The efficiency of bank branches Berger, Allen N.; Leusner, John H.; Mingo, John J.
Journal of monetary economics,
09/1997, Letnik:
40, Številka:
1
Journal Article
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An understanding of bank branch efficiency may help resolve a number of conceptual, measurement, and policy questions about efficiency at the bank level. We measure the efficiency of over 760 ...branches of a large U.S. commercial bank. We find that there are about twice as many branches as would minimize costs, but this may be optimal from a profitability standpoint because ‘overbranching’ raises revenues from providing extra customer convenience. X-inefficiencies are quite large, over 20% of operating costs. These findings may help explain some efficiency results commonly found in bank-level analysis, and have important implications regarding bank M&As and interstate branching.
The current regulatory capital standard for banks – the Basle Accord – is a lose/lose proposition. Regulators cannot conclude that a bank with a nominally high regulatory capital ratio has a ...correspondingly low probability of insolvency. On the other hand, because the Accord often levies a capital charge out of proportion to the true economic risk of a position, banks
must engage in “regulatory capital arbitrage” (or exit their low risk business lines). Since such arbitrage is costly, the capital regulations keep banks from maximizing the value of the financial firm. Regulators need to answer three questions: (1) What are the goals of prudential regulation and supervision? (2) How should bank “soundness” be defined and quantified? (3) At what level should a minimum “soundness” standard be set in order to meet the (perhaps conflicting) goals of prudential regulation and supervision? Possible answers to these questions are attempted, then the paper analyzes the two leading proposals for rationalizing the Accord – a “modified-Basle” (or ratings-based) approach and a “full-models” approach.
This paper surveys the current state-of-the-art in credit risk modeling at large U.S. banks. Within this context, the paper examines the near-term feasibility of an internal models approach to ...setting formal regulatory capital requirements for banks, as a replacement for the 1988 Basle Accord. Such an overhaul of the international capital standards would require, in our view, specific attention to several deficiencies in current modeling practices, including questions relating to model specification, parameter estimation, and model validation procedures. The paper also discusses possible uses of internal risk models for setting regulatory capital requirements against
selected credit instruments and/or improving examination guidance dealing with the capital adequacy of large, complex banking organizations.
Most Basel II observers have become well acquainted with the terms "expected losses" (EL) and "unexpected losses" (UL), because the final international rule issued in 2004 contains a capital charge ...for each. In this continuing debate over the EL charge, regulators have said that margins on loans may not be enough to cover EL during a tail event, when many loans will be defaulted and not paying any yields. US regulators made this concern explicit by suggesting, in 2003, that future margin income (FMI) on credit cards could be allowed to offset 75% of the EL capital charge if the bank could show that expected FMI was not only higher than EL but also high enough to cover two standard deviations of historical loss experience. If banks do their job right and price these loans to cover all interest and noninterest expenses, plus expected credit losses, plus a return to economic capital, FMI will indeed cover all of EL.
THE REGRESSION RESULTS SUPPORT PELTSMAN'S CONCLUSION THAT BANKERS TREAT DEPOSIT INSURANCE AS A SUBSTITUTE FOR BANK CAPITAL, AND SUGGEST THAT REGULATORS HAVE MADE NO ATTEMPT TO REDUCE THIS ...'SUBSTITUTION EFFECT'. OTHER FINDINGS SHOW THAT THE LOWER THE RATIO OF ACTUAL CAPITAL TO CAPITAL DESIRED BY THE REGULATORS, THE MORE LIKELY IS THE BANKER TO ADD TO CAPITAL OVER THE NEXT PERIOD TO SATISFY THE DEMANDS OF THE BANK EXAMINER. THE EFFECT OF REGULATORY DEMANDS IS NONLINEAR IN NATURE, AND ITS MAGNITUDE IS QUITE LARGE. THESE RESULTS INDICATE THAT THE LEVEL OF BANK CAPITAL IS NOW GREATER THAN IT WOULD BE IN THE ABSENCE OF BANK CAPITAL REGULATION, AND THE CONSOLIDATION OF THE EXAMINATION FUNCTION INTO A SINGLE AGENCY WOULD NOT APPRECIABLY CHANGE THE IMPACT OF SUCH REGULATION. APPENDIX. REFERENCES.
A model is presented with strong neoclassical micro-economic roots. Profit maximization is assumed to be management's goal with the primary external constraint being the regulator's soundness ...requirement. By solving the model and then determining how the balance sheet would be adjusted in response to a change in regulatory requirements, a first step in analyzing the interrelationship between profits and soundness and the influence of regulation on balance sheet decisions is provided. The means by which a bank increases its soundness depends crucially on the shapes of the supply function for capital, the loan demand function, and the cost of deposits function. As long as banks face imperfect asset and liability markets, the implications of a regulatory move toward generally greater "soundness" go beyond the effects on the safety of the entire system. Both changes in banking structure and in relative bank size are likely to result from a change in regulatory posture.
Many policy makers, including senior regulatory authorities, believe that a cause of the credit cri-sis was that "the risk models didn't work." An array of quantitative models is used to measure ...risk, but not all the models are appropriate for measuring the risk of securitization positions. Securitiza-tions, although not widely understood, are the main reason people are facing their current troubles. A major cause of the securitization bubble and subsequent bust was that investment managers, including the trading desks of some of the country's largest banks, used credit risk models that were not up to the task of allocating capital to particular securitization positions. What people are seeing in the middle of this crisis is quite disturbing. Ratings are still being relied on, even though strong empirical evidence shows that ratings of securitization positions are not sufficient to understand tail risk. Rather, in the current environment, there is a pervading sense that "models don't work" and that such securitization positions "can't be valued."
Early studies on the effect of holding company affiliation on bank performance yield some curious results (see 9, 11, 12). Specifically, these studies did not find that holding company affiliation ...results in changes in capital-asset ratios or bank profitability.
