EconSouth (First Quarter 2005)
Research Notes and News
Research Notes and News highlights recently published research as well as other news from the Federal Reserve Bank of Atlanta. For complete text of summarized articles and publications, see the Atlanta Fed’s World Wide Web site at www.frbatlanta.org/publ.cfm.
What makes community
Authors Scott E. Hein, Timothy W. Koch, and S. Scott MacDonald explore the differences between community banks and larger banks to discover what makes community banks unique. Large banks engage primarily in transactional banking—the provision of highly standardized intermediation services, such as gathering deposits and extending loans, that require little human input to manage. Community banks, in contrast, typically focus on relationship banking, which requires more human input, more detailed credit evaluation, and localized decision making.
Examining profit and risk measures for the 1998–2002 period for both community banks and large banking organizations, Hein, Koch, and MacDonald find evidence that small banks were generally profitable. In all but the smallest size category, community banks have performed as well as, and often better than, large banks in managing net interest margins, aggregate profits, and credit risk. Also, community banks are more likely to adopt Subchapter S tax status, which allows them to avoid direct federal income taxation and pass tax benefits on to shareholders. These institutions typically have relatively higher returns on both equity and assets than larger banks do.
Whether community banks will be able to sustain this good performance will depend, the authors conclude, on how well managers find valuable relationship lending niches, invest bank capital, and balance asset quality with growth.
Banks’ levels of risk may
This shift in a bank’s product mix increases its exposure to risk and potentially increases the volatility of its earnings. Such product expansion also affords a bank’s management greater discretion in determining the bank’s business model. Authors Elijah Brewer III, William Curt Hunter, and William E. Jackson III find that both the level of management discretion and the level of a bank’s risk correlate to the structure of its CEO’s compensation. They also find that equity-based CEO compensation has become more prevalent since the 1990s, a period of significant deregulation in the banking industry.
The authors examine the relationship between the structure of bank CEO compensation and banking organizations’ financial characteristics from 1992 to 2000. Their analysis shows that banks that developed greater exposure to risk during this period provide their CEOs with higher levels of equity-based compensation such as stock options and restricted stock. Also, as a bank moves its product mix toward fee-based activities and away from traditional banking activities, equity-based compensation increases and, in the view of some, aligns the interests of shareholders and bank management.
However, the authors also note that a shift away from traditional banking activities could make it more difficult for shareholders to evaluate an executive’s actions and provides no assurance that his or her behavior will conform to shareholders’ expectations.
Studying the remitting
To gain an understanding of who remits, how much and why they remit, and what transfer mechanisms they use, authors Catalina Amuedo-Dorantes, Cynthia Bansak, and Susan Pozo review the basic trends in remittance transfers from Mexican immigrants in the United States—who account for about one-third of U.S. immigrants—to their families in Mexico.
Using survey data from the Mexican Migration Project and the Encuesta Sobre Migración en la Frontera Norte de México, the authors examine the demographic characteristics and the remittance and banking behavior of Mexicans who have migrated to the United States. The surveys encompass nearly 11,000 documented and undocumented immigrants.
The authors’ analysis indicates that immigrants’ motives for remitting to their home communities are at least as varied as their reasons for migrating. Altruism, investment, and mitigating risk appear to play important roles in explaining immigrants’ remitting behavior.
The propensity to remit seems to be greater among immigrants who are undocumented, those who have left dependents in Mexico, those with lower levels of education and English skills, and the unbanked, the authors conclude. Over the 1993–2000 period, the use of money transfer firms to make remittance payments declined from 77 percent to 66 percent of all transfers while banks’ market share increased from 4 percent to 17 percent.