Three essays on bank efficiency

Since commercial banks play important roles in the financial markets, it isimportant to evaluate whether banks operate efficiently. Moreover, given increasedcompetition from non-bank financial institutions, commercial banks should operatemore efficiently than they did previously. Commercial banks might operate moreefficiently if they have superior information. If this is true, bank size should notmatter to the operation of the bank. Thus, as long as the bank has superiorinformation, it will operate more efficiently. Therefore, is it necessary that banksshould be big to be efficient? Will the numbers of small commercial banks decrease?This dissertation will investigate the survival value of small commercial banks.There are three essays related to X-efficiencies in U.S. commercial banks inthis dissertation. First, the relation between commercial banks' X-efficiency andagricultural factors is examined. Two hypotheses are examined in this essay. First,pairwise comparison tests and regression analyses are used to test relations betweenX-efficiency and bank size, location, and specialization. Second, the relation betweenbank X-efficiency and agricultural factors at the county level is examined. Likeprevious studies, economies of scale are shown to exist in the banking industry.However, the degree of scale efficiency is found to be related to loan specialization.Larger is not always better for banks with loan specialties in agriculture. Furthermore,agricultural factors, regarded as a proxy for local economic activity, have a significantimpact on small agricultural banks. The second essay examines the degree to whichcommercial bank X-efficiencies are affected through time by monetary policy andmacro economic factors. We are able to document that X-efficiency does changethrough time in a predictable manner. Finally, in the third essay, an improvement inthe methodology for calculating bank X-efficiency is examined. The improvement isdesigned to solve the problems associated with using cross-sectional and time-seriespanel data. The improved methodology is used to re-examine the empirical resultsfound in the first two essays.