Degree Year

1996

Document Type

Thesis - Open Access

Degree Name

Bachelor of Arts

Department

Economics

Advisor(s)

James Zinser

Keywords

United States, Bank, Banking industry

Abstract

My study focuses on testing the conduct of banks in their traditional activities, loans and demand deposits provision. The twenty-one year period runs from 1972 to 1992. A relatively recent econometric model is employed. The model takes a set of two-equation system that contains one demand function and one reduced-form supply equation. A parameter that references the deviation in the conduct of banks from the competitive equilibrium level can be estimated using the model. When the parameter has a value that is not significantly different from 0, banks' conduct is said to be competitive. A positive value indicates market power possessed by banks. Market power in the banking industry is not necessarily a bad thing, especially when we are concerned about banks' ability to sustain economic shocks. Banks will have an added level of protection with some market power. A negative value of the parameter is linked to disequilibrium where production level is beyond the competitive equilibrium level which has price equal marginal cost of production. This type of equilibrium is given the name "excess capacity" in a number of banking studies. There is, however, another definition of "excess capacity" that says firms have excess capacity if they operate on the downward sloping portion of their average cost curve. This second definition is difficult to test using my model. Therefore, I will use the phrase excess capacity with its first definition unless otherwise noted in the paper. My regression results suggest that the industry as a whole is capable of providing loans in a competitive manner. The provision of demand deposits shows more diversity across the country, but there is reason to believe that banks are quite well prepared for competitions and shocks in that area of operation.

The next section gives some background information of the U.S. banking industry. The third section is a brief survey of the literature on banking. The fourth section elaborates on the theoretical aspects of the study. The fifth section introduces the model and the equations involved. The sixth section lists the sources of data and describes the data. The seventh section discusses regression results. The eighth section concludes the study and makes suggestions for future studies. The ninth section is a collection of exhibits, including charts, description of data and regression outputs.

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