Monograph: The Productive Efficiency of North Carolina Commercial Banks

University of North Carolina at Chapel Hill, Graduate School of Business Administration, Research Paper 21, February 1975, 114 pp.

Posted: 11 May 2015 Last revised: 11 Aug 2015

See all articles by John A. Haslem

John A. Haslem

University of Maryland - Robert H. Smith School of Business; University of Maryland - Robert H. Smith School of Business

William Longbrake

Independent

Date Written: May 14, 2015

Abstract

This study indicates that most of North Carolina's forty-two unit banks have lower operating costs for demand deposits, time deposits, installment loans, administration, and occupancy than if they were operated as offices of branch banks. However, most of the unit banks have higher costs business loans, real estate loans, and securities and investments. These three functions are more easily centralized in branch banks than are the functions where unit banks possess a cost advantage. It appears that costs of coordinating activities which cannot be centralized easily overwhelm any cost advantage that might be realized by branch banks because of the greater overall size.

Analysis of seventy-four of North Carolina's branch banks indices that the average-sized office of most branch banks is less efficient for demand deposits, time deposits, installment loans, administration, and occupancy and more efficient for business loans, real estate loans, and securities and investments than if it were operated as an independent bank. These results are completely consistent with findings for North Carolina's unit banks.

In general, it is found that holding-company affiliation is not desirable for unit banks. Affiliation lowers cost only for the real estate loan and investments functions. Important opera ions in both of these functions can be centralized by the holding company to take advantage of scale economies. However, branch bank affiliation with holding companies tends to improve efficiency in all the functions except demand deposits and installment loans. Even then, the advantage of unaffiliated branch banks is very slight for demand deposits.

Combined cost functions show that the unaffiliated unit bank form of organization is the most efficient. Holding-company affiliation is not advantageous for unit banks but it is advantageous for branch banks. However, because of some simplifying assumptions that were necessary to conduct the analysis, these conclusions should not be considered as definitive concerning the relationships that exist between organizational form and operating costs.

Granting this caveat, elimination of independent unit banks cannot be justified on the basis of efficiency. However, while unit banks produce some services more efficiently, branch banks produce other services more efficiently, and holding-ckompany affiliates produce still others more efficiently. Thus branch or holding-company banking cannot be ruled out entirely as useful alternative organizational forms, especially where conditions in individual local banking markets may be favorable to one of these forms of organization. Or, in large markets, opportunities may exist for banks having a particular form of organization to concentrate on functions where they possess a clear cost advantage.

In the final analysis, the regulatory implications of this study must be considered in conjunction with the regulatory implications of other factors such as competition. Some reduction in productive efficiency may be tolerable if competition is enhanced in a way such that product quality is improved or prices are lowered. If it can be demonstrated that important new services, improvement in existing services, or lower prices will result from a merger or an affiliation, these may be deemed to outweigh the potential detrimental effect of the merger or affiliation on productive efficiency. Nevertheless, knowing how merger or affiliation affect productive efficiency is important if the most appropriate public policy is to be formulated for the development of banking structure in North Carolina.

Ultimately, the regulatory authorities control the development of banking structure. The results have several general implications for policy. Small unit banks should not merge or affiliate unless extenuating circumstances, such as impending failure or lack of management succession are important. Branch banks should not be permitted to establish de novo offices unless the deposit potential is substantial. Affiliation of unit banks should be discouraged. Affiliation of branch banks might be desirable but it is doubtful that bankers will show much interest in this organizational form as long as North Carolina permits statewide branching.

Suggested Citation

Haslem, John A. and Haslem, John A. and Longbrake, William, Monograph: The Productive Efficiency of North Carolina Commercial Banks (May 14, 2015). University of North Carolina at Chapel Hill, Graduate School of Business Administration, Research Paper 21, February 1975, 114 pp., Available at SSRN: https://ssrn.com/abstract=2604686

John A. Haslem (Contact Author)

University of Maryland - Robert H. Smith School of Business ( email )

College Park, MD 20742
United States
202-387 2025 (Phone)

University of Maryland - Robert H. Smith School of Business ( email )

5901 MacArthur Blvd NW 124
Washington, DC DC 20016
United States
202-236 3172 (Phone)

William Longbrake

Independent ( email )

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