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Article
Publication date: 11 April 2022

Alex Fayman, Su-Jane Chen and Timothy R. Mayes

The purpose of this paper is to better understand the differences between community and non-community banks (CBs and Non-CBs) in the US. As the former have been declining in…

275

Abstract

Purpose

The purpose of this paper is to better understand the differences between community and non-community banks (CBs and Non-CBs) in the US. As the former have been declining in numbers, previous literature shows inherent differences between the business models of CBs and Non-CBs. This study attempts to gauge whether the impact of the reserve elimination during the Covid pandemic affected all banks similarly or whether community banks showed a differentiated response.

Design/methodology/approach

On March 26, 2020, the Federal Reserve, at the onset of the Covid pandemic, altered the depository institution reserve requirement for the first time since 1992. This significant change in policy led to the reserve requirement reduction from 10% to 0%. This study examines the impact of the 2020 reserve elimination on all community banks and non-community banks in the US and finds that although the level of cash to assets increased at both types of depository institutions post reserve elimination, the impact on liquidity-focused ratios was more pervasive at community banks in the first quarter post the regulatory shift. Among community banks, the largest depository institutions experienced the biggest balance sheet adjustments in the June 2020 quarter that followed the change in Federal Reserve’s policy. Further, the study finds that over two-quarters post reserve elimination, the non-community banks demonstrate a greater increase in balance sheet liquidity. Past literature shows that community banks tend to carry more liquidity than non-community banks and small community banks tend to carry more liquidity than their larger counterparts. These previous findings may provide some explanation for the different speed documented in this study at which various banks have reacted to the reserve elimination in 2020.

Findings

This research finds that community banks had a quicker response to the change in the reserve elimination, showing quick increases across liquidity ratios. The larger non-community banks tended to play catch up, increasing their liquidity in the subsequent quarter. The study also shows that the changes in liquidity were initially driven by the segment of large community banks.

Originality/value

This study looks at how the reserve elimination enacted by the Federal Reserve in March 2020 in response to the Covid pandemic affected community versus non-community banks. Currently, as far as the authors know, there are no other published papers that look at this issue.

Details

Managerial Finance, vol. 48 no. 6
Type: Research Article
ISSN: 0307-4358

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Article
Publication date: 4 August 2022

Alex Fayman

The paper aims to highlight differences in bank performance based on state politics during the onset of the Covid pandemic. The response to Covid pandemic created an unusual…

398

Abstract

Purpose

The paper aims to highlight differences in bank performance based on state politics during the onset of the Covid pandemic. The response to Covid pandemic created an unusual opportunity for an investigation of how politics impacts banking due to the initial response to the pandemic being heavily impacted by political affiliation states' governors and dominant parties in state legislatures. Previous research looked at impact of elections on the federal level (both executive and legislative branches) on bank risk and performance. The response to the Covid pandemic in 2020 allows for an investigation on how political influence on the state level impacted banks performance.

Design/methodology/approach

The Covid pandemic was an unexpected storm that entered the United States with a vengeance in 2020, taking countless lives and ravaging the economic landscape. The response to the pandemic quickly took a political spin as republican governors showed greater reluctance to shutter business activity in hopes of slowing down the spread of the virus than their democratic counterparts. This paper examines the impact of the two Americas created along the lines of political influence as it impacted bank performance over four-quarters beginning with the fourth quarter of 2019. All US banks are split into groups based on the political affiliation of state governors and the dominant party in state legislatures to measure impact of politics on bank performance and risk.

Findings

This research finds that banks operating in states with republican governors produced greater profits and exhibited higher liquidity levels. The same results held for banks in states where both the governorship and the legislature were controlled by republicans versus banks in states where both the governor and the legislature were democratic. Interestingly, the findings present a reversal when examining banks in states led by republican governors and democratic legislatures versus banks in states with democratic governors and republican legislatures. In those instances of mixed leadership, banks in states with democratic governors tend to show greater profits, greater liquidity while demonstrating lower asset quality.

Originality/value

A paper published in Managerial Finance in 2018 discussed the impact of the parties in control of the White house and the legislative branch on bank performance and risk. There have been no studies, to the author’s knowledge, that look at how states' political leadership (gubernatorial and legislative) impact on bank performance. Because the response to the Covid pandemic became a politically polarized issue, the onset of the crisis allowed for measurement of how different responses by republican and democratic state leadership impacted bank performance and risk.

Details

Managerial Finance, vol. 49 no. 1
Type: Research Article
ISSN: 0307-4358

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Article
Publication date: 12 February 2018

Alex Fayman, Ling T. He and K. Michael Casey

The purpose of this paper is to investigate the potential impact of political party control on bank profitability and risk. This study extends previous work by looking at overall…

2080

Abstract

Purpose

The purpose of this paper is to investigate the potential impact of political party control on bank profitability and risk. This study extends previous work by looking at overall political power with respect to party control of the House, Senate, and the Presidency.

Design/methodology/approach

This paper employs regression analysis using several different dependent measures of risk and return. The independent variables include dummies to represent political power and control.

Findings

The results indicate that political control does impact both bank returns and risk. More specifically, concentration of power in either party results in higher profits. However, risk and returns typically increase during periods of democratic control.

Originality/value

To date, no research addresses the impact of political control and party affiliation on bank risk and return. Given the importance of banks to the overall economy and financial system, this research should provide policymakers and regulators with a different perspective on bank risk and return.

Details

Managerial Finance, vol. 44 no. 2
Type: Research Article
ISSN: 0307-4358

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Article
Publication date: 4 January 2011

Alex Fayman and Ling T. He

The purpose of this paper is to identify effects of prepayment risk on performance of commercial banks in the USA. Understanding how various risks impact banks' performance can…

6161

Abstract

Purpose

The purpose of this paper is to identify effects of prepayment risk on performance of commercial banks in the USA. Understanding how various risks impact banks' performance can help to improve performance of financial institutions and better estimate risk premia charged by banks on the loans they extend to their customers.

Design/methodology/approach

The paper measures the prepayment risk premium and aims to gauge its effect on various ratios that measure bank performance. Since, risk management is an important goal of financial management, it is important to learn how prepayment risk pertains to bank performance.

Findings

The results of this paper suggest that prepayment risk may significantly impact return on loans, return on equity and real estate loans to total loans ratios of various commercial banks. The impacts, in terms of strength and direction, vary between the periods of pre‐ and post‐passage of the Financial Institutions Reform and Recovery Act. The results indicate that the addition of prepayment risk variable to regression models can generally increase their ability to explain bank performance metrics.

Originality/value

To the authors' knowledge, there is no existing literature that gauges the impact of prepayment risk on various components of bank performance. There is existing literature that shows that bank stocks move in response to prepayment risk.

Details

The Journal of Risk Finance, vol. 12 no. 1
Type: Research Article
ISSN: 1526-5943

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