Daniel E. Nolle

Foreign-Owned Banks in the United States: Earning Market Share or Buying It?

Foreign-owned U.S. banks have been chronically unprofitable for more than a decade. The authors employ a profit efficiency model introduced by Allen N. Berger, Diana Hancock, and David B. Humphrey (1993), modified to be less sensitive to variations in asset size, to estimate the relative profit efficiency of 62 foreign-owned and 240 U.S.-owned banks between 1985 and 1990. Their results indicate that foreign-owned banks were significantly less profit efficient than were U.S.-owned banks primarily due to foreign banks reliance on expensive purchased funds. For foreign-owned banks, the results are consistent with a strategy of sacrificing profits in exchange for fast growth and increased market share during the 1980s. Copyright 1996 by Ohio State University Press.

Commercial Banking Structure, Regulation, and Performance: An International Comparison

This paper provides detailed information on banking structure, permissible banking activities, regulatory structure, deposit insurance schemes, and supervisory practices in each of the 15 European Union countries, as well as in Canada, Japan, Switzerland, and the United States. Comparisons across the countries show there is a wide range of banking structures and supervisory practices, and there is a roughly equal division between those countries that rely on the central bank as the chief banking supervisor and those that do not. In addition, although all of the countries currently have deposit insurance schemes, these schemes differ widely in many respects. Cross-country comparisons of the different aspects of banking do reveal one common characteristic, however. Almost all of the countries allow a wide range of banking activities, including underwriting, dealing, and brokering in both securities and insurance, and these activities can generally be conducted either directly in a bank or indirectly through a subsidiary of a bank, rather than through a holding company structure. The notable exceptions to this common tendency are the United States and Japan. An appendix presents an exploratory regression analysis illustrating a way in which empirical examinations of bank performance might be enriched by taking into account differences in permissible banking activities across countries.

Global financial system reform: the Dodd‐Frank Act and the G20 agenda

Purpose - The Dodd-Frank Act of 2010 is the keystone policy response directed at reforming US financial system activities and oversight in the wake of the 2007-2009 financial crisis. The USA also has financial system reform policy commitments in the international arena, including in particular by virtue of its membership in the G20. The purpose of this paper is to consider US policy initiatives related to a core dimension of financial system reform: risks posed by systemically important financial institutions (“SIFIs”). Design/methodology/approach - The paper provides a deta‘iled comparison of SIFI policy initiatives and timetables under both the Dodd-Frank Act and the G20 agenda, as reflected in the ongoing work plan of the Financial Stability Board (FSB), and poses the question “Are US domestic and international financial system reform commitments in sync?” Findings - The study finds that, fundamentally, the answer is “yes.” However, the comparison yields two caveats with potential policy implications. First, the two agendas differ in their relative emphasis on the coverage of both banks and nonbanks. The G20/FSB focus, at least over the near-term, is bank-centric compared with the Dodd-Frank Act, which consistently addresses both bank and nonbank financial firms. Second, implementation of Dodd-Frank Act provisions is subject to long-established US law mandating that there be sufficient opportunity for public input into the rulemaking process, whereas the G20/FSB process has been less systematic and transparent on public consultation and feedback. Practical implications - These observations may be relevant to the current debate over the speed and scope of Dodd-Frank Act implementation measures, and to the discussion about the future international competitiveness of US banks and nonbank financial firms. Originality/value - This study is the first to present a detailed, comprehensive comparison of financial system reform initiatives and provisions in the Dodd-Frank Act and the G20 agenda.

ACH Payments: Changing Users and Changing Uses

Declining paper check usage, growing reliance on credit cards, and the rapid expansion of debit cards are all well-known aspects of the rise of electronic payments, but less focus has been placed on automated clearing house (ACH) transactions. This Policy Analysis Paper describes the changing ACH landscape, and considers the degree to which this growth and change have heightened one risk issue in particular: the susceptibility of ACH payments to fraud. The paper begins by summarizing overall trends in ACH payments and factors underlying the growing demand. This description of the ACH landscape also focuses on the emergence and rapid recent growth of a new set of ACH debit transactions, referred to as “e-checks” that, unlike traditional ACH debits, do not rely on established customer-originator relationships.

Mortgage Lending Underwriting Standards During the Housing Market Boom: Examiners' and Bankers' Views

It is by now widely acknowledged that the too-lenient trend in residential mortgage underwriting standards over the past half-dozen years was a key factor propelling the housing boom, and is a principal reason that the “bust” now underway has spiraled into a broad-based credit crisis. Importantly, comprehensive, economy-wide documentation for mortgage lending underwriting trends (as compared to institution-specific analysis) is sparse. Hence, although industry observers understand this fundamental basis for the current turmoil in the financial system, a clear accounting of the nature and scope of underwriting trends is lacking. Indeed, the Federal Reserve Board’s Senior Loan Officer Opinion Survey on Bank Lending Practices (“Senior Loan Officer Survey”) is the only well-known economy-wide source of data on mortgage underwriting trends. However, the Senior Loan Officer Survey provides a relatively limited gauge of those trends: the quantitative information it provides is simply the net percent of surveyed banks easing mortgage underwriting standards in a given quarter. The OCC has developed a tool that addresses the dearth of detailed knowledge about the nature and scope of mortgage lending underwriting by banks: the agency’s annual Survey of Credit Underwriting Practices (“Examiner Survey”). That survey, which collects responses from examiners on their views about national banks’ underwriting practices, contains a much broader and deeper set of information than the Federal Reserve survey of senior bankers. Although heretofore the agency has not done so, as this Staff Report shows, it is possible to compare examiners’ perspectives on mortgage underwriting trends, as reflected in the OCC’s survey, with bankers’ views on these trends, as reflected in the Federal Reserve survey. In addition, because the Examiner Survey includes detailed information on specific mortgage underwriting practices not covered by the Federal Reserve survey, analysis of the OCC data can yield insights about the mortgage market not available from the Senior Loan Officer Survey.The primary purpose of this Policy Analysis Staff Report is to provide the first systematic comparison of bankers’ perspectives on mortgage underwriting trends, as reflected in the well-known Senior Loan Officer Survey, with examiners’ perspectives reflected in the OCC’s underwriting survey. One major observation emerging from the analysis is that bankers’ and examiners’ assessments of mortgage underwriting trends were roughly consistent with each other, especially during 2004-2006, when both groups reported persistent easing. The main exception is for the late-2006-early-2007 period, when bankers claimed they tightened mortgage underwriting standards sharply. OCC examiners did not agree, seeing instead a slight, but nevertheless continuing, easing of mortgage lending standards. Were OCC examiners correct in their significantly different assessment at that point? In the absence of a comparable “third party” set of information on underwriting practices it is not possible to answer that question definitively. Nevertheless, subsequent analysis in this Staff Report showing a strong consistency between examiners’ summary or overall assessment of underwriting practices, and their assessments of specific, detailed components of mortgage underwriting practices enhances the credibility of examiners’ story.

Global Trends in the Bank Regulatory and Supervisory Environment

Recent changes in the nature of banking and costly banking crises in countries around the world have focused attention on the adequacy of bank regulation and supervision. Policy makers have struggled with questions about the most appropriate regulatory regime to adopt, and the supervisory practices best suited to implement and enforce the regime. Several countries, in this regard, have recently transferred regulation and supervision to a separate agency from the central bank, with China being the most recent to do so in April 2003. Many countries have also recently taken actions to improve their prudential regulations and supervisory practices governing the activities of banks, a process that is likely to receive added impetus when the new Basel Capital Accord comes into effect. This paper provides an overview of key global trends in bank regulation and supervision. The study draws on recent research and detailed cross-country data, including data from a recent World Bank survey of bank regulation and supervision worldwide, to focus on some of the underlying reasons for and implications of developments in a variety of areas. These include the following: the nature and changing role of banks in promoting economic growth, development and stability; restrictions on the scope of banking activities and allowable ownership arrangements in which to conduct them; the structure and scope of bank regulatory and supervisory schemes; supervisory practices to promote safe and sound banks; market discipline and corporate governance in banking; deposit insurance schemes; offshore banking, and potential disputes in banking arising from World Trade Organization membership.

Integration and Globalization of the Canadian and U.S. Banking Industries: A Modest Role For NAFTA?

This chapter presents evidence that the impact of NAFTA on the direct banking presence of Canadian banks in the United States and U.S. banks in Canada may have been relatively modest. No post-NAFTA change in the level of banking activity, as measured by assets of Canadian banks in the United States and U.S. banks in Canada occurred, and the current market shares of Canadian banks in the United States and of U.S. banks in Canada appear to be low. Despite a less than central role for NAFTA in setting the agenda of international banking issues, important policy concerns remain. These include internal policy debates within NAFTA countries, because the legal and regulatory environment in each of the signatory countries affects banks from each of the other countries.