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The return to retail and the performance of U.S. banks

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  • Beverly J. Hirtle
  • Kevin J. Stiroh

Abstract

The U.S. banking industry is experiencing a renewed focus on retail banking, a trend often attributed to the stability and profitability of retail activities. This paper examines the impact of banks' retail intensity on performance from 1997 to 2004 by developing three complementary definitions of retail intensity (retail loan share, retail deposit share, and branches per dollar of assets) and comparing these measures with both equity market and accounting measures of performance. We find that an increased focus on retail banking across U.S. banks is linked to significantly lower equity market and accounting returns for all banks but lower volatility for only the largest banking companies. We conclude that retail banking may be a relatively stable activity, but it is also a low-return one.

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Bibliographic Info

Paper provided by Federal Reserve Bank of New York in its series Staff Reports with number 233.

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Date of creation: 2005
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Handle: RePEc:fip:fednsr:233

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Keywords: Banks and banking ; Retail trade ; Bank profits;

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References

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  1. Houston, Joel & James, Christopher & Marcus, David, 1997. "Capital market frictions and the role of internal capital markets in banking," Journal of Financial Economics, Elsevier, vol. 46(2), pages 135-164, November.
  2. Stulz, René M., 1984. "Optimal Hedging Policies," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 19(02), pages 127-140, June.
  3. Froot, Kenneth A. & Stein, Jeremy C., 1998. "Risk management, capital budgeting, and capital structure policy for financial institutions: an integrated approach," Journal of Financial Economics, Elsevier, vol. 47(1), pages 55-82, January.
  4. Beverly Hirtle & Christopher Metli, 2004. "The evolution of U.S. bank branch networks: growth, consolidation, and strategy," Current Issues in Economics and Finance, Federal Reserve Bank of New York, issue Jul.
  5. Kenneth A. Froot & David S. Scharfstein & Jeremy C. Stein, 1992. "Risk Management: Coordinating Corporate Investment and Financing Policies," NBER Working Papers 4084, National Bureau of Economic Research, Inc.
  6. Merton, Robert C., 1973. "On the pricing of corporate debt: the risk structure of interest rates," Working papers 684-73., Massachusetts Institute of Technology (MIT), Sloan School of Management.
  7. Eugene F. Fama & Kenneth R. French, 2004. "The Capital Asset Pricing Model: Theory and Evidence," Journal of Economic Perspectives, American Economic Association, vol. 18(3), pages 25-46, Summer.
  8. Kevin J. Stiroh, 2002. "Diversification in banking: is noninterest income the answer?," Staff Reports 154, Federal Reserve Bank of New York.
  9. Stiroh, Kevin J. & Rumble, Adrienne, 2006. "The dark side of diversification: The case of US financial holding companies," Journal of Banking & Finance, Elsevier, vol. 30(8), pages 2131-2161, August.
  10. Slovin, Myron B & Sushka, Marie E & Polonchek, John A, 1993. " The Value of Bank Durability: Borrowers as Bank Stakeholders," Journal of Finance, American Finance Association, vol. 48(1), pages 247-66, March.
  11. Stiroh, Kevin J., 2006. "A Portfolio View of Banking with Interest and Noninterest Activities," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 38(5), pages 1351-1361, August.
  12. J. David Cummins & Richard D. Phillips & Stephen D. Smith, 1998. "The rise of risk management," Economic Review, Federal Reserve Bank of Atlanta, issue Q 1, pages 30-40.
  13. Demsetz, Rebecca S & Strahan, Philip E, 1997. "Diversification, Size, and Risk at Bank Holding Companies," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 29(3), pages 300-313, August.
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Citations

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Cited by:
  1. Claudio Dicembrino & Pasquale Lucio Scandizzo, 2012. "Can Portfolio Diversification increase Systemic Risk? Evidence from the U.S and European Mutual Funds Market," CEIS Research Paper 240, Tor Vergata University, CEIS, revised 11 Jul 2012.
  2. Iftekhar Hasan & Heiko Schmiedel & Liang Song, 2012. "Returns to Retail Banking and Payments," Journal of Financial Services Research, Springer, vol. 41(3), pages 163-195, June.
  3. Saoussen Ben Gamra & Dominique Plihon, 2011. "Revenue diversification in emerging market banks: implications for financial performance," Working Papers hal-00598136, HAL.
  4. Sarah Sanya & Simon Wolfe, 2011. "Can Banks in Emerging Economies Benefit from Revenue Diversification?," Journal of Financial Services Research, Springer, vol. 40(1), pages 79-101, October.
  5. Carbo Valverde, Santiago & Rodriguez Fernandez, Francisco, 2007. "The determinants of bank margins in European banking," Journal of Banking & Finance, Elsevier, vol. 31(7), pages 2043-2063, July.
  6. Baele, Lieven & De Jonghe, Olivier & Vander Vennet, Rudi, 2007. "Does the stock market value bank diversification?," Journal of Banking & Finance, Elsevier, vol. 31(7), pages 1999-2023, July.
  7. Fadzlan Sufian & Muzafar Shah Habibullah, 2010. "Developments in the efficiency of the Thailand banking sector: a DEA approach," International Journal of Development Issues, Emerald Group Publishing, vol. 9(3), pages 226-245, July.
  8. Fadzlan Sufian & Muzafar Habibullah, 2009. "Bank specific and macroeconomic determinants of bank profitability: Empirical evidence from the China banking sector," Frontiers of Economics in China, Springer, vol. 4(2), pages 274-291, June.
  9. L. Baele & V. De Bruyckere & O. De Jonghe & R. Vander Vennet, 2012. "Do Stock Markets Discipline US Bank Holding Companies: Just Monitoring, or also In‡uencing?," Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium 12/827, Ghent University, Faculty of Economics and Business Administration.
  10. Hirtle, Beverly, 2007. "The impact of network size on bank branch performance," Journal of Banking & Finance, Elsevier, vol. 31(12), pages 3782-3805, December.
  11. Goddard, John & McKillop, Donal & Wilson, John O.S., 2008. "The diversification and financial performance of US credit unions," Journal of Banking & Finance, Elsevier, vol. 32(9), pages 1836-1849, September.
  12. Saoussen Ben Gamra & Dominique Plihon, 2011. "Revenue diversification in emerging market banks: implications for financial performance," CEPN Working Papers hal-00598136, HAL.

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