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Financial
Industry Perspectives
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Increased competition, new technology, and bank consolidation are reinforcing the need for banks to operate efficiently. Moreover, recent research on banking efficiency shows that there is much room for reducing expenses and making better use of bank resources. This article compares the financial characteristics, as well as the management and ownership structure, of a sample of efficient and inefficient banks from the Tenth Federal Reserve District. The comparison reveals a number of factors that contribute to bank efficiency. Efficient banks control all aspects of costs, yet deliver bank services that are often more resource intensive than the services provided by less efficient banks. Stockholders at efficient banks are actively involved, play a major policymaking role, or make other contributions through the board of directors. A bank is more likely to be efficient if its manager either has a strong financial stake in the bank, or is closely monitored by stockholders and given appropriate incentives. The data further suggest that efficient banks are not achieving their efficiency by expending fewer resources on credit analysis and other forms of risk control. In sum, efficient bank operations can be obtained under a variety of circumstances, but two essential keys to success are properly motivated managers and active participation by bank owners. Back to top FIP homeSuccessful Strategies in Interstate Bank Acquisitions Much of the recent consolidation in the banking industry has been across state lines, and this trend will accelerate due to recent federal legislation. As interstate banking expands further, the performance and success of banks that are acquired will be the key factor determining how much consolidation will occur and which organizations will be major participants. This article therefore examines a group of banks that were acquired on an interstate basis in 1986 and 1987, and tracks their performance after acquisition. It identifies strategies and characteristics that distinguish acquisitions with strong performance from those with weak performance. While strong and weak performing acquisitions were similar in many ways at the time they were acquired, strong performers expanded on an already significant presence in loan markets and avoided a deterioration in asset quality. Strong performers grew moderately overall, and improved net interest margins. Compared to weak performing acquisitions, strong performers were better at controlling expenses, and they widened this advantage after acquisition. Overall, the strong performers achieved success by applying sound banking techniques in a challenging new market, where previous experience and detailed insights into customers and competitors were limited. Back to top FIP home |