Analyzing Bank Efficiency: Are “Too-Big-to-Fail” Banks Efficient?

Inanoglu, Hulusi; Jacobs, Michael; Liu, Junrong; Sickles, Robin C.

doi:10.1007/978-1-137-49449-8_5

Cited by 8 publications

(7 citation statements)

References 40 publications

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“…where ln R −1 (C F it ) ≥ 0 captures the inefficiency from managerial slack, u it ≥ 0 accounts for technical and allocative inefficiency as in the stochastic frontier literature, and it and v it are the usual idiosyncratic noise terms. Input allocations are assumed to be optimal such that banks only have technical inefficiency, an assumption supported by findings in Inanoglu et al (2016) and Al-Sharkas et al (2008). Output prices are bank-specific since bank prices are not regulated, and banks can charge different interest rates on their products depending on their local markets.…”

Section: Structural Modelmentioning

confidence: 99%

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The agency problem revisited: a structural analysis of managerial productivity and CEO compensation in large US commercial banks

Sickles

2020

Empir Econ

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The paper analyzes performance, incentives, and the inefficiencies that may arise due to agency problems and market power using a newly developed panel of large US commercial banks that have too-big-to-fail nature. We use a structural model to characterize managerial efficiency, which complements technical efficiency in standard stochastic frontier models. We incorporate managerial decisions, bank-specific characteristics, and market competition in deriving managerial efficiency. Data on the 50 largest commercial banks in the USA during 2000 and 2017 are collected from the Call Reports and are matched with CEO compensation from S&P's ExecuComp database. The paper connects empirical evidence with economic theory and contributes to the literature on efficiency and management. The ultimate goal is to better understand the linkages among managerial performance, CEO compensation, and the size and scope of bank operations. Current results point to robust empirical findings. Economies of scale have steadily declined throughout the period and are not positively related to managerial performance and CEO compensation. The size of a bank does not seem to be justified by the evidence in that larger banks offer larger bonuses and tend to have lower managerial efficiency and diminishing scale economies.

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Section: Structural Modelmentioning

confidence: 99%

“…However, both the user cost and value-added approaches encounter measurement difficulties and require detailed data on transactions hard to obtain. The asset approach is more consistent with the banking data (Adams et al 1999) Inanoglu et al 2016). Therefore, we adopt the asset approach to define inputs and outputs.…”

Section: Datamentioning

confidence: 99%

The agency problem revisited: a structural analysis of managerial productivity and CEO compensation in large US commercial banks

Sickles

2020

Empir Econ

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“…This, in turn, may reduce incentives to innovate and lead to inefficient resource allocation on the firm level when banks dedicate resources to grow beyond their optimal size and operate in a cost-inefficient manner (STERN and FELDMAN, 2004;VÖLZ and WEDOW, 2011). Both is undesirable from a macroeconomic perspective because innovative capacity is a major source for economic growth and inefficient resource allocation also occurs on the macrolevel: if creditors of banks trust in government protection, they will allocate disproportionately high resources to the banking sector, which leads to inefficient growth and becomes a potential source of financial instability (INANOGLU et al, 2015;KNOT and VAN VOORDEN, 2013). This instability is long-lasting due to the absence of incentives to put inefficient banks out of the market (POP and POP, 2009).…”

Section: Too Big To Fail and Related Problemsmentioning

confidence: 99%

The Contribution of Large Banking Institutions to Systemic Risk: What Do We Know? A Literature Review

Moch

2018

Review of Economics

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Against the background of the global financial crisis, we review recent literature on the debate about “too big to fail”. This is (still) one of the key issues in banking literature since it determines the conditions for adequate banking regulation, financial stability and economic welfare. Analyzing 30 papers from 2009 to 2017, our work focusses on the impact of large banks on systemic risk. Large financial institutions can affect systemic risk by either contributing to systemic risk or being extremely exposed to sources of systematic risk and contagion. We find a considerable number of theoretical and empirical studies providing evidence that against the background of the constitution of present-day real financial systems, bank size is a key predictor for systemic risk and that the largest banks disproportionately contribute to overall risk. This relationship is found in samples of different composition, for various periods and with different measures covering diverse aspects of systemic risk.

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“…We consider only 40 of these banks due to missing observations and other data anomalies. The empirical model is borrowed from Inanoglu et al (2015), who use a suite of econometric specifications, including time-invariant panel data models, time-variant models, and quantile regression methods, to examine issues of "too big to fail" in the banking industry. In our illustration of the new Bayesian estimators, we will only compare the results across the different time-varying stochastic frontier panel estimators we discussed in the last section, along with modifications in the Bayesian estimators, to deal with potential issues of endogeneity.…”

Section: Empirical Modelsmentioning

confidence: 99%

Bayesian Treatments for Panel Data Stochastic Frontier Models with Time Varying Heterogeneity

2017

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Analyzing Bank Efficiency: Are “Too-Big-to-Fail” Banks Efficient?

Cited by 8 publications

References 40 publications

The agency problem revisited: a structural analysis of managerial productivity and CEO compensation in large US commercial banks

The agency problem revisited: a structural analysis of managerial productivity and CEO compensation in large US commercial banks

The Contribution of Large Banking Institutions to Systemic Risk: What Do We Know? A Literature Review

Bayesian Treatments for Panel Data Stochastic Frontier Models with Time Varying Heterogeneity

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