Essays on the US community banking system: Financial Risk, Efficiency and Competition

  • Athina Petropoulou

Student thesis: Doctoral ThesisPhD


A peculiarity of the US banking system is that it spans from a few large and systemically important banks to many, small community banks. Changes in the US banking sector during 1990s have diminished the number of community banks. During the banking crises of late 1980s to early 1990s and the Global Financial Crisis, over 2,500 community banks ceased operations. However, community banks still account for 92 percent of the total number of banks, suggesting that they are a fundamental part of the US banking system. A striking feature that differentiates community banks is that they are considered to be “relationship bankers”. They are small in terms of their asset size and operate within limited geographic scope. They engage mostly in traditional loan making and deposit taking activities and their ownership structure is concentrated. In this thesis, we investigate how the uniqueness of the community banking business model translates in differences in the risk profile, efficiency and market power of community versus non-community banks.
First, we compare insolvency, credit and liquidity risk of community banks to their non-community counterparts using an array of bank-specific, macroeconomic and market structure variables. We uncover strong evidence that community banks have lower insolvency and credit risk but higher liquidity risk. Furthermore, the community bank risk profile shows important similarities and differences in the sensitivities to an extensive array of financial indicators. Second, we compare the two bank types on the basis of cost efficiency and we further decompose efficiency into a persistent and a residual component; the former capturing market structure and regulatory changes, the latter reflecting managerial performance. We find evidence of higher efficiency for community banks and the decomposition reveals that community banks benefit from superior managerial capabilities and from developments at the regulatory front. The third study analyses the relationships between capitalisation, stability and efficiency in the US banking and introduces for the first time the effect of competition on that nexus. By including business model dynamics in the above nexus, we investigate how the relationship approach adopted by community banks fares against its competitors. Empirical evidence from this study confirm our results from the two previous studies on stability and efficiency and bring to light novel findings for higher market power for community banks. Our findings have important implications for regulators in tailoring the supervisory practices to the unique characteristics and different nature of challenges that each bank group faces.
Date of Award17 Feb 2021
Original languageEnglish
Awarding Institution
  • University of Bath
SupervisorRichard Fairchild (Supervisor), Dimitrios Gounopoulos (Supervisor) & Vasileios Pappas (Supervisor)

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