The US banking system: Does the size of the institution matter to its economic-financial situation?

Fernández Fernández,Virginia Vázquez,Virseda Vicente

doi:10.2298/pan181231019f

Fernández Fernández, Virginia Vázquez + Show 1 more

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https://doi.org/10.2298/pan181231019f

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Abstract

This paper analyzes the relationship between the size of the entities in the US banking system and their economic-financial situation. The objective of this study is to group different economic and financial variables of the entities together into factors that characterize the US banking system and identify how the factors vary according to the size of the entities. To do this, we start from the values taken by 32 economic-financial and regulatory ratios, obtained directly from the Federal Deposit Insurance Corporation (FDIC), for a period between the first quarter of 1990 and the penultimate of 2016. With this data it is performed a factorial analysis that allows synthesizing the 32 variables in 7 factors and, at the same time, obtaining relationships between these variables and the size and between themselves. Finally, through a neural network, the previous factors are hierarchized according to the influence that the size of the entities exerts on them. Among the conclusions reached, it should be noted that the loan structure is the factor that best classifies the size. It also determines the existence of a negative ?profitability solvency? relationship with larger entities, (Assets > $250 B.) and smaller ones (Assets < $100 M.), as well as demonstrating the existence of moral hazard and the need for regulation that limits said risk (because the largest entities are the least solvent and assume the most risks).

Highlights

This paper analyzes the relationship between the size of the entities in the US banking system and their economic-financial situation
By using factor analysis together with a neural network, an analysis is conducted of the behavior of all the indicated variables in the US banking system over the period from the first quarter of 1990 until the third quarter of 2016
The objective is to maximize the sum of the variances of y1 = a′1x, y2 = a′2x,..., yp = a′px where a1, a2,..., apare the vectors that define the plane

Summary

Introduction

This paper analyzes the relationship between the size of the entities in the US banking system and their economic-financial situation. We start from the values taken by 32 economic-financial and regulatory ratios, obtained directly from the Federal Deposit Insurance Corporation (FDIC), for a period between the first quarter of 1990 and the penultimate of 2016 With this data it is performed a factorial analysis that allows synthesizing the 32 variables in 7 factors and, at the same time, obtaining relationships between these variables and the size and between themselves. Temporarily over the years of study, we analyze how the factors behave according to the size groups This analysis will allow us to study important aspects such as moral hazard, systemic risk and other characteristics that define the factors obtained. Another contribution of the work is the identification of the factors that determine the size according to its degree of importance, using the neural network technique

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