Affiliated Bank Performance and the Simultaneity of Financial Decision‐Making

Abstract

The remarkable growth of bank holding companies (BHCs) during the last decade has aroused a great deal of interest and controversy among academic economists and bank regulators. One of the important issues discussed has been the impact of holding company affiliation on the operating performance of the acquired banks. Subsequent empirical testing of the question has produced a wide array of results. Nevertheless, a recent survey of the literature by the staff of the Federal Reserve Board [18] concluded that while not entirely unambiguous, the findings are “relatively consistent and conclusive.” Such a sweeping generalization seems premature at best. In a recent issue of this Journal [4], we proposed an empirical model designed to test the interdependency between financial decision‐making and bank performance. The purpose of this note is to examine the implications of that investigation for the BHC performance issue. The impact of affiliation on bank performance has been analyzed in several different ways; however, no study has considered the important theoretical and statistical implications of the simultaneity question.

Operating Performance and Merger Benefits: The Savings and Loan Experience

“…The bank studies utilized several univariate [17,18,28,291 and multivariate tests [9,14,16,19,301 to examine financial and operating ratios. Most profitability studies cited found no significant tendency toward higher profit or higher growth rates for merged banks and BHCs.…”

“…Loan portfolio composition also differs between merged and independent banks. Merged banks have a larger proportion of business loans [ 14,26,281 (although another study indicates the reverse [19]). Real estate loans [19,26,281 are used more extensively by merging banks.…”

“…Overall, lending and liquidity policies of merged banks and BHCs are characterized as more aggressive, and riskiness embodied in the asset structure of merged banks is reported as slightly higher than that of independent banks. Also, capital structures of merged banks, as indicated by the total capital to total assets ratio [19, 261, are lower as BHC affiliates exhibit more leverage than do independent banks [14].…”