Robert DeYoung

Globalization of Financial Institutions: Evidence from Cross-Border Banking Performance

We address the causes, consequences, and implications of the cross-border consolidation of financial institutions by reviewing several hundred studies, providing comparative international data, and estimating cross-border banking efficiency in France, Germany, Spain, the U.K., and the U.S. during the 1990s. We find that, on average, domestic banks have higher profit efficiency than foreign banks. However, banks from at least one country (the U.S.) appear to operate with relatively high efficiency both at home and abroad. If these results continue to hold, they do not preclude successful international expansion by some financial firms, but they do suggest limits to global consolidation.

Product Mix and Earnings Volatility at Commercial Banks: Evidence from a Degree of Leverage Model

We construct a degree-of-total-leverage framework to test whether and how shifts in product mix affect earnings volatility at 472 U.S. commercial banks between 1988 and 1995. Our framework, which accounts for cost and revenue synergies not captured in most previous studies, conceptually links earnings volatility to revenue volatility, expense fixity, and product mix. We find that replacing traditional lending activities with fee-based activities - an ongoing trend that may be strengthened by recent financial modernization - is associated with both higher revenue volatility and higher total leverage, which in this framework implies higher earnings volatility.

The performance of de novo commercial banks: A profit efficiency approach

Abstract We examine the profit efficiency of US banks chartered between 1980 and 1994. Our results suggest that profit efficiency improves rapidly at the typical de novo bank during its first three years of operation, but on average takes about nine years to reach established bank levels. Excess branch capacity, reliance on large deposits, and affiliation with a multibank holding company are associated with low profit efficiency at de novo banks. De novo national banks are initially less profit efficient than are state-chartered de novos, perhaps reflecting differences in the chartering philosophy of federal and state bank regulators.

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.

The Past, Present, and Probable Future for Community Banks

We review how deregulation, technological advance, and increased competitive rivalry have affected the size and health of the U.S. community banking sector and the quality and availability of banking products and services. We then develop a simple theoretical framework for analyzing how these changes have affected the competitive viability of community banks. Empirical evidence presented in this paper is consistent with the models prediction that regulatory and technological change has exposed community banks to intensified competition on the one hand, but on the other hand has left well-managed community banks with a potentially exploitable strategic position in the industry. We also offer an analysis of how the number and distribution of community banks may change in the future.

Youth, adolescence, and maturity of banks: Credit availability to small business in an era of banking consolidation

This paper addresses the relationship between the aging process at new and relatively young banks and the tendency of banks to make loans to small businesses. Defining small business loans as CI and when only MBHC banks are considered, age disappears as a significant influence.

The Information Content of Bank Exam Ratings and Subordinated Debt Prices

Do supervisory examinations of large commercial banking firms produce useful information not already reflected in market prices? To investigate this question, we apply a new research methodology to data on bank exam ratings and the subordinated debt risk spreads of their parent holding companies. We find that government exams do produce new, value-relevant information; that debenture prices do not immediately reflect this information; and that the market prices the likely regulatory actions implied by this information. These results have implications for market versus regulatory discipline at large banking firms, and for proposals to make subordinated debt mandatory for these firms.

Learning by Observing: Information Spillovers in the Execution and Valuation of Commercial Bank M&As

We offer a new explanation for why academic studies typically fail to find value creation in bank mergers. Our conjectures are predicated on the idea that, until recently, large bank acquisitions were a new phenomenon, with no best practices history to inform bank managers or market investors. We hypothesize that merging banks, and investors pricing bank mergers, learn by observing information that spills over from previous bank mergers. We find evidence consistent with these conjectures for 216 M&As of large, publicly traded U.S. commercial banks between 1987 and 1999. Our findings are consistent with semistrong stock market efficiency.

The Performance of Internet-based Business Models: Evidence from the Banking Industry

The initial Internet bank startups tended to underperform branching bank startups. This suggested that Internet-only business models were not economically viable for banks. However, firms that pioneer new business models may benefit substantially from experience as they grow older, and firms that use automated production technologies may benefit from scale effects as they grow larger. Econometric analysis of Internet-only bank startups finds strong evidence of the latter, but not the former, effect. The results suggest that Internet-only banking success depends on attaining sufficient scale and strong management practices.

Technological Progress and the Geographic Expansion of the Banking Industry

We test some predictions about the effects of technological progress on geographic expansion using data on banks in U.S. multibank holding companies over 1985-1998. Specifically, we test whether over time (a) parental control over affiliate banks has increased, and (b) the agency costs associated with distance from the parent have decreased. The data suggest that banking organizations exercise significant control over affiliates that has been increasing over time, and that the agency costs associated with distance have decreased somewhat over time. The findings are consistent with the hypothesis that technological progress has facilitated the geographic expansion of the banking industry.