Small Commercial Banks Research Articles

Stock market reactions to the depository institutions deregulation and monetary control act of 1980

This paper evaluates the effects of events leading to the passage of the Depository Institutions Deregulation and Monetary Control Act of 1980. The evidence suggests that the initial proposal of the Act by then President Carter, and the final passage of the Act by the House of Representatives, produced positive abnormal returns to stockholders of large commercial banks. Stockholders of small commercial banks and small savings and loans, on the other hand, generally experienced negative abnormal returns. Furthermore, when hopes of passage of the Act faced significant negative (positive) abnormal returns were experienced by stockholders of large (small) commercial banks.

Competition, economies of scale, and diversity of firm sizes

This paper presents an empirical example in which small firms are able to compete by specializing, without monopolistic conduct, despite economies of scale. The viability of small commercial banks in Illinois is established both by casual observation and by a finding of constant returns to scale, not correcting for specialization. A second specification of the cost function, correcting for specialization, exhibits economies of scale, suggesting that specialization is the means by which small banks survive. Monopoly conduct is ruled out by a Rosse–Panzar test, rejecting the alternative hypothesis that monopoly power has allowed inefficient banks to survive.

Bank profitability and interest rate risk

It is frequently asserted that the profitability of institutions that lend long and borrow short is restricted during periods of rising interest rates. In banking circles this assertion has been translated into a concern primarily for the soundness of smaller banks, which are commonly thought to hold a large proportion of their portfolios in longer term fixed-rate loans and thus face considerable interest rate risk. Moreover, with the popularity of the new “NOW” accounts and competing money market mutual funds, there is a fear that a potential profit squeeze at these institutions has been made more probable. The present study examines the issue of the interest rate sensitivity of commercial bank profitability at a theoretical level and attempts to measure empirically the extent to which the profitability of different size classes of banks has been affected by periods of changing interest rates since 1976. This study finds that small commercial banks as a group have actually experienced increased profitability both absolutely and relative to large banks in recent periods (since 1976) of rising interest rates. However, this variation is numerically small. This finding calls into question both the usefulness of the maturity composition model as a predictor of interest rate risk and the concern for the supposed plight of small banks during periods of rising interest rates.

Interest Rates and Bank Profitability: Additional Evidence: Note

Large banking organizations (1978 assets greater than $2 billion) are well hedged against interest rate fluctuations [2]. When market rates change, their revenues and costs adjust equally quickly, leaving net current operating earnings largely unaffected. At the other institutional extreme, thrift institutions have seriously mismatched balanced sheets [1, 4], causing their earnings to fluctuate violently when interest rates change. Small commercial banks in many ways lie between their larger counterparts and the thrifts. Small banks share the predominantly retail orientation of thrifts (often holding large mortgage portfolios), but have access to a broader range of asset and liability powers. It is therefore unclear ex ante whether small banks bear a greater resemblance to thrifts or large commercial banks in terms of interest rate risk exposure. To resolve the issue empirically, this note applies the methodology of [2] to a set of sixty smaller banks. The empirical results are similar to the results for large banks: the data do not support the conventional wisdom that banks chronically and extensively borrow short and lend long.

BANK PROFITABILITY AND INTEREST RATE RISK

Abstract It is frequently asserted that the profitability of institutions that lend long and borrow short is restricted during periods of rising interest rates. In banking circles this assertion has been translated into a concern primarily for the soundness of smaller banks, which are commonly thought to hold a large proportion of their portfolios in longer term fixed-rate loans and thus face considerable interest rate risk. Moreover, with the popularity of the new “NOW” accounts and competing money market mutual funds, there is a fear that a potential profit squeeze at these institutions has been made more probable. The present study examines the issue of the interest rate sensitivity of commercial bank profitability at a theoretical level and attempts to measure empirically the extent to which the profitability of different size classes of banks has been affected by periods of changing interest rates since 1976. This study finds that small commercial banks as a group have actually experienced increased profitability both absolutely and relative to large banks in recent periods (since 1976) of rising interest rates. However, this variation is numerically small. This finding calls into question both the usefulness of the maturity composition model as a predictor of interest rate risk and the concern for the supposed plight of small banks during periods of rising interest rates.

Commercial banks and business loan behavior

In order to assess the cause of the 1975 weakness in business borrowing from commercial banks, a model of the business loan market is examined and estimated for small and large commercial banks. The major results of this study are that (1) large bank and small bank markets are structurally dissimilar and thus should not be aggregated (2) superior forecasts for total business loans can be achieved by forecasting from large and small bank equations, and (3) the model does forecast the weak business loan behavior in 1975, particularly at the large banks, and tracks the current period fairly well.

Researching Marketing Activities in Small Commercial Banks1

Commercial banking is going through a period of transition which is being molded by various environmental changes. A successful transition will require that banks adopt many of the marketing techniques utilized by the packaged goods industries. This observation applies to both large and small commercial banking institutions. In order to ascertain the current status of their marketing activities, 273 Illinois banks were surveyed. New product introductions, advertising, and product differentiation were found to be the most frequently used marketing techniques. Least used marketing variables included marketing research, statement of marketing objectives, timely consumer information, and employment of full time marketing staff.

POLICIES AND PRACTICES IN THE MANAGEMENT OF ASSET LIQUIDITY RESERVES OF SMALL AND MEDIUM COMMERCIAL BANKS IN WISCONSIN*

THE PRIMARY PURPOSE of this study was to see whether small and medium-sized Wisconsin commercial banks were managing their asset liquidity reserves in accordance with the concepts and principles generally proposed by writers in the field. The secondary purpose was to see whether the methods followed were leading to either inadequate or excessive liquidity. The approach utilized was an analysis of returns from questionnaires sent to a representative sample of banks in the state having less than $20 million of deposits. Data were received from 98 banks -a return rate of about 40 per cent-on the concepts and methods used in managing their funds. Returns from a second questionnaire were received from 51 of the same 98 banks, giving data on their assets and liabilities, plus other related financial data, for the years 1955-60; the data included year-end, month-end, and intramonthly information. Results indicate that most of the banks are following the presently accepted principles found in bank-management literature, although very few have formalized their methods. Significant numbers of the banks, however, ranging up to about 40 per cent in a few instances, use practices that are explicitly considered less desirable than others by most bank-management authorities. The liquidity positions of the banks at the end of 1960 were compared with needs that might occur in the future on the basis of past seasonal and cyclical bank experiences and other data. Results indicate that approximately three-fifths of the banks met the test assumptions, with the remainder about equally divided above and below. The banks generally held about equal amounts of U.S. government securities in each of the first four yearly maturity ranges, with holdings in the 4-5-year maturity category being slightly smaller than those in each of the earlier annual maturities; government bonds due after 5 years were usually quite small. Holdings of munic-