Shelagh Heffernan

Cost X-efficiency in China's banking sector

Employing the stochastic frontier approach, this paper investigates cost X-efficiency in Chinas banking sector over the period 1985-2002. The objective is to assess whether different ownership types and banking reforms affect X-efficiency. A two-stage regression model is estimated to identify the significant variables influencing X-efficiency. The results show that on average, banks are operating 50-60% below the X-efficiency frontier. The jointstock banks are found to be more X-efficient than the state-owned commercial banks, and it appears that X-efficiency was higher during the first phase of bank reform.

How do UK Banks React to Changing Central Bank Rates

This paper explores the interest rate transmission mechanism using a broad disaggregated sample of UK deposit and credit products. For a large proportion of rates the adjustment speed is time-varying, switching among four regimes according to the direction of the policy rate and its effect on the disequilibrium gap. In general, this sign asymmetry implies faster adjustment to the long run path when the policy rate revision widens the gap. There is evidence of curvature in the catch-up effect towards equilibrium, namely, large gaps entail a disproportionately faster correction although mainly for deposits. The size of the policy rate change also impacts the adjustment speed. The notable heterogeneity found across financial institutions/products regarding the presence of these nonlinear patterns raises important questions on how to assess the effectiveness of monetary policy. The cross-section heterogeneity uncovered can be explained to some extent by diversification, profit volatility, product range, market concentration and menu costs.

Competition in British retail banking

This article employs British cross-section time-series data to examine the competitive behavior of retail banks in the period 1985–1989. Product offerings are found to consist of both survivor and dominated products over time. In addition, there is evidence of price discrimination being practiced by banks. Individual banks are found to be influential in the setting of interest rates for retail bank products, though there is wide variation across banks and products.

Interest rate transmission in the UK: a comparative analysis across financial firms and products

This paper differentiates itself from the existing literature by testing for heterogeneities in the interest rate transmission mechanism using a large sample of 662 monthly retail rate histories (1993-2004) on seven key deposit and loan products. Error correction models are estimated to analyse the long-run pass-through, the long-run mark-up and the short-run speed of adjustment. The prediction that the official and retail rates move together in the long run is supported by the data. The evidence suggests weak between-product heterogeneity but notable differences were found between financial firms in the way they adjust their rates, which could hinder the achievement of monetary policy objectives. Consumer responses to official rate changes could therefore be more phased and intricate than hitherto believed. Heterogeneity in adjustment is found to be linked to menu costs and key financial ratios under managerial control. Copyright

Financial Innovation in the UK

This study employs a national survey of over 1100 British financial firms to ascertain the determinants of financial innovation and their sales success using the logit and the generalized Tobit models. We find that the likelihood of financial innovation rises with the size of financial firms, employee education, greater expenditure on research and development, the availability of finance and the extent to which firms cooperate with each other. Perceptions of economic risk and innovation costs are also influential. R&D, cooperation and human capital are the main variables driving the success of financial innovation, measured by the percentage share of innovations sold. Firms in London/the south have a significantly greater tendency to innovate, though Scotland also does well. Stock broking, fund management and related activities are more innovative than firms in the financial intermediation and pension/insurance sectors.

UK Bank Services for SMEs: Are they Competitively Priced?Faculty of Finance Working Paper - Revised April-2004

This research examines the pricing behaviour of British financial institutions with respect to key bank products/services offered to small and medium sized enterprises (SMEs) including current accounts, investment accounts, business loans, and mortgages. Using monthly data from March 1996, it is possible to gauge individual firm reactions to changes in a market rate of interest, to identify factors influencing the setting of deposit and loan rates, to rank banks according to whether they offer bargains or rip-offs, and to assess the competitive structure that best describes the UKs SME banking market. There is evidence of a complex oligopoly, with considerable SME inertia. As a result, bargain and rip-off products are found in each market. Some of the key policy recommendations made by the Competition Commission (2002) are reviewed in light of findings from this econometric study. Policies should be directed at combating this inertia - if well informed businesses could switch financial firms and accounts with relative ease, greater competition would be encouraged and the number of rip-off products reduced.

UK Bank Services for SMEs: Are they Competitively Priced?

This research examines the pricing behaviour of UK financial institutions with respect to key bank products or services offered to small and medium sized enterprises (SMEs) including current accounts, investment accounts, business loans, and mortgages. Using monthly data from March 1996, it is possible to gauge individual firm reactions to changes in a market rate of interest, to identify factors influencing the setting of deposit and loan rates, to rank banks according to whether they offer bargains or rip-offs, and to assess the over all competitive structure of SME banking markets. Some of the key policy recommendations made by the Competition Commission (2002) are reviewed in light of findings from this econometric study. There is evidence of a complex oligopoly, with considerable SME inertia. As a result, bargain and rip-off products are found in each market. Policies should be put in place to combat this inertia - if well informed businesses could switch financial firms and accounts with relative ease, greater competition would be encouraged and the number of rip-off products reduced.