Credit market freedom and cost efficiency in US state banking

Abstract

This paper investigates the dynamics between the credit market freedom counterparts of the economic freedom index drawn from the Fraser institute database and bank cost efficiency levels across the U.S. states. We consider a sample of 3,809 commercial banks per year, on average, over the period 1987-2012. After estimating cost efficiency scores using the Data Envelopment Analysis (DEA), we develop a fractional regression model to test the implications of financial freedom for bank efficiency. Our results indicate that banks operating in states that enjoy a higher degree of economic freedom are more cost efficient. Greater independence in financial and banking markets from government controls can result in higher bank efficiency. This effect emerges in addition to the efficiency enhancing effects of interstate banking and intrastate branching deregulation.

Financial stability, competitiveness and banks' innovation capacity: Evidence from the Global Financial Crisis

“…Second, we contributed to the current debate on banking performance, advocating for the need to return to understanding the financial environment's competitiveness. To 4 date, regardless of the theoretical and empirical framework presented in extant business literature that explores the link between competition and innovation (Hausman and Johnston, 2014;Chen et al, 2017), empirical banking studies have focused on the relationships among efficiency, risk, single banking market, integration and financial openness (e.g., Altunbas et al, 2000;Altunbas et al, 2007;Casu and Girardone, 2006;Chortareas et al, 2016;Fiordelisi et al, 2011;Goddard et al, 2007;Lozano-Vivas et al, 2001;Mamatzakis et al, 2008;Maudos and de Guevara, 2007;Pasiouras et al, 2009;Schaeck and Cihák, 2014), but not on how the nexus of financial centres' competitiveness and the banking system's stability can contribute to innovation capacity as measured by technological change in the banking system. To achieve this, we used a global sample of banks and integrated the analysis as a measure of the business environment's competitiveness.…”

Impact of Rule of Law and Government Size to the Microfinance Efficiency

“…Meinzen-Dick et al (2009) also suggest that legislation could alleviate poverty by providing the security of property owns by the poor people. In the study of Chortareas et al (2016), they have also examined on effect of property rights under economic freedom components towards the efficiency of bank. From the study, it shows a positive and significant relationship between property rights and bank efficiency.…”

“…In the study of Chortareas et al (2016), they examined the effect of government size that can be measured by government spending and tax burden under economic freedom towards the bank efficiency in US state banking. The result has shown a negative and significant relationship between government size and bank efficiency.…”

“…The result has shown a negative and significant relationship between government size and bank efficiency. Chortareas et al (2016) reported that inefficiency would be occurred due to excessive government spending. Therefore, the efficient spending by the government could improve the MFIs efficiency since huge financial allocation can be grant and subsidize to the MFIs.…”

Bank competition, information specialization and innovation

“…Indeed, banks have to face problems of asymmetric information when financing informationally opaque businesses. Instead of the traditional arguments on relationship lending, banking strategic theory proposes that greater competition in local credit markets would improve bank cost efficiency (Chortareas et al 2016) and drive banks to increase credit supply to small, proximate and opaque borrowers (McKee and Kagan 2018). As a result, banks would create a competitive edge that helps insulate themselves from pure price competition from outside banks (Boot and Thakor 2000;Dell'Ariccia and Marquez 2004).…”