Thomas F. Siems

Evaluating the productive efficiency and performance of US commercial banks

Reviews previous research on the efficiency and performance of financial institutions and uses Siems and Barr’s (1998) data envelopment analysis (DEA) model to evaluate the relative productive efficiency of US commercial banks 1984‐1998. Explains the methodology, discusses the input and output measures used and relates bank performance measures to efficiency. Describes the CAMELS rating system used by bank examiners and regulators; and finds that banks with high efficiency scores also have strong CAMELS ratings. Summarizes the other relationship identified and recommends the use of DEA to help analysts and policy makers understand organizations in greater depth, regulators and examiners to develop monitoring tools and banks to benchmark their processes.

An envelopment-analysis approach to measuring the managerial efficiency of banks

The dramatic rise in bank failures over the last decade has led to a search for leading indicators so that costly bailouts might be avoided. While the quality of a banks management is generally acknowledged to be a key contributor to institutional collapse, it is usually excluded from early warning models for lack of a metric. This paper presents a new approach for quantifying a banks managerial efficiency, using a data-envelopment-analysis model that combines multiple inputs and outputs to compute a scalar measure of efficiency and quality. An analysis of 930 banks over a five-year period shows significant differences in management-quality scores between surviving and failing institutions. These differences are detectable long before failure occurs and increase as the failure date approaches. Hence this new metric provides an important, yet previously missing, modelling element for the early identification of troubled banks.

Forecasting Bank Failure: A Non-Parametric Frontier Estimation Approach

The dramatic rise in bank failures over the last decade has led to a search for leading indicators so that costly bailouts might be avoided. While the quality of a banks management is generally acknowledged to be a key contributor to institutional collapse, it is usually excluded from early-warning models for lack of a metric. This paper describes a new approach for quantifying a banks managerial efficiency, using a data- envelopment-analysis model that combines multiple inputs and outputs to compute a scalar measure of efficiency. This new metric captures an elusive, yet crucial, element of institutional success: management quality. New failure-prediction models for detecting a banks troubled status which incorporate this explanatory variable have proven to be robust and accurate, as verified by in-depth empirical evaluations, cost sensitivity analyses, and comparisons with other published approaches

Bank Failure Prediction Using Dea to Measure Management Quality

Presented are new failure-prediction models for detecting a bank’s troubled status up to two years prior to insolvency using publicly available data and a new category of explanatory variable to capture the elusive, yet crucial, element of institutional success: management quality. Quality is assessed using data envelopment analysis (DEA), which views a bank as transforming multiple inputs into multiple outputs, focusing on the primary functions of attracting deposits and making loans. The new models are robust and accurate, as verified by in-depth empirical evaluations, cost sensitivity analyses, and comparisons with other published approaches.

B2b Emarketplace Announcements and Shareholder Wealth

In the business-to-business (B2B) sector, new supply-chain models within electronic marketplaces (eMarketplaces) offer firms significantly lower procurement costs, increased operating efficiencies, and expanded market opportunities. Using event-study methodology to look at the period July 1999-March 2000, Andrew Chen and Thomas Siems find that investors reacted favorably to B2B eMarketplace announcements, with slightly higher abnormal returns associated with vertical than with horizontal eMarketplaces. They also find significant positive abnormal returns for e-commerce technology providers that partnered with computer industry giants or with competitors in B2B e-commerce initiatives. The abnormal returns are more than three times greater than returns from creating a B2B eMarketplace alone or with Old Economy leaders. These results suggest that, at least for the period studied, shareholders valued alliances between B2B eMarketplace developers more than firms developing e-commerce strategies on their own or with an Old Economy partner.

The likelihood and extent of banks' involvement with interest rate derivatives as end users

Based on annual data for medium-sized U.S. commercial banks from 1991 through 1998, we investigate both the decision of whether to participate in interest rate derivatives and, for those banks participating, the extent of their involvement as end users. We find the hedging of balance sheet positions is an important motivation for involvement in derivatives. In addition, the extent of involvement is directly related to a banks capital position. These results pointing to the typical end user as a financially secure bank seeking to hedge unwanted risk argue against the need for any additional restrictions on derivatives activities.

Who Supplied My Cheese? Supply Chain Management in the Global Economy

Today, with an Internet connection and some specialized skills, individuals and companies located in the remotest ends of the earth can compete and collaborate globally. This paradigm shift has occurred as technological forces, the fracturing of political barriers, and a relentless drive for greater efficiencies changed how we work and where we work, ushering in the age of globalization in ways never imagined previously. While many factors can influence macroeconomic variables—including better monetary and fiscal policies, freer trade, and fewer economic shocks—evidence is presented here that better global supply chain management and a more global economy should not be overlooked. On the one hand, these new practices have likely helped to keep inflation lower, reduce economic volatility, strengthen productivity growth, and improve living standards. On the other hand, these new practices cause greater uncertainties and calls for protectionist policies, as outsourcing and offshoring move work to lower cost providers with little regard for geopolitical boundaries.

B2B E-Commerce: Why the New Economy Lives

In an ideal market economy, perfect competition delivers peak performance. For perfect competition to exist, not only are many buyers and sellers needed for each particular good, but perfect information about products (for example, availability, quality and specifications), demand, prices and delivery schedules is also required. As business-to-business (B2B) commerce shifts to the Internet and secure business intranets, better information will move markets closer to the textbook model of perfect competition. By improving the flow, accuracy and timeliness of information, secure Internet-enabled systems provide greater transparency and efficiency at all points along the supply chain. Simply put, the Internet is a continuation of technological improvements that deliver information faster and cheaper, reduce search and transaction costs in online markets and improve the management of transporting and inventorying products. These savings come from both cheaper information (through lower agency and intermediary costs) and cheaper inputs (through increased supplier competition). This article explores how new online marketplaces and supply-chain management practices will change transaction processing and business relationships. As B2B electronic commerce (e-commerce) boosts productivity and reduces costs, the long-run beneficiaries will be consumers.

The wealth effects from a subordinated debt policy: evidence from passage of the Gramm-Leach-Bliley Act

Abstract Using an event study methodology which assumes that returns follow a GARCH (1,1) process, we estimate the wealth effects of a possible subordinated debt policy by examining the stock market reaction to the passage of the Gramm–Leach–Bliley (GLB) Act. A portfolio of banks with relatively high amounts of subordinated debt experienced positive and significant wealth effects associated with passage of the GLB. Portfolios made up of all banks, and those with no subordinated debt experience statistically insignificant wealth effects. We argue that these results suggest that policymakers should consider the use of subordinated debt as a way to enhance market discipline on banks.

Strengthening Globalization's Invisible Hand: What Matters Most?

In this paper, we investigate what matters most to sustaining strong economic growth in todays more globalized, knowledge economy. An examination of 2005-2006 statistical and survey data across 52 countries reveals that economic growth is driven mainly by developed and trustworthy financial markets, a well-educated and skilled workforce, and access to information and communications technologies. Moreover, we find that creditworthy financial markets are strengthened by free and open economies based on the rule of law and legal protections. Our findings support the notion that innovative ideas and entrepreneurship are at the heart of economic growth. However, these ideas need support from institutional policies and practices that create and sustain growth by providing needed protections and a market in which to finance them.