The Role of Stability and Ownership Structure in Determining the Efficiency of US Bank Holding Companies

Abstract

During the last three decades, the focus of regulators has been to enhance the stability of the financial system. However, there is little research as to how the desire for higher financial stability for bank holding companies would affect their efficiency. By using a dataset of 553 US Bank Holding Companies (BHC)for the period 2004 to 2015 and a dynamic panel methodology, this study investigates whether the efficiency of BHC was affected by the requirement for higher stability and ownership structure during the sample period. The empirical findings suggest that BHC with higher stability (lower risk levels) are relatively more efficient. Regarding the ownership structure, we find evidence that BHC with a higher proportion of institutional ownership, especially those that exerting market discipline such as mutual funds and hedge funds, positively affects the efficiency of BHC. On the other hand, a higher level of government ownership adversely impacts the efficiency of BHC. Overall empirical findings support the regulatory view that higher stability levels and close monitoring by shareholders help in improving efficiency. The results remain robust with alternative measures of efficiency. These findings have implications for regulators and investors alike as there is a need to carefully evaluate regulatory policies such that they may not adversely affect efficiency while keeping the banking sector healthy and stable.