Table 1 - uploaded by Scott E. Hein
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To the public, all banks seem alike. But banking insiders make important distinctions between community banks and all other banks. Policymakers worry that community banks’ unique characteristics threaten their survival in the face of industry consolidation. However, despite dramatic regulatory and technological changes in the industry in the past t...
Context in source publication
Context 1
... distinction might also explain why some bankers anticipate great benefits from consolidation while others spend considerable energy and resources starting up de novo banks. The data in Table 1 indicate that, during the merger mania of the late 1990s, the relationship between mergers and de novo formations has been fairly steady, averaging about three mergers for every start-up bank over the last seven years. We contend that larger banks, especially those more interested in mergers, are likely focused relatively more on transactional banking and that smaller banks, such as de novo banks, are likely focused relatively more on relationship banking. ...
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Citations
... Another concern is whether sector consolidation will reduce the availability of credit to small businesses (for recent research on this subject see for example Minton et al., 2024). Some factors, such as the concentration of risk in lending, weigh against the sustainability of community banks (see, for example, the review in Hein et al., 2005). The size of community banks arguably prevents them from sufficiently diversifying their credit risks. ...
... Some researchers (Hein et al., 2005) indicate that community banks are likely to enjoy relatively higher net interest margins (NIMs) as their customers are willing to accept higher interest rates due to specialised loan terms and their depositors are ready to take lower interest rates (particularly due to the personal approach). Moreover, large banks that rely on the transactional approach may have lower profit margins as a proportionally larger share of their assets is valued as commodities. ...
... Relationship banking, unlike transactional banking, which is standardized, concentrates on soft information, including community standing, personal relationships, and weak ties (e.g., friend of a friend). Although a precise definition of soft information is not available, Scott (2004) underlined its qualitative nature, and Hein et al. (2005) emphasized that relationship banking is based on human input. Only by working one on one can a bank acquire soft information. ...
... Therefore, contrary to economic theory, we propose that individuals are not atomized; rather, their behaviors are shaped by social circumstances. Hein et al. (2005) provided an example of how community banks embed themselves in the local economy. ...
... decrease in total bank lending. These findings persist after controlling for time-invariant and time-varying bank characteristics such as deposits, 4 The banking literature characterizes smaller community banks as relationship-based, using more heterogeneous soft information for lending compared to larger transactional banks (Berger, Miller, Petersen, Rajan, and Stein, 2005;Hein, Koch, and MacDonald, 2005;Berger and Udell, 2006;Stein, 2002;Liberti and Mian, 2009;Canales and Nanda, 2012;Kysucky and Norden, 2015). Relationship lending spreads are also anti-cyclical compared to transactional lending (Bolton, Freixas, Gambacorta, and Mistrulli, 2016). ...
When the Federal Reserve first paid interest on excess reserves (IOER) on October 2008, banks faced a choice to earn a "better than" risk-free rate, or lend to earn a higher, riskier rate. Evidence suggests the "reserves-lending puzzle" is not driven by endogeneity from reverse causality, flight to safety, or increased Treasury supply, but by the introduction of the "reserve premium" (IOER-3MT), which is associated with a reduction of domestic bank-level lending by -5.1% (-$420.2B). Findings suggest the reserves channel can aid in restricting inflation. Additionally, recent Senior Financial Officer Surveys corroborate the conclusions presented in this paper.
... In a study that examines the comparative advantages of banks based on size, Carter et al. (2004) provide evidence that small banks have an informational advantage in evaluating credit. In another study, Hein et al. (2005) report that whereas larger banks concentrate on transactional banking, smaller banks focus on relationship banking. They report that in all but the smallest category, community banks have performed as well as if not better than their larger counterparts. ...
We compare the post-financial crisis of 2007-2009 performance of U.S. banks based on bank sizes using financial ratios with their performance before the financial crisis. We find bank performance declined in the post-financial crisis period as compared with their pre-financial crisis performance, evidenced by reduced ROE and ROA, higher debt ratios, lower net interest margin, increased net loan losses, more nonperforming loans, and to a lesser extent their estimated losses on loans. In the difference-in-differences tests between the largest and smallest groups, we find the biggest banks report significantly higher ROA, lower debt ratio, in addition to outperforming small banks in net interest margin and loan loss reserves. Smaller banks did better only in net loan losses. Our results are controlled for general economic conditions and interest rate changes. We conclude that small banks have a significant disadvantage in the industry in the post-financial crisis era compared with both big banks and their own pre-financial crisis historical performance.
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... The community banking sample enabled us to access an industry with newfound competitive vigor. Deregulatory measures in the 1980 and 1990s transformed community banking into a far more competitive industry where leaders have significant competitive discretion (DeYoung et al., 2004;Hein et al., 2005). Major regional and national banks also entered markets previously dominated by community banks, increasing the competitive rivalry. ...
... For changes in market share, the study calculated the percentage change in a bank's deposits and loans from December 2005 to December 2007. Levels of deposits and loans are an indication of market share and future profitability in banking (Hein et al., 2005;Nagar and Rajan 2005). Six banks in the sample had been formed since 2005 making their change-in-market-share data unavailable. ...
... Control Variables. A dummy variable for Subchapter S banks controlled for their lower tax obligations and higher profits (Hein et al., 2005). Dummy variables for Oklahoma and New Mexico controlled for geographic effects. ...
Purpose
The purpose of this paper is to develop and empirically test a conceptualization of competitive aggressiveness (CA), a dimension of entrepreneurial orientation.
Design/methodology/approach
Structural equation modeling and hierarchical regression are employed on responses from 182 banks in the southwestern US Performance data on the banks are drawn from the US Federal Deposit Insurance Corporation's (FDIC's) Call reports.
Findings
The results indicate awareness, motivation and capability are antecedents of CA, which itself is positively related to increased market share and, in more dense markets, profitability.
Practical implications
Aggressive firms exhibit certain routines that can lead to competitive actions, which assists performance in some contexts. Managers who wish to increase (or decrease) their firms' overall competitive posture can encourage (or discourage) employees from performing competitive routines such as monitoring their rivals or talking about their rivals' strategies.
Originality/value
By developing CA' conceptualization, the study advances the understanding of the antecedents of competitive behavior and makes it easier to study competition in smaller firms.
... Second, we highlight how the DFA deposit insurance reform affects community banks differently than noncommunity banks and add to the previously documented differences between the two types of banks. Hein et al. [35] provide an in depth analysis of the uniqueness of community banks. In brief, the authors document that community banks generally do not rely heavily on non-interest income, maintain higher capital levels, are more likely to organize as Subchapter S corporations, and rely more heavily on relationship lending. ...
A seldom discussed part of the 2010 Dodd–Frank Act (DFA) is how the deposit insurance assessment alteration impacted different types of banks. We provide details of the reform and investigate the effects on the banking industry. The DFA called for an expansion of the assessment base used to determine deposit insurance fees, along with a simultaneous reduction in assessment rates, so as to not raise additional fees paid. This reform did not affect all banks the same as a result of very different business models. The reform was aimed to benefit community banks at the expense of non-community banks. We estimate that community banks in the aggregate benefitted by more than $3.7 billion in deposit insurance fee reductions since the reform’s implementation in 2011. While non-community banks initially experienced increased fees, offsetting the benefits to community banks, we find evidence that non-community banks in the aggregate adjusted their funding behavior so that all but the largest banks also enjoyed benefits from the reform during our sample period.
... Capital structure strategy also uniquely affects small community banks. Deposits are perceived as a central component of the traditional community banking model (Duke 2012;Hein et al. 2005;Rice and Rose 2016) and are essential to managing bank failure risk (Antoniades 2015). The stability of annual income associated with steady inflows of deposits, instead of interest income, is appealing for community banks operating in nonmetro (rural) areas with limited prospect of growth (Hein et al. 2005). ...
... Deposits are perceived as a central component of the traditional community banking model (Duke 2012;Hein et al. 2005;Rice and Rose 2016) and are essential to managing bank failure risk (Antoniades 2015). The stability of annual income associated with steady inflows of deposits, instead of interest income, is appealing for community banks operating in nonmetro (rural) areas with limited prospect of growth (Hein et al. 2005). Nevertheless, bank size is associated with the reliance on deposits for funding, with the smallest and largest banks operating in unique niches for deposit demand (Wang 2015). ...
... Community banks also provide more services than the placement (moving) of deposits to borrowers. Instead, relationships with borrowers are accompanied by accounting and other customer based services (Hein et al. 2005).The largest banks attract deposits by virtue of offering leading technologies and security features desired by customers (Marinč 2013), however community banks are adopting technology based fund acquisition applications and observing corresponding changes in demand for deposit products (DeYoung et al. 2007). ...
Community banks have historically been important sources of intermediary services. Changes in regulation and intermediation technologies have affected the efficiency with which these firms can perform these services. Relatively small community banks, those with assets of 10 billion or less, we measure the x-efficiency of all community banks and compare the results of small and all other community banks since 2010. We test for the importance of internal and external determinants of efficiency. We observe that declines in product provision are related to specific determinants of declining x-efficiency in small community banks. The results indicate limited assets or customer growth rates experienced by small community banks, coupled with a declining population in community bank trade areas, do not support improvements in x-efficiency through expanded intermediation activity. Small asset community bank managers will need to strategically deploy products that allow the customer relationship to be enhanced and sustained, using customer affiliations that cannot be easily adopted by larger competitors.
... 25 Banking literature consistently regards small banks as characterized by relationship lending and using soft information to a greater degree than larger banks. (Hein, Koch, and MacDonald (2005); Berger and Udell (2006); Stein (2002); Berger, Miller, Petersen, Rajan, and Stein (2005); Liberti and Mian (2009);Canales and Nanda (2012); Kysucky and Norden (2015) ) loans with hard quantitative information. ...
... Our timing was fortuitous, as our survey captured bankers' perspectives near the end of an aggressive cycle in community banking and prior to a serious economic downturn. De-regulatory measures enacted in the 1980s and 1990s triggered a sea change in banking (DeYoung et al. 2004;Hein et al. 2005;McNamara et al. 2003). The banking industry consolidated, with regional and national banks often buying existing community banks to enter new markets. ...
The Entrepreneurial Orientation (EO) research stream is quite popular in investigating how companies act entrepreneurially and how EO relates to issues such as financial performance, innovation, and founder satisfaction. Part of EO’s popularity may be that it is measured using simple, widely-accepted items. Yet the idea of how to best measure EO has become a recent topic of debate. Part of that debate is that the items measure dispositions as much as behaviors and are self-reported, which means they are somewhat subjective. This paper investigates the relationship between subjectively-measured EO and actual entrepreneurial behavior as measured through objective data. To do so, the paper examines the relationship between EO dimensions and realized risk-taking behavior. Using a sample of 156 community banks headquartered in the southwestern United States, the paper uses banks’ risk-weighted asset ratio, which captures the riskiness of the bank’s portfolio, as a measure of sustained entrepreneurial behavior. The analysis finds that subjectively-measured EO risk-taking is strongly related to objectively-measured realized bank risk-taking. There was not a significant direct relationship with the other EO dimensions, though there was some evidence of a moderated relationship. The paper lends some credibility to current EO measures and suggests how additional research is needed to improve upon EO’s measurement.
... While all banks may strive for these two goals, the degree of importance they attach to each goal differs among banks and across various categories of the bank (Bergendhal & Lindblom, 2008;Grigorian & Manole, 2006). In general, poverty-focused banks, by the very nature of their clients, tend to underline the development services before allowing their clients to access financial services (Ajagbe et al., 2007;Hein et al., 2005). Consistent with the development focus, the two strands of literature have emerged attempting to expound theoretical evolution of ijef.ccsenet.org ...
... Therefore, CBs have emerged to fill this gap by providing development with flexible regulated banking services to this group of clients. The other strand accounts for the emergency of CBs on the quest for reliable and permanent financial services that would facilitate the realization of local economic pride (Lalika, 2006;Hein et al., 2005). This perspective corresponds with the view that CBs symbolize patriotic interests and stand as icons of the indigenous people's efforts for financial independence to curb capital flight. ...
... Because of their perspective, they may be thought to be more oriented to safeguarding local interests than traditional commercial banks. They do focus on maximizing customer value even though they have to generate profit as well in order to grow and become sustainable (Filbeck et al., 2010;Lalika, 2006;Hein et al., 2005). Because of their special focus, CBs have emerged nearly all over the world along with the other large banks to cater for the regulated financial needs of the financially excluded people. ...
Efficient utilization of resources is critical for effective performance of banks. This paper measured efficiency of community banks in Tanzania and compares performance between two community banks’ categories during 2002-2014. Efficiency was estimated using Data Envelopment Analysis (DEA) approach while the independent samples t-test was applied on means of efficiency to compare performance between the banks’ categories. The paper establishes that, most community banks were inefficient, suggesting that there was effect of unnecessary additional costs on the banks performance. Despite the general poor performance, community banks in Tanzania were generally operating at a decreasing part of the average cost curve, which granted an opportunity for expansion and exploitation of scale economies. The paper further establishes that efficiency of respective categories of community banks did not differ significantly; implying that the bank type did not matter as regards efficiency issue. The policy implications are; community banks should effectively manage their cost structure in order to improve performance, and a separate regulatory framework should be applied to community banks to take care of their uniqueness.
