Robust, dynamic nonparametric benchmarking: the evolution of cost-productivity and efficiency among U.S. credit unions

This paper develops a new methodology for estimating cost-productivity and efficiency change that benchmarks the performance of individual firms against an estimated a-quantile. We adapt the estimators of Daouia and Simar (2007) and Wheelock and Wilson (2008a) to the estimation of cost efficiency where input prices and some outputs are fixed. Theoretical results demonstrate that our new estimator retains the root-n convergence, asymptotic normality, and other desirable properties of the original estimators. We show how the estimator can be used to construct a cost analog of the widely-used Malmquist productivity index. In addition, we propose a new decomposition of the Malmquist index to reveal the sources of changes in scale efficiency that affect changes in cost-productivity. We examine changes in the efficiency and productivity of U.S. credit unions between 1989 and 2006. We find that productivity increased among the largest 20-percent of credit unions, as well as for credit unions that grew substantially in size during 1989-2006.Credit unions

Trends in the efficiency of Federal Reserve check processing operations

The Monetary Control Act of 1980 requires the Federal Reserve to charge customers for financial services, with the intent of improving the efficiency with which Fed offices deliver those services. Prior studies found little improvement in the efficiency of Fed check processing operations after pricing was implemented in 1982. This article examines the efficiency of Fed check operations using a longer sample period (1980:Q1–2003:Q3) than previous studies and new methods for estimating efficiency. The authors find that the median office became somewhat less efficient when pricing was introduced, but that efficiency improved through the 1990s. Although they find that Fed offices became somewhat less efficient on average after 1999, this might reflect adjustments associated with declining check volumes and implementation of a common operating platform across System offices.Payment systems ; Check collection systems

Consolidation in US banking: which banks engage in mergers?

The number of U.S. commercial banks has declined by some 40 percent since 1984, primarily through mergers of solvent institutions. The relaxation of legal impediments to branching has enabled this consolidation, but specific characteristics of banks that engage in mergers reflect the regulatory process and market structure, as well as the bank's own condition. This paper seeks to quantify the regulatory, market, and financial characteristics that affect the probability of a bank engaging in mergers and the volume of banks it absorbs over time. We examine separately consolidation within holding companies and mergers of independent banks.Bank mergers

Are credit unions too small?

Since 1985, the share of U.S. depository institution assets held by credit unions has nearly doubled, and the average (inflation-adjusted) size of credit unions has increased over 600 percent. We use a non-parametric local-linear estimator to estimate a cost relationship for credit unions and derive estimates of ray-scale and expansion-path scale economies. We employ a dimension-reduction technique to reduce estimation error, and bootstrap methods for inference. We find substantial evidence of increasing returns to scale across the range of sizes observed among credit unions, suggesting that an easing of regulations on credit union membership or activities would lead to further increases in the size of credit unions.Credit unions

Robust nonparametric estimation of efficiency and technical change in U.S. commercial banking

This paper examines the performance of the U.S. commercial banking industry over 1984-2002. Rather than measuring performance relative to the unknown (and difficult-to-estimate) boundary of the production set, performance for a given bank is measured relative to expected maximum output among m banks using no more of each input than the given bank. This approach permits fully non-parametric estimation with vn-consistency avoiding the usual curse of dimensionality that plagues traditional non-parametric efficiency estimators. The resulting estimates are robust with respect to outliers and noise in the data.Banks and banking ; Econometrics

Non-parametric, unconditional quantile estimation for efficiency analysis with an application to Federal Reserve check processing operations

This paper examines the technical efficiency of U.S. Federal Reserve check processing offices over 1980–2003. We extend results from Park et al. (2000) and Daouia and Simar (2007) to develop an unconditional, hyperbolic, a-quantile estimator of efficiency. Our new estimator is fully non-parametric and robust with respect to outliers; when used to estimate distance to quantiles lying close to the full frontier, it is strongly consistent and converges at rate root-n, thus avoiding the curse of dimensionality that plagues data envelopment analysis (DEA) estimators. Our methods could be used by policymakers to compare inefficiency levels across offices or by managers of individual offices to identify peer offices.Check collection systems ; Payment systems

Why do banks disappear? The determinants of U.S. bank failures and acquisitions

This paper examines the determinants of individual bank failures and acquisitions in the United States during 1984-1993. We use bank-specific information suggested by examiner CAMEL-rating categories to estimate competing-risks hazard models with time-varying covariates. We focus especially on the role of management quality, as reflected in alternative measures of x-efficiency and find the inefficiency increases the risk of failure, while reducing the probability of a bank's being acquired. Finally, we show that the closer to insolvency a bank is, as reflected by a low equity-to-assets ratio, the more likely its acquisition.Bank failures

New evidence on returns to scale and product mix among U.S. commercial banks

Numerous studies have found that banks exhaust scale economies at low levels of output, but most are based on the estimation of parametric cost functions which misrepresent bank cost. Here we avoid specification error by using nonparametric kernal regression techniques. We modify measures of scale and product mix economies introduced by Berger et al. (1987) to accommodate the nonparametric estimation approach, and estimate robust confidence intervals to assess the statistical significance of returns to scale. We find that banks experience increasing returns to scale up to approximately $500 million of assets, and essentially constant returns thereafter. We also find that minimum efficient scale has increased since 1985.Banks and banking ; Banks and banking - Costs ; Economies of scale

Evaluating the efficiency of commercial banks: does our view of what banks do matter?

Bank management

Explaining bank failures: deposit insurance, regulation, and efficiency

This paper uses micro-level historical data to examine the causes of bank failure. For state charactered Kansas banks during 19 10-28, time-to-failure is explicitly modeled using a proportional hazards framework. In addition to standard financial ratios, this study includes membership in the voluntary state deposit insurance system and measures of technical efficiency to explain bank failure. The results indicate that deposit insurance system membership increased theprobability of failure and banks which were technically inefficient were more likely to fail than technically efficient banks.Bank failures