this authority effectively and a credible strategy under which an orderly resolution of a SIFI can be carried out without putting the financial system itself at risk. These key challenges have been the focus of the FDIC's efforts since the enactment of Dodd-Frank in July 2010. I would like to focus my comments on the prowess we have made in meeting these important challenges. Orderly liquidation authority, resolution planning, and the Office of Complex Financial Institutions The FDIC has taken a number of steps since Dodd-Frank was passed to carry out its new systemic resolution responsibilities. First, the FDIC established a new Office of Complex Financial Institutions to carry out three core functions: * Monitor risk within and across these large, complex financial firms from the standpoint of resolution; * Conduct resolution planning and develop strategies to respond to potential crisis situations; and * Coordinate with regulators overseas regarding the significant challenges associated with cross-border resolution. For the past year, this office has been developing its own resolution plans in order to be ready to resolve a failing systemic financial company. These internal FDIC resolution plans, developed pursuant to the orderly liquidation authority provided under title II of Dodd-Frank, apply to a SIFI many of the same powers that the FDIC has long used to manage failed-bank receiverships. This internal resolution planning work is the foundation of the FDIC's implementation of its new responsibilities under Dodd--Frank. Second, the FDIC has largely completed the basic rulemaking necessary to carry out its responsibilities under Dodd--Frank. In July 2011, the FDIC Board approved a final rule implementing title II--orderly liquidation authority. This rule addressed, among other things, the priority of claims and the treatment of similarly situated creditors. Last September, the FDIC Board adopted two rules regarding resolution plans that systemically important financial institutions themselves will be required to prepare--the so-called living wills. The first resolution plan rule, jointly issued with the Federal Reserve, requires bank holding companies with total consolidated assets of $50 billion or more, and certain nonbank financial companies that the Financial Stability Oversight Council designates as systemic, to develop, maintain, and periodically submit resolution plans to regulators. Complementing this joint rulemaking, the FDIC issued another rule requiring any FDIC-insured depository institution with assets over $50 billion to develop, maintain, and periodically submit plans outlining how the FDIC would resolve it through the FDIC's traditional resolution powers under the Federal Deposit Insurance Act. These two resolution plan rules are designed to work in tandem and complement each other by covering the full range of business lines, legal entities, and capital-structure combinations within a large financial firm. …

Economic theories of organizational behavior assume that private organizations are driven by efficiency concerns. If the organization is not reaching its goals in an efficient manner, profits drop, dividends are withheld, and competitors are encouraged to challenge the organization's place in the market. A bottom-line profit allows these organizations to measure successes and failures, and motivates the search for less costly ways of delivering goods and services. The public administration literature has long advocated that public executives adopt business-like techniques to make their operations similarly efficient (Wilson, 1887; Gulick and Urwick, 1937; Fayol, 1949), and today's public management literature is no exception. Executives are encouraged to create bottom lines, or measures of performance toward which employees can work, and by which they can measure their progress (Behn, 1992; Osborne and Gaebler, 1992). In this case study, I examine management changes in the Federal Deposit Insurance Corporation (FDIC) at the height of the recent banking crisis and argue that the agency's clear bottom line, the Bank Insurance Fund (BIF), played a crucial role in motivating and facilitating important shifts in organizational resources, authority, and structure. More than an indicator of performance, a well-managed and solvent BIF provides the agency with income and is essential to the agency's political autonomy. Further, professionals in the FDIC place a high value upon protecting the BIF because it is also key to their own professional autonomy. Management changes aimed at facilitating the BIF's viability have consequently been embraced by agency personnel as necessary adjustments. The FDIC was created in 1934 to manage the federally guaranteed insurance fund for bank depositors and to be the primary supervisor for several thousand state-chartered banks. For more than half a century, the deposit insurance fund was solvent. Premiums paid by banks for insurance coverage and the interest earned on insurance funds through the investment in government bonds provided sufficient income to protect depositors in failed institutions, and to cover the FDIC's operating expenses. Beginning in 1983, however, the FDIC's expenses began to exceed the amount it received in bank premiums. Most critical, the number of bank failures that year escalated from 5 (on average) to 48, and reached a decade total 1,086 in 1989 (FDIC Annual Report, 1991, p. 132).(1) The FDIC's own operating expenses also placed a strain on the fund. There were more troubled banks to supervise, more failed banks to resolve, and a greater number of failed-bank assets to liquidate; as a result, the FDIC had to hire and train more personnel (FDIC Annual Report, 1991; 31-32). The operating stress was heightened in 1989 when Congress gave the agency oversight responsibility for resolving the savings and loan crisis, and management responsibility for the new Savings Association Insurance Fund (to replace the insolvent Federal Savings and Loan Deposit Insurance Fund); the same legislation renamed the Deposit Insurance Fund, the Bank Insurance Fund.(2) By 1991, the FDIC projected a first-time deficit of $7 billion (Konstas, 1992; 15). In one decade, the FDIC's workload, and the conditions under which it operated changed dramatically. What was once a relatively obscure sleepy existence was crashed by fiscal stress and intense political scrutiny. Obvious parallels were made to the savings and loan crisis, and the potential for a $100 billion taxpayer bailout of the banking industry brought the Congress, the administration, and the national media into the FDIC's daily operations. The FDIC responded with key management changes in order to guide the corporation from projected deficits to long-term solvency, and, hence, to reestablish some autonomy in managing its responsibilities. Management of bank resolutions and the FDIC's litigation activities (both directly related to liabilities placed on the BIF) were centralized, and the FDIC committed to conducting both activities in-house rather than rely upon private sector contractors. …

Cases the Federal Deposit Insurance Corporation (FDIC) pursues against the directors and officers of failed commercial banks for (gross) negligence are important for the corporate governance of U.S. commercial banks. These cases shape the kernel of bank corporate governance, as they guide expectations of bankers and regulators in defining the limits of acceptable behavior under financial distress. We examine the differences in behavior of all 408 U.S. commercial banks that were taken into receivership between 2007–2012. Sued banks had different balance sheet dynamics in the three years prior to failure. These banks were generally larger, faster growing, obtained riskier funding and were more “optimistic”. We find evidence that the behavior of bank boards adjusts in an out-of-sample set of banks. Our results suggest the FDIC does not only pursue “deep pockets”, but sets corporate governance standards for all banks by suing negligent directors and officers.

Why does the FDIC sue?

The paper examined the arguments and counterarguments within the scientific discussion on Financial Intermediation and the performance of Commercial banks in Nigeria. Despite a series of reforms and restructuring aimed at enhancing the bank’s ability to provide services effectively, establish branch networks and finance the real sector, there is still insufficient domestic credit to commercial real-estate banks, affecting the success of financial intermediation in the Nigerian commercial banking sector. The main purpose of this study is to examine the impact of financial intermediation on the performance of commercial banks in Nigeria. The data came from a statistical bulletin of the Central Bank of Nigeria. A systematic literary approach to data analysis is regression analysis. In Equation 1, it was found that there is a significant relationship between total lending and the commercial bank lending rate in Nigeria. In Equation 2, it was found that there is a significant relationship between the overall credit ratio and the cash reserve in the commercial banks of Nigeria. In the commercial bank performance equation, it was found that there is a significant relationship between the total assets and the capital involved by commercial banks in Nigeria. In the commercial bank performance equation, it was found that there was no significant relationship between the loan and deposit ratio and the liquidity ratio in the commercial banks of Nigeria. It has also been found in Commercial Banking Performance Equation 5 that there is a significant relationship between gross domestic product and total credit in the commercial banks of Nigeria. Thus, the study authors recommend reducing the commercial bank loan rate so that investors see commercial banks as the number one source of funding, the Central Bank of Nigeria should increase the commercial banks’ minimum reserve in order to facilitate adequate lending to commercial customers by clients/investors. Commercial banks need to make effective use of the capital used to increase profitability. Commercial banks should help increase liquidity to increase their ability to cover customer withdrawals and increase loans and advances to customers. Commercial banks should allocate proper credit to the real sector for productive purposes in order to increase gross domestic product. Keywords: Financial Intermediation, Commercial Banks, Gross Domestic Product, Commercial Bank Credit.

BANKING STRUCTURE IN THE UNITED STATES has been shaped by Congress, the bank regulatory agencies, the Antitrust Division of the Department of Justice, and by the Supreme Court of the United States. In recent years, antitrust litigation has had such a profound effect that, in the 1970 Phillipsburg decision, U.S. Supreme Court Justice Brennan referred to the antitrust division as a federal bank regulatory agency. In the ten year period 1961-1970, forty-two bank acquisition cases were instituted by the Antitrust Division. These cases have firmly created antitrust law which will have a substantial and significant economic impact beyond the banking area. Prior to the first major bank merger antitrust case (Philadelphia, 1961), substantial doubt existed on the issue of the applicability of the Clayton Act of 1950 to bank mergers. An important impetus for the passage of the Bank Holding Act of 1956 (BHA 56) and the Bank Merger Act of 1960 (BMA 60) was the intention to curb bank merger activity through the creation of new bank regulatory agency powers and procedures. The landmark Supreme Court decision in Philadelphia in 1963 created new legal-economic factors not only in bank mergers but in antitrust generally, and the other bank cases, such as Lexington, Nashville, and Phillipsburg, have continued to establish broad based antitrust law both in and out of the banking area. The Justice Department and the courts have consistently treated the bank merger cases similarly to any other merger case under existing Sherman and Clayton Act parameters. The only concession to the intention of Congress to somehow fold into the bank merger process the expertise of the bank regulatory agencies was to allow, as an additional bank merger gateway through the antitrust law barrier, the proof by the defense that the benefits of the merger clearly outweigh the competitive injury. The Bank Merger Act of 1960 as amended in 1966 (BMA 66) required merging banks to have the approval of one of the three federal regulatory agencies, the Comptroller of the Currency (Comptroller) if the surviving bank was a national bank, the Federal Reserve Board (FRB) if a state member bank, and the Federal Deposit Insurance Corporation (FDIC) if the surviving bank was an insured, state, non-member bank. Section 5 provided that the responsible agency shall not approve:1

Commercial banks have been highly regulated by Fed eral and state supervisory agencies for many years. Regu lations established by these agencies, particularly those of the Comptroller of the Currency, the Federal Reserve Board, and the Federal Deposit Insurance Corporation, have definitely influenced the development of commercial banks' accounting and financial reporting practices. Prior to 1964, most Federal banking regulations were designed primarily for protecting depositors from losses due to bank failures. Thus, many Federal regulations prompted banks to develop "depositor-oriented" reporting practices which often understated assets, overstated lia bilities, and reduced reported operating earnings. The primary purpose of this study is to determine whether regulatory influences on commercial banks' account ing and financial reporting practices are beneficial from the stockholders' viewpoint. The study also evaluates the effects of Federal regulations on the principal finan cial statements published by banks--the Income Statement and the Statement of Condition. The major accounting and reporting problems

a What Should Banks Do? a recent book by Robert E. Litan (1987), poses in its title a policy question that has been with us since banks were first chartered in the United States in the early nineteenth century. The American polity has always considered depository institutions-especially commercial banks-to be special. They have been seen as bastions of great economic and political power; they provide a common and important input (credit) for many enterprises and many household production units; they are at the center of the payments mechanism; and their deposits are an important means of wealth storage. Depository institutions have been-and continue to be-among the most heavily regulated entities in the U.S. economy. As the 1 980s come to a close, the title question of Litan's book is especially pertinent. At the beginning of the decade depository institutions-especially savings and loan associations and savings banks (collectively, thrifts) -experienced substantial deregulation. That experience alone would be expected to create turmoil and new winners and losers in a more competitive environment.' The rapidly improving technologies of information processing (computerization) and telecommunications-both of which are important inputs into banking services-have made it easier for financial institutions to enter new markets and to offer new services. This, in turn, has brought more financial institutions, depository and nondepository, into competition with each other. The same technologies have meant more international competition for U.S. financial institutions in both domestic and overseas markets. And the turmoil, compounded by inadequate policies (discussed below), severe sectorial recessions in agricultural and energy-related areas (especially in the Southwest), and a large overhang of reduced-value Third World country debt, has already created a severe strain on the federal insurance fund that guarantees deposits in most thrifts (the Federal Savings and Loan Insurance Corporation or FSLIC) and is likely to do so for the similar fund that insures deposits in commercial banks and some savings banks (the Federal Deposit Insurance Corporation or FDIC). At this time of writing in 1988, the Congress is seriously considering legislation that would substantially modify or eliminate the limitations on commercial banks' securities operations contained in the Glass-Steagall Act of 1933-another time of great turmoil in

Comment

In early 1989, the system of deposit insurance in the United States was in crisis. The Federal Savings and Loan Insurance Corporation (FSLIC), the U.S. government agency that provided deposit insurance for savings and loan (thrift) institutions, had sustained massive losses from the insolvencies of hundreds of thrifts. Tens of billions of dollars of general Treasury revenues will be necessary to make good the losses in the insurance fund, which had previously been financed solely through premiums assessed on thrifts' deposits. The Federal Deposit Insurance Corporation (FDIC), which provides similar insurance for deposits in commercial banks, has sustained much smaller losses but is considered to be in poor enough financial condition that its premium assessments will increase substantially. This article will review the current system of deposit insurance and advocate a set of necessary reforms.

An Analytical Model for the FDIC Deposit Insurance Premium

Recent literature questions the relative advantage of community banks vs. non-community banks in small business funding. Using the Federal Deposit Insurance Corporation’s definition of a community bank, the study re-examines the role of community banks in providing funding to small businesses using the Community Reinvestment Act (CRA) small business lending data over the period 2003 to 2016. The empirical results indicate that community banks are still providing 30 percent more small business funding than non-community banks, especially after the Great Recession. This role is even more important in those counties in non-metropolitan areas. In addition, the results indicate that in counties where community banks do not have offices, they provide 48 percent fewer loans compared to non-community banks in counties where they do not have offices, which suggests community banks still use physical offices to maintain their relationship lending advantage. Clearly, from a public policy standpoint, the results support the view that community banks are important because they continue to provide valuable services to small business firms throughout the country.