US Banking Industry Research Articles

IMPACT OF NON-PERFORMING LOANS ON SMALLER US BANK PROFITABILITY AND VALUE IN THE POST-CRISIS PERIOD

Credit quality is an important constituent of a bank’s asset portfolio. Asset quality and inadequate capital reserves were two significant triggers of the Global Financial Crisis (GFC) in 2009. Since then, there has been substantial regulatory and internal risk management changes within the US banking industry. There are no previous specific studies on smaller US banks. This study reviews the empirical literature on the topic of asset quality, bank profitability and market value along with statistics specific to the US banking industry. The impact on profitability is assessed through the return on equity ratio (ROE) and the impact on market value is assessed through the market to book ratio (MTBR). Along with the non-performing loan ratio (NPL), three other CAMEL ratios were also used as independent variables: capital adequacy (TRWCA), liquidity (LIQ) and management efficiency (MAN) to assess their impact on profitability and market value. Panel data has been collected for fifteen smaller US banks and the Generalised Method of Moments (GMM) of estimation is used robustly to estimate the effects of CAMEL ratios on bank profitability and market value. The link between NPL and other ratios on bank profitability and market value in smaller US banks has been assessed. The importance of the NPL ratio for bank profitability and market value is once again confirmed.

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

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).

There's No Playbook for Praxis: Translating Scholarship into Action to Build a More Ethical Bank

The US banking industry has a long history of excluding, exploiting, or simply ignoring low‐income communities, recent immigrants, and racial minorities. In this paper, I share my experiences creating a community of practice where employees of a rapidly‐growing banking startup can identify and confront the ethical challenges facing the financial technology (fintech) industry. This community is informed by insights from four years of activism and anthropological research that I conducted with small teams of service designers and ethnographers developing financial services for and with low‐ to moderate‐income communities around the world. Through this research, I identified three institutional logics—insularity, decontextualization, and technological hubris—which limit efforts to build a more inclusive, equitable banking system. These logics hold the potential to lead well‐intentioned organizations, and the practitioners they employ, to harm the marginalized communities they set out to help. This paper concludes with a reflection on the crucial role of ethnographers in identifying and counteracting ethical challenges in our organizations and industries.

Ownership structure and auditor selection

Purpose This paper aims to investigate the effect that ownership structure (public vs private) has on the demand for high-quality auditors, specifically in the US banking industry. Design/methodology/approach The authors predict that public banks are more likely to hire a high-quality auditor than private banks and pay a higher audit fee premium for that high-quality auditor (due to higher agency costs, more demand for financial information and higher litigation risk). The authors analyze 2008–2014 banking data from the Federal Reserve using probit and OLS regression analysis to examine if there is a higher probability that public banks choose higher quality auditors and pay higher audit fees when they do so. Findings The results show that private banks are less likely to hire Big 4 auditors and industry-expert auditors than public banks. The authors also find that both private and public banks pay higher audit fees for Big 4 and industry-expert auditors, and that public banks pay a higher premium for Big 4 auditors and industry experts than private banks. Research limitations/implications The findings may not be fully generalizable to other types of firms, as banking is a heavily regulated and complex industry. However, inferences from this study may be generalizable to other similar industries such as insurance or health care. Practical implications The results of this paper imply that public and private banks have differing priorities when hiring their financial statement auditor. This may be of interest to investors and auditing regulators. Social implications The findings of this paper underscore the value of hiring an industry-expert auditor in an industry that is highly complex and regulated. This may be of interest to managers and policymakers. Originality/value Due to data restrictions, the emphasis of prior literature on the banking industry has been on public banks. This study is the first to analyze the differences between public and private banks’ demand for audit services.

Impact of financial liquidity and solvency on cost efficiency: evidence from US banking system

PurposeThe purpose of this paper is to evaluate the importance of financial liquidity and solvency on US commercial and domestic banks’ cost efficiency while accounting for internal and external factors.Design/methodology/approachThe Stochastic Frontier Analysis and Data Envelopment Analysis estimators are used to estimate the cost efficiency of 11,044 US commercial and domestic banks from 2005 to 2017. Using Tobit regression model, the importance of financial liquidity and solvency on cost efficiency is examined.FindingsThe results provide evidence that the financial liquidity and solvency negatively impact the cost efficiency of US commercial and domestic banks. Overall, US commercial and domestic banks were inefficient during the financial crisis in comparison to the tranquil period. The importance of financial solvency on the cost efficiency was not statistically significant, while the financial liquidity negatively collapsed because of contagion. Finally, the results provide evidence that the amount of total assets matters in the improvement of the cost efficiency.Originality/valueThis paper estimates and identifies the 2007-2009 financial crisis with liquidity, solvency or both financial factors.

Empirically assessing and modeling spillover effects from operational risk events in the insurance industry

The aim of this paper is to propose the first mathematical model for spillover effects caused by operational losses and to calibrate it based on an extensive empirical study of spillover effects and their influencing factors in the US and European banking and insurance industry. Our event study shows significant spillover effects due to operational losses, whereby a higher number of firms faces contagion effects than competitive effects. A regression analysis further reveals that spillover effects are rather information-based than pure, as event and firm characteristics have a significant impact, specifically external fraud, the return on equity of the announcing firm and the similarity between the announcing and the non-announcing firm in terms of size. Based on the empirical findings, we fit a distribution and model spillover effects and underlying operational losses to assess respective risk measures by means of a simulation analysis. The results show that spillover risk can be considerable for non-announcing firms as well as from a portfolio view, which has important risk management implications.

The Big Short Redux and FinTech

Similar to the Internet, which created a revolution in the ability to communicate quickly and cheaply, FinTech companies are using blockchain and digital wallets to create a revolution in the transfer of value across the world. The literature and blog space to date have indicated that digital wallets could overtake the need for traditional banking. The purpose of this article is to provide further testing on whether FinTech banking companies could overtake the need for traditional banking by evaluating whether the number of deposits at various US commercial banks and the growth of digital wallets have impacted US commercial bank market values over the past two to three years. Results indicate a strong positive relationship between the number of deposits and US commercial bank market values and a strong negative relationship between digital wallet proxy measures and US commercial bank market values from 2017 to 2019. The trends indicate a stable amount of deposit in the US banking system to a slight decline versus a large growth in the digital wallet sphere. Results indicate that digital wallets could create a large decrease in the market value of commercial banks in the future. Such a result would indicate the need to consider carefully how FinTech companies should be included in financial sector indices. TOPICS:Real assets/alternative investments/private equity, currency Key Findings • The growth in digital wallets in the past several years has been rapid. In comparison, the growth in bank deposit accounts has been rather stagnant. • The question is whether digital wallets are a complement to banks or a competitor. Regression results indicate that the number of deposit accounts has a strong positive relationship with bank market value and that digital wallet proxies have a negative relationship. This means the FinTech companies are taking away market value and may be viewed as a competitor. • Assuming that digital wallet growth takes away deposits from banks, results indicate that market values of bank may be on the decline. If such a case exists, it would be wise for exchange-traded funds and index companies to incorporate FinTech companies in their funds sooner rather than later. This will help offset the possible withdrawal from pure traditional banking funds.

History and Geography of the US Banking System

The reviewer discusses the monograph “The Greater Wall Street: New York City and Other Banking Metropolises of the USA in the Late 20th and Early 21st Centuries” (Chelyabinsk: SUSHPU Publ., 2019. 545 pp.) by L.V. Nikitin, focused on the evolution of the US banking system and changes in its territorial structure. The reviewer notes that the author convincingly reveals the reasons why some financial centers broke out to the forefront, while others, on the contrary, were in a certain decline. The reviewer also draws attention to the fact that the author analyzes in detail both changes in institutional norms and the dynamics of the entire banking system. The reviewer praises the author for the fact that he used voluminous and varied statistical data and applied rather complex cliometric methods of analysis, which made it possible to study the growing stratification and inequality between the banking capitals of the United States. The book under review also contains enlarged appendices in the form of various graphs and tables that illustrate many of the features of the US banking geography in the long-time historical dynamics. According to the reviewer, the book by L.V. Nikitin is located at the junction of several relevant areas of historical and economic research, such as economic history, economic geography, historical urban studies, institutional history, and institutional economics, demonstrating a successful example of combining the merits of these areas when conducting interdisciplinary study.

Deposit Flow Seasonalities and the January Effect in Retail Deposit Rates

Deposits flow out of the US banking system in January and February and flow in later in the year. In response to this outflow, banks increase rates on retail deposit products in January, including time, savings, and money market deposit accounts. Banks tend to offer highest deposit rates in January, after which the rates decline monotonically, reaching the minimum in December. The effect is more pronounced after the financial crisis, when banks relied less on nondeposit borrowings to replace outflowing liquidity. Consistent with the seasonal outflow of deposits, increased reliance on deposits, especially demand deposits, is associated with a stronger January effect in deposit rates at the bank level.

Discretionary loan loss provision behavior in the US banking industry

Earnings management can be opportunistic and add noise to earnings, or informative about a firm’s underlying economic performance and add information to financial reports. Our study examines earnings management in banks with different levels of information asymmetry. We compare earnings management between public and private banks by using discretionary loan loss provisions (DLLPs) as a proxy. We use a dataset of US public and private banks from 1986:Q1 to 2013:Q4 and provide evidence of greater earnings management in public banks than private banks. We also examine the conditions that motivate managers to engage in earnings management. DLLPs are used to send private information to investors, consistent with our signaling hypothesis. We also find evidence that capital requirements alter DLLPs, consistent with our capital management hypothesis. Banks with relatively low (high) earnings tend to decrease (increase) their earnings through manipulation of DLLPs, inconsistent with our income-smoothing hypothesis. This study extends the current literature on earnings management between public and private banks. Our discussion provides a better understanding of the determinants of bank earnings management.

Minority Depository Institutions: Why So Few — After 150 Years?

In 1865, the first minority bank in the United States was established. Over time, banks owned or controlled by minorities have grown in number. Yet, one hundred and fifty years later, they still account for only 2.8 percent of all banks. The contribution of this paper is fourfold. First, it provides a comprehensive assessment of the role of different types of MDIs in the banking industry as well as the characteristics of the communities in which they operate. Second, it contributes to the corporate finance literature that focuses on the extent to which the diversity of ownership/control affects the performance and riskiness of firms, but is among the few that does so in terms of majority ownership/control of banks. Third, the paper examines the recent performance of MDIs from the perspective of whether their disproportionately small role in the banking industry is due to their relatively poorer and riskier performance as compared to non-MDIs. Fourth, a check on the robustness of the results is provided, including for the first time using two different databases on MDIs, one from the FDIC and the other from the FRB. It is found the MDIs are in communities in which the largest share of the population is a minority and one in which income and poverty are worse compared to national averages. Importantly, when MDIs are compared to non-MDIs the results indicate the MDIs generally, in contrast to most previous studies, show no sign of underperformance or greater riskiness. The policy issue that arises for future research based on this finding is if it is not performance and risk then what does explain the lack of significant diversity in terms of ownership/control in the US banking industry.

Enforcement Actions, Market Movement and Depositors\u2019 Reaction: Evidence from the US Banking System

We examine market movement and depositors’ reaction following the announcement of enforcement actions (EAs) on US banks over the period 2004 to 2015. Using an extensive dataset of manually collected EAs, employing event study and multivariate analyses, we investigate the impact of EAs on key bank stakeholders, i.e. shareholders and depositors. Our findings suggest that equity market and depositors are able to discriminate EAs based on their severity. Market reacts negatively following severe EAs (cease and desist) while weak reaction is noted for other EA types (civil money penalty and formal agreements). Demand depositors exhibit some level of depositor disciplining mechanism following cease and desist announcements, while core depositors seem to reward sanctioned banks for a higher return. A positive effect is found following formal agreement announcements that seem to be perceived as a corrective mechanism. We validate these findings across the sanctioned (treatment) and comparable non-sanctioned (control) banks, using propensity score matching methodology. These findings have important policy implications and expand the existing knowledge on the consequences of banking supervision to guide banks’ behaviour, drive policy interventions and contribute to enhance supervisory effectiveness.

Does Corporate Culture Affect Bank Risk‐Taking? Evidence from Loan‐Level Data

AbstractUsing comprehensive corporate and retail loan data, we show that the corporate culture of banks explains their risk‐taking behaviour. Banks whose corporate culture leans towards aggressive competition are associated with riskier lending practices: higher approval rate, lower borrower quality, and fewer covenant requirements. Consequently, these banks incur larger loan losses and make greater contributions to systemic risk. The opposite behaviour is observed among banks whose culture emphasizes control and safety. Our findings cannot be explained by heterogeneity in a bank's business model, CEO compensation incentives or CEO characteristics. We use an exogenous shock to the US banking system during the 1998 Russian default crisis to support a causal inference.

Addressing Systemic Risk Using Contingent Convertible Debt — A Network Analysis

We construct a balance sheet based network model to study the interconnectedness of US banking system. After a simulation analysis of the buffer effect of contingent convertible (CoCo) debt in controlling contagion in the banking network under a theoretically motivated model, we use 13-F filings made to the US Securities and Exchange Commission (SEC) to calibrate the theoretical model. Our results demonstrate that CoCo debt conversion significantly reduces the average number of bank failures, decreases the Delta-CoVaR of the banking system, and thus, mitigates systemic risk. While CoCo debt with dual-trigger is not so efficient as a single trigger design in reducing individual bank failures, the former is more effective at protecting the surviving banks, which leads to improved stability from the perspective of the banking system. Two-tranche CoCo debt can combine the benefits of single trigger and dual trigger CoCo debt. We claim that the different designs of CoCo triggers result in trade-offs for addressing systemic risk, which may be evaluated in a network model developed in this work.

The complexity of bank regulation: audit requirements in the USA

We use requirements governing external audits in the US banking industry as a case study to illustrate the complexity of regulatory structure. Complexity reflects a flexibility that has been used to “tailor” regulations for particular categories of banks. But it appears to conflict with recent proposals to “rationalize” a system that is said to lack coherence.

Regional Competition in US Banking – Trends and Determinants

Competition in the US banking industry as measured by the Lerner Index has on average increased substantially during the last decade. At the same time, regional differences in competition on the state level have decreased considerably. Based on a dynamic panel framework we find that these developments are mainly driven by industry specific factors such as the costs to income ratio. The empirical evidence indicates that inefficiency and the Lerner index are significant negatively correlated. Macroeconomic conditions appear to have supported these trends in competition, however, to a somewhat lesser extent.

Risk averse banks and excess reserve fluctuations

Abstract We develop a model to study how risk averse banks use excess reserves to manage risk on their asset portfolios. Our model predicts that risk averse banks accumulate substantial holdings of excess reserves in response to large, low-probability shocks to the risk on loans. Our findings support the hypothesis that risk aversion led banks to build-up excess reserves within the US banking system in September of 2008 following news about the failure of Lehman Brothers and the credit downgrade of AIG. Moreover, our model also explains the magnitude of excess reserve fluctuations observed in the US over typical business cycles.

Does Accounting Treatment of Share‐based Payments Impact Performance Measures for Banks?

AbstractThis paper identifies, evaluates and analyses the resulting impact of mandatory expensing of share‐based compensation (SBC) under IFRS2/FASB123R on a set of widely used performance measures in the EU and US banking industry. The paper shows that the accounting treatment of SBC schemes, following the mandatory adoption of IFRS2/FAS123R, has a statistically significant negative impact on the selected performance measures over the period 2004–11. The impact also seems to be material, yet modest, for US banks and only for large and high‐growth EU banks, indicating that earlier public concerns and criticisms of the implementation of IFRS2/FAS123R are largely unsubstantiated. The findings also show that banks continue to use SBC, but there is a reduction, albeit insignificant, in the recognised SBC expense over the period 2009–11. That is, earlier public concerns that firms would curtail employing SBC in their employees’ compensation schemes to avoid the effect of SBC expense recognition on their financial ratios came to light after the first option life‐cycle in the post‐adoption period was over. The findings also show a marked movement towards using cash‐settled‐based payments, possibly due to their manipulative accounting treatment, a potentially interesting issue for related accounting research and accounting standard setters.

A New Look at the Performance of Industrial Loan Companies and Their Contribution to the US Banking System

In this paper, we examine the differences between commercially-owned ILCs and those owned by financial firms, and offer a current assessment of ILC performance, paying particular attention to commercially-owned ILCs, and their contribution to the US banking system. The rules governing their oversight, especially relative to bank regulation, occupy a significant part of this evaluation as we consider why the ILC ownership concept causes a stir when they’re subject to the same FDIC regulation as any other banking institution. Most important, we look at the capitalization and performance of ILCs over the past few decades relative to the banking industry more generally. And because all ILCs are state-chartered, we specifically compare their size and performance to other state-chartered banks.

The Financial Repression Index: U.S Banking System Since 1984

This paper reviews the research literature concerning financial repression. The paper then presents an empirical measure for financial repression in the US banking system entitled “The Financial Repression Index,” drawing upon public data going back to the early 1980s The paper draws some preliminary conclusions about the economic impact of financial repression in the US based upon observations of the banking system and related data. Overall this paper concludes that bank depositors and investors have been the victims of significant financial repression since the 1990s and particularly since the 2008 financial crisis as measured by the dramatic shift in net interest income in favor of banks. The paper also concludes that while banks themselves have received a significant subsidy due to financial repression, banks have also suffered decreased asset returns as a result of the low interest rates policies and open market operations of the Federal Open Market Committee.