Transcript A Look at Banking Deregulation and its Effects on the U.S.

A Look at Banking
Deregulation and its Effects on
the U.S. Macroeconomy
Kyle Myers
June 17, 2004
Objectives
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Provide samples of common arguments for and
against Deregulation
Examine literature on Deregulation as it pertains
to effect on the macroeconomy
Attempt to quantify the relationship between
deregulation and the economy
Weigh arguments for and against regulation
Propose final recommendations
Arguments Against Deregulation
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Smaller banks are more profitable and efficient
Small business loans will decline
“Too Big to Fail” Status
Arguments For Deregulation
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Economies of Scale
Global Competition
Increased Diversification
Increases Competition
Literature Review
Boyd & Graham (1991) – “Investigating the Banking
Consolidation Trend”
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Offer arguments against economies of scale reasoning for
consolidation
Point out data that shows economies of scale reached when a
banks total deposits equal $100 million
3,000 banks in 1988 had deposits in that range
Provide data showing that from 1972 to 1990 larger banks have:
Lower ROA (net income as a % of total assets)
o Lower ROE (net income as a % of equity capital)
o Less Financial leverage (equity capital as a % of total assets)
…than smaller banks
o
Literature Review
Famulla (1999) – “Insights Into Accenture’s
Financial Services Consumer Index”
Contains data from 1995-98 showing measures of revenue and
profit for different bank sizes
 Shows that medium sized banks bring in more revenue per
customer and earn larger profits per customer than larger banks.
Bank Size Definitions
 Super large banks (more than $80 billion in assets)
 Large banks ($35 - $80 billion in assets)
 Medium banks ($10 - $35 billion in assets)
 Small banks (less than $10 billion in assets)
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Literature Review
Kwan (1997) – “Efficiency of U.S. Banking
Systems”
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Contends that optimal size of large banks is well below
that of today's megabanks.
Points out that “…that finding may be obsolete given
the dynamics of the banking industry. With significant
regulatory changes, rapid technological breakthroughs,
and constant product innovations, the right size for
yesterday's environment may no longer be optimal
today, much less for the future.”
Literature Review
Evanoff and Örs (2002) – “Local Market
Consolidation and Bank Productive Efficiency”
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Performed study that measures bank efficiency
before and after a merger takes place in a certain
region.
Finding was that efficiency increases though not
necessarily at the bank that was acquired.
Literature Review
Horwitz and Selgin (1987) – “Interstate
Banking: The Reform That Won’t Go Away”
 Predict that interstate mergers will lead to
diversification, inter-bank funds movement, and
reduced bank failures.
Literature Review
Strahan (2002) – “The Real Effects of U.S. Banking
Deregulation”
 Attempts to tie the economic effects of deregulation
into the macroeconomy by measuring state growth ,
entrepreneurial activity, and business cycle stability.
 Found positive effect on state growth rates and
entrepreneurial activity
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Growth rates went up .5%-1.0% from 1980-1992
Increase in corporation formation per capita of 9.8% over
same period
Literature Review
Demirgüç-Kunt, Laeven, and Levine (2003) “The
Impact of Bank Regulations, Concentration, and
Institutions on Bank Margins”
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Review impact of deregulation on global scale
Findings are that banking regulations effect bank
incomes across globe
Authors used net income as measure of bank
success which is what I used in my statistical
analysis
Literature Review
Burger and Humphrey (1997) “Efficiency of
Financial Institutions: International Survey and
Directions for Future Research ”
 Found no significant cost savings, on average,
attributed to mergers
 Submit that when banks do become more
profitable after mergers it may be due to product
mix, as opposed to cost efficiencies
Literature Review
Yi-kan, Mason, and Higgins (2001) “Does Bank
Efficiency Change With the Business Cycle ”
 Also support Gilbert’s (1997) arguments that the
entry of large banks into a local area, positively
effect those area bank’s efficiency; in other
words competition is good for efficiency.
 Find that the macroeconomy does have an effect
on banking efficiency
Causality
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In the early Twentieth Century, Joseph Schumpeter
argued that efficient financial systems promote
innovations; hence, better finance leads to faster
growth.
Joan Robinson (1952) believed that the causality was
reversed; economies with good growth prospects
develop institutions to provide the funds necessary to
support those good prospects.
In other words, the economy leads and finance follows.
Tie To Macroeconomy
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Did rate of GDP change after Deregulation?
Is there a relationship between GDP and bank
net income?
Methodology
Strategy
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Establish way to measure relationship between
banking industry profitibility and Macroeconomy
Use net income and GDP respectively as a proxy
for those relationships
Comparative analysis; regulation vs deregulation
era
Findings
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High Correlation (.9478) between Bank Net
Income and GDP
Implies that there is a positive relationship with
respect to movement between GDP and Bank
Net Income
Statistically Significant Difference between pre
and post Deregulation Bank Average Income
Correlation Chart
Correlation Chart: Inflation Adjusted Bank Income vs
GDP
1000
800
600
400
200
0
-200 4
3 941 948 955 962 969 976 983 990 997
9
1
1
1
1
1
1
1
1
1
1
Bank Income in billions
GDP Adjusted to 1934
$
’87 Market
crash
Limits
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Limited by data on commercial banks insured by
FDIC only…may not be representative on entire
banking industry
May be other factors effecting bank profitability
that have nothing to do with Deregulation
efforts
Conclusion
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Deregulation is good for the economy, at least in
the short run
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My Opinion: Many bank regulations that were
in effect protected private interest, not public
Recommendations
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Maintain current regulatory acts regarding
banking
Address “Too Big To Fail” concern through
antitrust that is applicable to all industries
Questions?