Authors: Konstantinos Andriakopoulos, Konstantinose Kounetas

Title: The impact of large lending on bank efficiency in U.S.A.

Abstract

This paper investigates a rather neglected issue in the banking literature regarding the impact of large lending on banks' productive performance. Possible influences may arise in the context of banks’ credit risk as trade credit, which is provided by large, creditworthy firms, and it is considered to be a method of monitoring and enforcing loan contracts to relatively riskier firms. Indeed, trade credit providers view payments beyond the discount period as a sign of financial difficulty while the option to cut off shipments for nonpayment is a potentially powerful means for a trade creditor to force repayment, especially if a supplier provides its costumer with a product that has no close substitutes. A unique dataset was constructed concerning all USA Banks collected from SDI (Statistics on Depository Institutions) report compiled by FDIC (Federal Deposit Insurance Corporation). Our sample contains 7960 banks and tracked quarterly for the period 2010 -2017, creating an unbalanced panel of bank quarter observations. An econometric framework based on nested non-neutral frontiers, was developed to estimate the influence and the decomposition of large lending on banks' productive performance. Moreover, different types of frontiers aiming at the production, or cost side have been investigated. The empirical findings reveal that the large lending plays a crucial role on banks' technical efficiency. Significant variations among different frontier models, type of bank and size, banks’ ownership structure and macroeconomic conditions appear to be present. By considering all CAMEL (Capital Adequacy Asset Quality Management Earnings Liquidity) parameters we notice that banks’ financial strength affects banks’ efficiency. Some policy implications are derived based on the empirical evidence supporting a safer and sounder banking system can be emerged as banks finance large firms, increasing the willingness of people to save and bank’s attitude to finance profitable investments projects that rise firm’s value and promote economic growth.

This paper investigates a rather neglected issue in the banking literature regarding the impact of large lending on banks' productive performance. Possible influences may arise in the context of banks’ credit risk as trade credit, which is provided by large, creditworthy firms, and it is considered to be a method of monitoring and enforcing loan contracts to relatively riskier firms. Indeed, trade credit providers view payments beyond the discount period as a sign of financial difficulty while the option to cut off shipments for nonpayment is a potentially powerful means for a trade creditor to force repayment, especially if a supplier provides its costumer with a product that has no close substitutes. A unique dataset was constructed concerning all USA Banks collected from SDI (Statistics on Depository Institutions) report compiled by FDIC (Federal Deposit Insurance Corporation). Our sample contains 7960 banks and tracked quarterly for the period 2010 -2017, creating an unbalanced panel of bank quarter observations. An econometric framework based on nested non-neutral frontiers, was developed to estimate the influence and the decomposition of large lending on banks' productive performance. Moreover, different types of frontiers aiming at the production, or cost side have been investigated. The empirical findings reveal that the large lending plays a crucial role on banks' technical efficiency. Significant variations among different frontier models, type of bank and size, banks’ ownership structure and macroeconomic conditions appear to be present. By considering all CAMEL (Capital Adequacy Asset Quality Management Earnings Liquidity) parameters we notice that banks’ financial strength affects banks’ efficiency. Some policy implications are derived based on the empirical evidence supporting a safer and sounder banking system can be emerged as banks finance large firms, increasing the willingness of people to save and bank’s attitude to finance profitable investments projects that rise firm’s value and promote economic growth.