David C. Wheelock

Why do Banks Disappear? The Determinants of U.S. Bank Failures and Acquisitions

This paper seeks to identify the characteristics that make individual U.S. banks more likely to fail or be acquired. We use bank-specific information to estimate competing-risks hazard models with time-varying covariates. We use alternative measures of productive efficiency to proxy management quality, and find that inefficiency increases the risk of failure while reducing the probability of a banks being acquired. Finally, we show that the closer to insolvency a bank is (as reflected by a low equity-to-assets ratio) the more likely is its acquisition.

Do Large Banks Have Lower Costs? New Estimates of Returns to Scale for U.S. Banks

The number of commercial banks in the United States has fallen by more than 50 percent since 1984. This consolidation of the U.S. banking industry and the accompanying large increase in average (and median) bank size have prompted concerns about the effects of consolidation and increasing bank size on market competition and on the number of banks that regulators deem “too–big–to–fail.” Agency problems and perverse incentives created by government policies are often cited as reasons why many banks have pursued acquisitions and growth, though bankers often point to economies of scale. This paper presents new estimates of ray-scale and expansion-path scale economies for U.S. banks based on non-parametric local-linear estimation of a model of bank costs. Unlike prior studies that use models with restrictive parametric assumptions or limited samples, our methodology is fully non-parametric and we estimate returns to scale for all U.S. banks over the period 1984–2006. Our estimates indicate that as recently as 2006, most U.S. banks faced increasing returns to scale, suggesting that scale economies are a plausible (but not necessarily only) reason for the growth in average bank size and that the tendency toward increasing scale is likely to continue unless checked by government intervention.

New evidence on returns to scale and product mix among U.S. commercial banks

Numerous studies have found that banks exhaust scale economies at low levels of output, but most are based on the estimation of parametric cost functions which misrepresent bank cost. Here we avoid specification error by using nonparametric kernal regression techniques. We modify measures of scale and product mix economies introduced by Berger et al. (1987) to accommodate the nonparametric estimation approach, and estimate robust confidence intervals to assess the statistical significance of returns to scale. We find that banks experience increasing returns to scale up to approximately

Non-parametric, unconditional quantile estimation for efficiency analysis with an application to Federal Reserve check processing operations

500 million of assets, and essentially constant returns thereafter. We also find that minimum efficient scale has increased since 1985.

Robust Non-Parametric Quantile Estimation of Efficiency and Productivity Change in U.S. Commercial Banking, 1985-2004

This paper examines the technical efficiency of U.S. Federal Reserve check processing offices over 1980–2003. We extend results from Park et al. (2000) and Daouia and Simar (2007) to develop an unconditional, hyperbolic, a-quantile estimator of efficiency. Our new estimator is fully non-parametric and robust with respect to outliers; when used to estimate distance to quantiles lying close to the full frontier, it is strongly consistent and converges at rate root-n, thus avoiding the curse of dimensionality that plagues data envelopment analysis (DEA) estimators. Our methods could be used by policymakers to compare inefficiency levels across offices or by managers of individual offices to identify peer offices.

Member Bank Borrowing and the Fed's Contractionary Monetary Policy during the Great Depression

This paper describes a non-parametric, unconditional, hyperbolic quantile estimator that unlike traditional non-parametric frontier estimators is both robust to data outliers and has a root-n convergence rate. We use this estimator to examine changes in the efficiency and productivity of U.S. banks between 1985 and 2004. We find that larger banks experienced larger efficiency and productivity gains than small banks, consistent with the presumption that recent changes in regulation and information technology have favored larger banks.

Measuring Commercial Bank Profitability: Proceed with Caution

This paper examines the causes of Federal Reserve policy errors during the Great Depression. It finds compelling evidence that the Fed developed a flawed strategy during the 1920s, and continued to use that strategy during the depression. The Feds strategy relied on the behavior of member bank borrowing and interest rates as policy indicators. A detailed empirical examination of borrowed reserve demand reveals the errors in the Feds strategy and helps to explain why the Fed did not undertake vigorous countercyclical policy during the depression. Copyright 1990 by Ohio State University Press.

Regional Disparities in the Spatial Correlation of State Income Growth

The Federal tax code creates challenges for comparing the profit rates of different banks on a consistent basis. The earnings of banks that elect to operate under Subchapter S of the Federal tax code are not subject to the Federal corporate income tax, but S-bank shareholders are taxed on their pro rata share of the entire earnings of the bank. The number of banks electing Subchapter S tax treatment has increased rapidly, especially among small banks. Using estimates of the Federal corporate income tax that S-banks would pay if they were subject to the tax, this article shows that differences in the tax treatment of S-banks and other banks has a large impact on measures of U.S. banking system profitability. Further, the article shows that adjustment of S-bank earnings by estimates of Federal income taxes to make them comparable with the earnings of other banks can markedly affect conclusions of studies that use net income as a measure of performance. Finally, the article shows that S-banks tend to out-earn their peers even if S-bank earnings are reduced by estimated Federal taxes, and that S-banks also tend to have higher earnings rates than their peers in the year before they elect S-bank status.

Does the Structure of Banking Markets Affect Economic Growth? Evidence from U.S. State Banking Markets

This paper presents new evidence of spatial correlation in U.S. state income growth. We extend the basic spatial econometric model used in the growth literature by allowing spatial correlation in state income growth to vary across geographic regions. We find positive spatial correlation in income growth rates across neighboring states, but that the strength of this spatial correlation varies considerably by region. Spatial correlation in income growth is highest for states located in the Northeast and the South. Our findings have policy implications both at the state and national level, and also suggest that growth models may benefit from incorporating more complex forms of spatial correlation.

Inflation, Monetary Policy and Stock Market Conditions

This paper examines the impacts of banking market structure and regulation on economic growth using new data on banking market concentration and manufacturing industry-level growth rates for U.S. states during 1899–1929—a period when the manufacturing sector was expanding rapidly and restrictive branching laws segmented the U.S. banking system geographically. Unlike studies of developing and developed countries today, we find that banking market concentration generally had a positive impact on manufacturing sector growth in the early twentieth century United States, with a somewhat stronger impact on industries with smaller establishments, lower rates of incorporation, and less reliance on bond markets (and, hence, relatively more reliance on banks). Because regulations affecting bank entry varied considerably across states and the industrial organization of the U.S. banking system differs markedly from those of other countries, we consider the impact of other aspects of banking market structure and policy on growth. Even after controlling for differences in the prevalence of branch banking, deposit insurance, and other aspects of policy and market structure, we find that market concentration boosted industrial growth.