Jeffrey A. Clark

X-Efficiency in Banking: Looking beyond the Balance Sheet

The distribution free and stochastic frontier estimation methods are used to derive bank specific measures of cost and profit Xefficiency. This is done to investigate the importance of including aggregate measures of off-balance-sheet (OBS) activities. The results indicate that economic cost and production cost X-efficiency estimates increase with the inclusion of the OBS measure. Profit Xefficiency estimates are largely unaffected. Further, the composition of banksÕ OBS activities appears to help explain interbank differences in cost and profit X-efficiency estimates, whereas bank size and the mix between on- and off-balance-sheet banking activities are largely uncorrelated with the X-efficiency estimates.

Economic Cost, Scale Efficiency, and Competitive Viability in Banking

This paper addresses the issue of the competitive viability of banks of different scales and scopes of operation and the implications that this may have for the evolving structure of the banking and financial services industry. Unlike previous papers, this paper is the first to include both production and opportunity costs in an empirical evaluation of bank efficiency. No consistent evidence is reported to suggest that banking organizations can achieve further gains in either production or economic efficiency by expanding beyond

Estimation of Economies of Scale in Banking Using a Generalized Functional Form

2 billion dollars of total assets. Thus it is likely that smaller, less diversified banking organizations will remain competitively viable. Copyright 1996 by Ohio State University Press.

Off-site monitoring systems for predicting bank underperformance: a comparison of neural networks, discriminant analysis, and professional human judgment

THIS PAPER ADDRESSES four issues that arise in the estimation of economies of scale in the commercial banking industry. First, a common assumption underlying many of the studies of economies of scale in banking is the assumption of a Cobb-Douglas production function with exogenous input prices. The use of a Cobb-Douglas production function facilitates the estimation of the output elasticity of cost. However, there does not appear to be any other reason, a priori, for such an assumption. This paper utilizes a Box-Cox (hereafter B-C) generalized functional form methodology to directly test the assumption of an underlying Cobb-Douglas production function. Second, if the assumption of a Cobb-Douglas production function is inappropriate as a description of the production process of the financial firm, estimates of the output elasticity may be biased. The sensitivity of the estimates of this elasticity to the choice of functional form can also be examined through the use of a generalized functional form methodology. Third, no general consensus has been reached regarding the appropriate definition of bank output. Thus, a diversity of measures of bank output have been employed in previous estimates of economies of scale in banking. The sensitivity of the estimated output elasticity of cost to the selection of several alternative measures of output is examined through the use of the generalized functional form methodology. Finally, the B-C estimates of the cost function for commercial banks can be used

Single-equation, multiple-regression methodology: Is it an appropriate methodology for the estimation of the structure-performance relationship in banking?

This study compares the ability of discriminant analysis, neural networks, and professional human judgment methodologies in predicting commercial bank underperformance. Experience from the banking crisis of the 1980s and early 1990s suggest that improved prediction models are needed for helping prevent bank failures and promoting economic stability. Our research seeks to address this issue by exploring new prediction model techniques and comparing them to existing approaches. When comparing the predictive ability of all three models, the neural network model shows slightly better predictive ability than that of the regulators. Both the neural network model and regulators significantly outperform the benchmark discriminant analysis models accuracy. These findings suggest that neural networks show promise as an off-site surveillance methodology. Factoring in the relative costs of the different types of misclassifications from each model also indicates that neural network models are better predictors, particularly when weighting Type I errors more heavily. Further research with neural networks in this field should yield workable models that greatly enhance the ability of regulators and bankers to identify and address weaknesses in banks before they approach failure. Copyright

The economic effects of client losses on OTC bank derivative dealers: evidence from the capital market

Abstract Tests of the structure-performance paradigm of the industrial organization literature have been carried out almost exclusively using a single-equation, multiple-regression methodology. The purpose of this paper is to suggest that where the firms being considered are multiple product in nature and may pursue objectives in addition to maximizing the value of the firm, such a methodology may be inappropriate. The results presented in this paper suggest that the absence of a consistently strong, positive, and statistically significant relationship between market concentration and bank profitability may be traced in part to such an inappropriate methodology.

The Market Valuation of Bank Shares: With Implications for the Value Additivity Principle

This paper investigates the economic impact of client derivatives losses on OTC derivatives dealers. Its focus is on the capital marketers reaction to losses suffered by four end-users of OTC derivatives products arranged with Bankers Trust New York. Evidence is provided on the impact of these end-user losses on Bankers Trust itself as well as whether these losses produced any systemic or contagion effects extending to other major bank OTC derivatives dealers. Finally, the paper investigates whether possible systemic effects may be associated with bank specific characteristics, such as the level of derivatives exposure, counterparty risk, and reliance on trading income. Copyright 1996 by Ohio State University Press.

Compensating balance requirements and the firm's demand for transactions balances

This paper examines the capital markets pricing of cash flow producing activities of U.S. banks. A multiple regression methodology is used in conjunction with an extensive, cross section-time series data set spanning the years 1974 through 1991. This data set and methodology provide the basis for a unique test of the value additivity principle as well as insight into how banks have responded to the changing technological, competitive and regulatory environments. Overall the results support the value additivity principle until 1983. However, statistically significant deviations from the value additivity principle are identified across all subgroups beginning in 1984. Important product innovations, changing technology, and regulatory and competitive changes appear to have provided banks with greater opportunities and incentives for the expansion and linkage of cash flow producing activities.

Rethinking Bank Efficiency and Regulation: How Off-Balance Sheet Activities Make a Difference

Previous analyses of the conditions for the rationality of the use of compensating balance requirements have been stated in terms of the relationship between the firms normal transactions balance and the required compensating balance. However, these papers fail to recognize the interdependence between the required compensating balance and the firms optimum transactions balance. Our paper incorporates a required compensating balance into the control limits model of Miller and Orr (1966). Our results demonstrate that the average level of transactions balances and the expected opportunity cost of maintaining these balances are non-decreasing functions of the required compensating balance, thus strengthening the case against their rationality.