Managerial efficiency and failure of U.S. commercial banks during the 2007-2009 financial crisis: was this time different?
Main Article Content
Keywords
Bank Failure, Profit Efficiency, Hazard Models
Abstract
Compared with previous crises few banks failed as a result of the U.S. financial crisis of 2007-2009. We investigate the role played by managerial efficiency in the non-systemic bank failures during the crisis. During previous waves of bank failures, cost-inefficient banks and banks with relatively less capital or low-quality assets were more likely to fail. Using data from 2001 to 2010, we show that profit inefficiency—our proxy for managerial inefficiency— is a robust predictor of bank failures while cost inefficiency is unrelated to them. In addition, capital adequacy lost importance in predicting non-systemic bank failures during the crisis while loan quality remained a strong predictor. Our results suggest that profit efficiency can be an important managerial indicator in monitoring banks.
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References
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Liadaki, Aggeliki and Chrysovalantis Gaganis, “Efficiency and stock performance of EU banks: Is there a relationship?,” Omega, 2010, 38 (5), 254 – 259. Empirical Research in the EU Banking Sector and the Financial Crisis.
Lo, Andrew W., “Reading about the Financial Crisis: A Twenty-One-Book Review,” Journal of Economic Literature, March 2012, 50 (1), 151–78.
Lozano-Vivas, Ana and Fotios Pasiouras, “The impact of non-traditional activities on the estimation of bank efficiency: International evidence,” Journal of Banking & Finance, 2010, 34 (7), 1436 – 1449. Performance Measurement in the Financial Services Sector.
Mian, Atif and Amir Sufi, “The Consequences of Mortgage Credit Expansion: Evidence from the U.S. Mortgage Default Crisis,” The Quarterly Journal of Economics, 2009, 124 (4), 1449–1496.
Miller, Scott, Eric Olson, and Timothy J. Yeager, “The relative contributions of equity and subor- dinated debt signals as predictors of bank distress during the financial crisis,” Journal of Financial Stability, 2015, 16, 118 – 137.
Moore, Bob and Mike Seamans, “Capital Regulation at Community Banks: Lessons from 400 Fail- ures,” Technical Report, Federal Reserve Bank of Dallas 2013.
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Restrepo-Tobon, Diego and Subal C. Kumhakar, “Measuring Profit Efficiency without Estimating a Profit Function: The case of U.S. Commercial Banks,” Working Paper. Binghamton University, 2011.
Rogers, K.E., “Nontraditional Activities and The Efficiency of US Commercial Banks,” Journal of Banking & Finance, 1998, 22 (4), 467–482.
Schaeck, Klaus, “Bank Liability Structure, FDIC Loss, and Time to Failure: A Quantile Regression Approach,” Journal of Financial Services Research, 2008, 33 (3), 163–179.
Sealey, C.W. and J.T. Lindley, “Inputs, outputs, and a theory of production and cost at depository financial institutions,” Journal of Finance, 1977, 32 (4), 1251–1266.
Shaffer, Sherrill, “Bank failure risk: Different now?,” Economics Letters, 2012, 116 (3), 613 – 616.
Shumway, Tyler, “Forecasting Bankruptcy More Accurately: A Simple Hazard Model,” The Journal of Business, 2001, 74 (1), pp. 101–124.
Tirole, Jean, “Illiquidity and All Its Friends,” Journal of Economic Literature, June 2011, 49 (2), 287–325.
Whalen, Gary, “A proportional hazards model of bank failure: an examination of its usefulness as an early warning tool,” Economic Review, 1991, 27 (1), 21–31.
Wheelock, D.C. and P.W. Wilson, “Explaining bank failures: Deposit Insurance, Regulation, and Efficiency,” The Review of Economics and Statistics, 1995, pp. 689–700.
Wheelock, D.C. and , “Why do Banks Disappear? The Determinants of US Bank Failures and Acquisitions,” Review of Economics and Statistics, 2000, 82 (1), 127–138
1670.
Akhavein, J.D., A.N. Berger, and D.B. Humphrey, “The Effects of Megamergers on Efficiency and Prices: Evidence from a Bank Profit Function,” Review of Industrial Organization, 1997, 12 (1),
95–139.
Akhigbe, A. and J.E. McNulty, “The Profit Efficiency of Small US Commercial Banks,” Journal of Banking & Finance, 2003, 27 (2), 307–325.
Akhigbe, Aigbe and Bradley A. Stevenson, “Profit efficiency in U.S. BHCs: Effects of increasing non-traditional revenue sources,” The Quarterly Review of Economics and Finance, 2010, 50 (2), 132 – 140.
Akhigbe, Aigbe and James McNulty, “Profit Efficiency Sources and Differences among Small and Large U.S. Commercial Banks.,” Journal of Economics & Finance, 2005, 29 (3), 289 – 299.
Amel, Dean F and Robin A Prager, “Performance of Community Banks in Good Times and Bad Times: Does Management Matter?,” Working Paper, 2013.
Antoniades, Adonis, “Commercial bank failures during the Great Recession: The real (estate) story,” Eurpoean Central bank Working Papers, 2015.
Aubuchon, Craig P and David C Wheelock, “The geographic distribution and characteristics of US bank failures, 2007-2010: do bank failures still reflect local economic conditions?,” Federal Reserve Bank of St. LouisŠ Review, 2010, 92.
Bates, James and A. J. M. Sykes, “Aspects of Managerial Efficiency,” The Journal of Industrial Economics, 1962, 10 (3), 209–217.
Berger, Allen N. and Loretta J. Mester, “Inside the Black Box: What Explains Differences in the Efficiencies of Financial Institutions?,” Journal of Banking & Finance, 1997, 21 (7), 895 – 947.
Berger, Allen N., Bjorn Imbierowicz, and Christian Rauch, “The Roles of Corporate Governance in Bank Failures during the Recent Financial Crisis,” Journal of Money, Credit and Banking, 2016, 48 (4), 729–770.
Berger, A.N., D. Hancock, and D.B. Humphrey, “Bank Efficiency Derived from the Profit Func- tion,” Journal of Banking & Finance, 1993, 17 (2-3), 317–347.
Berger, A.N., D.B. Humphrey, and L.B. Pulley, “Do Consumers Pay for One-stop Banking? Evidence from an Alternative Revenue Function,” Journal of Banking & Finance, 1996, 20 (9), 1601–1621.
Bologna, Pierluigi, “Structural Funding and Bank Failures,” Journal of Financial Services Research, 2015, 47 (1), 81–113.
Brunnermeier, Markus K., “Deciphering the Liquidity and Credit Crunch 2007-2008,” Journal of Economic Perspectives, March 2009, 23 (1), 77–100.
Brunnermeier, Markus K., and Yuliy Sannikov, “A Macroeconomic Model with a Financial Sector,” American Economic Review, February 2014, 104 (2), 379–421.
Cebula, Richard J., “Determinants of bank failures in the US revisited,” Applied Economics Letters, 2010, 17 (13), 1313–1317.
Cole, Rebel A. and Jeffery W. Gunther, “Separating the likelihood and timing of bank failure,” Journal of Banking & Finance, 1995, 19 (6), 1073 – 1089.
Cole, Rebel A. and Lawrence J. White, “Déjà Vu All Over Again: The Causes of U.S. Commercial Bank Failures This Time Around,” Journal of Financial Services Research, 2012, 42 (1), 5–29.
Cole, Rebel A. and Qiongbing Wu, “Predicting bank failures using a simple dynamic hazard model,” Technical Report, DePaul University, University of Western Sydney 2009.
Cox, D.R., “Regression Models and Life Tables,” Journal of The Royal Statistical Society, 1972, 34B, 269–276.
Delis, M.D. and E.G. Tsionas, “The joint estimation of bank-level market power and efficiency,” Journal of Banking & Finance, 2009, 33 (10), 1842 – 1850. Micro and Macro Foundations of International Financial Integration - International Financial Integration.
Demirguc-Kunt, Asli and Enrica Detragiache, “Does deposit insurance increase banking system stability? An empirical investigation,” Journal of Monetary Economics, 2002, 49 (7), 1373 – 1406.
Demyanyk, Yuliya and Iftekhar Hasan, “Financial crises and bank failures: A review of prediction methods,” Omega, 2010, 38 (5), 315 – 324. Empirical Research in the {EU} Banking Sector and the Financial Crisis.
Demyanyk, Yuliya and Otto Van Hemert, “Understanding the Subprime Mortgage Crisis,” Review of Financial Stud- ies, 2011, 24 (6), 1848–1880.
DeYoung, Robert, “De novo bank exit,” Journal of Money, Credit, and Banking, 2003, 35 (5), 711– 728.
DeYoung, Robert, and Gökhan Torna, “Nontraditional banking activities and bank failures during the financial cri- sis,” Journal of Financial Intermediation, 2013, 22 (3), 397–421.
Estrella, Arturo, Sangkyun Park, and Stavros Peristiani, “Capital ratios as predictors of bank failure,” Economic policy review, 2000, 6 (2).
Gilbert, R Alton, Andrew P Meyer, and James W Fuchs, “The future of community banks: Lessons from banks that thrived during the recent financial crisis,” Federal Reserve Bank of St. LouisŠ Re- view, 2013, 95.
Glasserman, Paul and H. Peyton Young, “Contagion in Financial Networks,” Journal of Economic Literature, September 2016, 54 (3), 779–831.
Gorton, Gary and Andrew Metrick, “Getting Up to Speed on the Financial Crisis: A One-Weekend- Reader’s Guide,” Journal of Economic Literature, March 2012, 50 (1), 128–50.
Hambusch, Gerhard and Sherrill Shaffer, “Forecasting bank leverage: an alternative to regulatory early warning models,” Journal of Regulatory Economics, 2016, 50 (1), 38–69.
Heyne, Paul, “Efficiency,” The Concise Encyclopedia of Economics. 2008. Library of Economics and Liberty, 2008.
Hoshi, Takeo, “Financial Regulation: Lessons from the Recent Financial Crises,” Journal of Eco- nomic Literature, March 2011, 49 (1), 120–28.
Humphrey, D.B. and L.B. Pulley, “Banks’ Responses to Deregulation: Profits, Technology, and Efficiency,” Journal of Money, Credit and Banking, 1997, 29 (1), 73–93.
Jovanovic, Boyan, “Selection and the Evolution of Industry,” Econometrica, 1982, 50 (3), 649–670.
Kolari, James, Dennis Glennon, Hwan Shin, and Michele Caputo, “Predicting large {US} com- mercial bank failures,” Journal of Economics and Business, 2002, 54 (4), 361 – 387.
Koutsomanoli-Filippaki, A., E. Mamatzakis, and C. Staikouras, “Structural Reforms and Banking Efficiency in the New EU States,” Journal of Policy Modeling, 2009, 31 (1), 17–21.
Krasnikov, A., S. Jayachandran, and V. Kumar, “The Impact of Customer Relationship Manage- ment Implementation on Cost and Profit Efficiencies: Evidence from the US Commercial Banking Industry,” Journal of Marketing, 2009, 73 (6), 61–76.
Kumbhakar, S.C. and C.A. Lovell, Stochastic frontier analysis, Cambridge University Press, 2003.
Li, Qingyu, “What Causes Bank Failures During the Recent Economic Recession?,” Technical Re- port, Illinois Wesleyan University Digital Commons 2013.
Liadaki, Aggeliki and Chrysovalantis Gaganis, “Efficiency and stock performance of EU banks: Is there a relationship?,” Omega, 2010, 38 (5), 254 – 259. Empirical Research in the EU Banking Sector and the Financial Crisis.
Lo, Andrew W., “Reading about the Financial Crisis: A Twenty-One-Book Review,” Journal of Economic Literature, March 2012, 50 (1), 151–78.
Lozano-Vivas, Ana and Fotios Pasiouras, “The impact of non-traditional activities on the estimation of bank efficiency: International evidence,” Journal of Banking & Finance, 2010, 34 (7), 1436 – 1449. Performance Measurement in the Financial Services Sector.
Mian, Atif and Amir Sufi, “The Consequences of Mortgage Credit Expansion: Evidence from the U.S. Mortgage Default Crisis,” The Quarterly Journal of Economics, 2009, 124 (4), 1449–1496.
Miller, Scott, Eric Olson, and Timothy J. Yeager, “The relative contributions of equity and subor- dinated debt signals as predictors of bank distress during the financial crisis,” Journal of Financial Stability, 2015, 16, 118 – 137.
Moore, Bob and Mike Seamans, “Capital Regulation at Community Banks: Lessons from 400 Fail- ures,” Technical Report, Federal Reserve Bank of Dallas 2013.
Oliveira, André, F Vitorino Martins, and Elisio Brandao, “Bank Failure and the Financial Crisis: an Econometric Analysis of US Banks,” Technical Report, Universidade do Porto 2015.
Ragalevsky, Stanley V and Sarah J Ricardi, “Anatomy of a bank failure,” Banking LJ, 2009, 126, 867.
Restrepo-Tobon, Diego and Subal C. Kumhakar, “Measuring Profit Efficiency without Estimating a Profit Function: The case of U.S. Commercial Banks,” Working Paper. Binghamton University, 2011.
Rogers, K.E., “Nontraditional Activities and The Efficiency of US Commercial Banks,” Journal of Banking & Finance, 1998, 22 (4), 467–482.
Schaeck, Klaus, “Bank Liability Structure, FDIC Loss, and Time to Failure: A Quantile Regression Approach,” Journal of Financial Services Research, 2008, 33 (3), 163–179.
Sealey, C.W. and J.T. Lindley, “Inputs, outputs, and a theory of production and cost at depository financial institutions,” Journal of Finance, 1977, 32 (4), 1251–1266.
Shaffer, Sherrill, “Bank failure risk: Different now?,” Economics Letters, 2012, 116 (3), 613 – 616.
Shumway, Tyler, “Forecasting Bankruptcy More Accurately: A Simple Hazard Model,” The Journal of Business, 2001, 74 (1), pp. 101–124.
Tirole, Jean, “Illiquidity and All Its Friends,” Journal of Economic Literature, June 2011, 49 (2), 287–325.
Whalen, Gary, “A proportional hazards model of bank failure: an examination of its usefulness as an early warning tool,” Economic Review, 1991, 27 (1), 21–31.
Wheelock, D.C. and P.W. Wilson, “Explaining bank failures: Deposit Insurance, Regulation, and Efficiency,” The Review of Economics and Statistics, 1995, pp. 689–700.
Wheelock, D.C. and , “Why do Banks Disappear? The Determinants of US Bank Failures and Acquisitions,” Review of Economics and Statistics, 2000, 82 (1), 127–138