James E. McNulty

The profit efficiency of small US commercial banks

Abstract This study investigates the profit efficiency (PROFEFF) of small banks (those under

Profit efficiency sources and differences among small and large U.S. commercial banks

500 million in total assets) for 1990–96. Assuming that small banks and large banks use the same production technology, we find, consistent with Berger and Mester [J. Bank. Finance 21 (1997) 875], that small banks are more profit efficient than large banks. Small banks in non-metropolitan statistical areas (non-MSA) areas are consistently more profit efficient than small banks in MSAs. Cross-sectional analysis of the correlates of the PROFEFF estimates suggests that structure–performance factors, relationship–development factors, and expense-preference behavior play an important role in explaining the PROFEFF of small US commercial banks.

Small bank loan quality in a deregulated environment: the information advantage hypothesis

Profit efficiency is an econometric financial performance measure of how well actual profitability compares to a best-practice frontier. We compare the profit efficiency of small (under

Two approaches to measuring journal quality: Application to finance journals

100 million in total assets), medium, and large (over

Investment policy, financing policy, and performance characteristics of de novo savings and loan associations☆

1 billion) commercial banks for the period 1995 to 2001 and examine the sources of profit efficiency for each. We also consider whether banks of different sizes attain their profit efficiency in different ways. We find that small and large banks have quite different ways of attaining high profits.

Overbuilding, real estate lending decisions, and the regional economic base

Abstract A number of studies and banking practitioners have questioned the ability of small banks to survive in a deregulated environment. We consider the hypothesis that small community banks actually have an information advantage in evaluating and monitoring loan quality. We call this the information advantage hypothesis (IAH). We evaluate four loan quality measures for a sample of all Florida banks for the period 1986 to 1996. There is no systematic evidence that loan quality is greater at small banks. Both net chargeoffs and loan loss provisions are lower at small banks in non metropolitan areas than at other banks, which is consistent with the IAH. However, other measures of loan quality—nonperforming loans and other real estate owned—are higher at small banks.

Obstacles to Financial Development in Transition Economies: A Literature Survey

We analyze the tendency of a journal to publish articles that eventually become classics in their specialized fields. A simple theoretical model is developed and applied to citation data for finance journals in 1991 and 1992. Of the top ten finance journals, only four are traditional finance journals, and six are economics journals, while none are accounting journals. This illustrates the close synergies between economic research and financial research. In contrast, the linkages between accounting research and financial research are much weaker.

The pricing of interest rate swaps

Abstract This paper develops a simultaneous equation model to investigate the investment policies, financing policies, and risk/return characteristics of de novo thrift institutions. A model to explain state entry rates for de novo institutions is also presented. Entry dates are significantly influenced by investment powers as the numbers of de novo charters are found to be significantly higher in states with the most liberal set of permissible activities. Economic growth and the demand for financial services also contributed to higher entry rates. Utilization of the liberal powers did not, however, contribute positively to returns. Firms with riskier asset portfolios were found to have lower realized returns. Efficiency in operations and strong capitalization were found to be positively associated with higher returns.

Toward a Better Measure of Bank Corporate Governance

The primary purpose of this paper is to evaluate the causes of overbuilding in the context of economic base theory. A second and closely related purpose is to determine if the economic base multiplier effect is stronger in the long run. Construction decisions depend on the strength of the local economy. Since basic activity is highly cyclical, if there are significant lags in the multiplier process running from basic to nonbasic sectors, then growth in non-basic employment will continue when the basic sector slows or declines. Hence, overbuilding may be, in part, a result of false signals about future growth in the local economy to builders, developers and lenders at the time a project is conceived. In addition, one of the important sources of the lags in the multiplier process is the construction sector. Potential solutions to overbuilding are discussed in an economic base context. The implications for bank regulation, bank lending and feasibility analysis are discussed.

Do Small Banks Have an Advantage in Lending? An Examination of Small Business Lending Performance for Large and Small Banks

This survey of approximately 70 studies considers five causes of weak financial system development in transition economies. These are: problem loans and inadequate capital; the absence of a credit culture, giving rise to perverse incentives to continue to make bad loans; inadequate regulatory systems; deposit insurance; and weak legal systems. There results a perverse feedback loop across the various problem areas that constrains the development of solutions. Policy recommendations include a focus on basic contract law as a way to break the perverse feedback loop.