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Although the banking system appears to be safer' and sounder today than it was two decades ago, new risk challenges have arisen that could not have been anticipated in the 1980s. This article outlines the fundamental structural changes in the U.S. commercial banking industry since then. The author's strategic analysis of the current state of the industry compares the 'transactions banking' business model practiced by large financial companies to the more traditional relationship-based banking business model. In particular, the author focuses on the different production technologies, product mixes, strategic behaviors, and risk-return trade-offs that characterize these two opposite approaches. In closing, the article discusses what these new developments may mean for the industry's ongoing safety and soundness., Bank failures are the most obvious manifestation of an unsafe and unsound banking system. From the early 1980s through the early 1990s, approximately 10 percent of U.S. commercial banks failed, [...]

The initial Internet bank startups tended to underperform branching bank startups. This suggested that Internet-only business models were not economically viable for banks. However, firms that pioneer new business models may benefit substantially from experience as they grow older, and firms that use automated production technologies may benefit from scale effects as they grow larger. Econometric analysis of Internet-only bank startups finds strong evidence of the latter, but not the former, effect. The results suggest that Internet-only banking success depends on attaining sufficient scale and strong management practices.

The work conducted by Lawrence G. Goldberg and Lawrence G. White does not only provide a significant overview on the importance of banks to small business lending, but offer substantial insights on major policy issues, as well. If the assumption that bank age is inversely related to lending capacity, therefore government officials must be discouraged from prohibiting the formation of new banks since small businesses would be deprived of financial resources. Results further imply that further consolidation would eventually decrease the lending capacity of banks.

Allen and Rai's (1996) paper on operational efficiency in banking arrive at two main conclusions which state that the occurrence of input x-inefficiencies are more significant than the existence of output inefficiencies. However, their conclusions which state that the distribution-free (DF) model overestimates the extent of x-inefficiencies when compared to the stochastic cost frontier (SCF) method are erroneous. Comparison of both the DF and the SCF methods using rank order correlation can better assess the two approaches as tests of relative bank efficiency.

Bank mergers have been evaluated to justify whether the traditional market for corporate control story where better performance is subsequently achieved when well-managed banks purchase poorly managed banks is consistent with the pre-and post-merger X-inefficiency pattern in banks. There were 348 mergers approved by the OCC during 1978 and 1988 evaluated, and results were not consistent with the traditional market for corporate control story. The costs of acquiring banks and their targets have been found to be considerably higher than that of their best practices peers.

Empirical evidence indicates that lending to small businesses is negatively correlated with the age and size of banks. This observation can be gleaned from a sample of banks with less than $500 million in assets for the period 1993-1996 and which were 25 years or younger at the time. In addition, small business lending is positively correlated with higher concentration rates in urban areas but negatively correlated with higher concentration in rural areas. These empirical findings suggest that bank consolidation has significant effects on small business lending.

A few short years ago, banking futurists were predicting that Internet banking would completely displace brick-and-mortar banking. But the number of branches in the United States has not decreased, and [...]

I WAS HUNTING WITH MY THREE DOGS WHEN THEY TREED A COON. I SHOT IT OUT OF THREE WITH MY .22 REVOLVER AND SLUNG IT OVER MY SHOULDER. AS I [...]

Payday loans are very expensive forms of credit, and states that permit payday lending typically impose ceilings on loan prices. We test whether and how such constraints influence the pricing behaviour of payday lenders, using data on 35,098 payday loans originated in Colorado between 2000 and 2006. We find that loan prices moved upward toward the legislated price ceiling over time, a pattern that is consistent with implicit collusion facilitated by a pricing focal point. This phenomenon is accompanied by a reduction in competitive rivalry: as average prices approach the ceiling over time, statistical evidence consistent with classical price competition fades, and is replaced by evidence consistent with a variety of strategic pricing.

Almost one in four of the new commercial banks chartered in the United States during the 1980s failed. This study uses a split-population duration model to examine failure patterns and failure determinants for these banks and compares the results to a benchmark model estimated for small established banks. The results are consistent with a “life cycle” pattern of new bank failure: compared to small established banks, newly chartered banks are initially less likely, then substantially more likely, and finally equally likely to fail. These patterns were most extreme for banks chartered just prior to the banking recession of the late 1980s or early 1990s.