Diana Hancock

Bank efficiency derived from the profit function

Abstract Both input and output inefficiencies are derived from a profit function for US banks. These inefficiencies are decomposed into allocative and technical components in a new way using shadow prices. About half of all potential variable profits are estimated to be lost to inefficiency. Most inefficiencies are from deficient output revenues, rather than excessive input costs. Larger banks are found to be more efficient than smaller banks, which may offset scale diseconomies found elsewhere. Tests of a new concept, ‘optimal scope economies’, suggest that joint production is optimal for most banks, but that specialization is optimal for others.

Why Are Bank Profits So Persistent? The Roles of Product Market Competition, Informational Opacity, and Regional/Macroeconomic Shocks

We investigate how banking market competition, informational opacity, and sensitivity to shocks have changed over the last three decades by examining the persistence of firm-level rents. We develop propagation mechanisms with testable implications to isolate the sources of persistence. Our analysis suggests that different processes underlie persistent performance at the high and low ends of the distribution. Our tests suggest that impediments to competition and informational opacity continue to be strong determinants of performance; that the reduction in geographic regulatory restrictions had little effect on competitiveness; and that performance remains sensitive to regional/macroeconomic shocks. The findings also suggest reasons for the recent record profitability of the industry.

Bank capital shocks: Dynamic effects on securities, loans, and capital

Abstract We used quarterly data for individual banks to estimate recent dynamic responses to bank capital shocks. While it took bank capital and securities only one year to adjust to capital shocks, liabilities and most loan categories took two to three years to complete their adjustments. Compared with those in the late 1980s, capital shocks were twice as large and portfolio responses to capital shocks tended to be more rapid in the early 1990s. Larger banks adjusted each component of their portfolios faster than smaller banks. Capital shocks caused banks with capital shortfalls to contract more and more quickly in the 1990s than they had in the 1980s.

Using Subordinated Debt to Monitor Bank Holding Companies: Is it Feasible?

Although accurate bond prices are difficult to come by, many have advocated that bank supervisors use subordinated debt spreads in the surveillance of large banking organizations. Our findings indicate that subordinated debt spreads are most consistent across data sources for the most liquid bonds (i.e., those of relatively large issuance size, relatively young age, issued by relatively large firms) traded in a relatively robust overall bond market. We also find a high degree of concordance in rankings of firms by their minimum spreads across bonds with especially strong agreement about which large firms are in the tails of the spread distribution at each point in time. Our time-series results further support and provide additional guidance for the use of subordinated debt spreads in supervisory monitoring, support the need for careful judgment when interpreting such spreads, highlight difficulties with currently available data sources, and motivate the need for further research.

Bank Capital and the Credit Crunch: The Roles of Risk-Weighted and Unweighted Capital Regulations

We investigated whether in recent years banks have increased their holdings of securities at the expense of their holdings of business loans in response to shortfalls of their capital relative to risk-weighted capital standards and relative to a capital standard that made no explicit allowance for credit risk. We estimated that bank credit fell by about

Did the Federal Reserve’s MBS Purchase Program Lower Mortgage Rates?

4.50 for each

Payment transactions, instruments, and systems: A survey

1 that a banks capital fell short of the unweighted capital standard. Banks that had less capital than required by the risk-weighted standard appear to have shifted away from assets with low risk weights (securities and single-family mortgages) and to have shifted toward assets with higher risk weights (commercial real estate and commercial and industrial loans). When we included both shortfall variables in a regression, shortfalls relative to the unweighted capital standard significantly affected bank credit, while shortfalls of capital relative to the risk-weighted standard did not. We found no significant effects of capital shortfalls at other, local-competitor banks on bank portfolios. Delinquencies in a given category of a banks loans generally had significantly negative effects on that banks holdings of loans in that category. In contrast, banks tended to increase holdings of loans in categories in which local-competitor banks were experiencing higher delinquency rates. Copyright American Real Estate and Urban Economics Association.

The efficiency of the Federal Reserve in providing check processing services

On November 25, 2008, the Federal Reserve announced it would purchase mortgage-backed securities (MBS). This program affected mortgage rates through three channels: (1) improved market functioning in both primary and secondary mortgage markets, (2) clearer government backing for Fannie Mae and Freddie Mac, and (3) anticipation of portfolio rebalancing effects. We use empirical pricing models for MBS yields and for mortgage rates to measure relative importance of channels: The first two were important during the height of the financial crisis, but the effects of the third depended on market conditions. Overall, the program put significant downward pressure on mortgage rates.

Cost reductions in electronic payments: The roles of consolidation, economies of scale, and technical change

The payments literature ranges from theoretical general equilibrium models to practical payment issues related to the day-to-day operation of various national networks for the transfer of money. It is an area where economic theory and institutional structure are often closely intertwined and it is currently undergoing significant change, shifting from costly paper-based systems to technologically advanced electronic payments. The extant literature is surveyed here with the aim of integrating the various strands of payment research which have been largely pursued separately. In addition, we present newly available data to illustrate and investigate a number of underdeveloped areas in this literature. ” 1998 Elsevier Science B.V. All rights reserved.

A Framework for Analyzing Efficiency, Risks, Costs, and Innovations in the Payments System

Abstract We examine the efficiency and productivity of check processing offices of the Federal Reserve System using a variety of frontier estimation techniques. Although there is broad agreement among the techniques about the relative efficiency rankings of offices, the average level of efficiency varies considerably depending on the technique chosen. Similar to other studies of financial services, we find that measured cost inefficiency (deviations from the frontier) dominates scale inefficiency. We find no evidence of significant technological progress over the main sample period.