A model of mean reversion of exchange rates to purchasing power parity is developed and tested where exchange rates are assumed to follow a mean reverting elastic random walk toward a stochastic PPP rate. The model recognizes the possibility that mean reversion towards PPP may be nonlinear which allows greater flexibility in the adjustment process. Regression equations consistent with the theoretical model are derived. The model is tested using long- and short-term data for six countries. While the results are generally consistent with the findings of previous studies, evidence is presented which demonstrates that the mean reversion process is not linear for some countries.

This paper discusses results and difficulties of comparing banks’ performance based on publicly available data for the case of Nordea, a pan-Nordic bank created through mergers of important national banks. The objective is to determine whether Nordea’s unique strategy of functional integration across four countries can be advantageous. For stock-market data, however, Nordea does not have stable betas on risk factors, and thus the comparables method must be used with great care. The Nordea holding company performed about as well as the comparables, both in terms of stock-market and accounting data. Nordea banks in individual countries outperformed comparable holding companies; by arithmetic, Nordea non-bank operations are not as profitable as its bank operations. In event studies, the data lend only the weakest support to the hypothesis that the market viewed Nordea’s acquisitions as adding value.

The relationship between market structure and performance has been studied extensively for American banking. In contrast, little work has been done to investigate this relationship for European banking. Two explanations of a positive correlation between profitability and concentration have been advanced, the traditional structure-performance hypothesis (SCP) and the efficient-structure hypothesis. Previous empirical tests of the alternative hypotheses have yielded mixed results but the tests were not robust because they did not incorporate measures of efficiency directly in the model. This study applies a stochastic cost frontier as proposed by Aigner et al. (1977) to derive measures of X-inefficiency and scale-inefficiency, under the assumption that the errors are distributed half-normal. We incorporate these measures of inefficiencies directly into the tests as proposed by Berger and Hannan (1993). We do not find a positive and significant relationship between concentration and profitability for a sample of banks across 11 European countries over a four year period, 1988–1991. However, we do find evidence to support one of the two versions of the efficient-structure hypothesis for banks located in countries with low concentration of banks. Since little support is found for either of the SCP hypotheses, a simple policy of strict limitations on cross-border acquisitions and growth is not warranted.

Abstract We study the effects of structural changes in banking markets on the supply of credit to small businesses. Specifically, we examine whether bank mergers and acquisitions (M&As) and entry have “external” effects on small business loans by other banks in the same local markets. The results suggest modest positive external effects from these dynamic changes in competition, except that large banks may reduce small business lending in reaction to entry. We confirm bank size and age as important determinants of this lending, and show that the measured age effect does not appear to be driven by local market M&A activity. JEL classification: G21, G28, G34, E58, L89.

With the growth of international mergers like DaimlerChrysler, interest in executive compensation practices abroad, particularly in Germany, has increased. Using unique data sources for Germany, we find that similar to US firms, German firms also have agency problems caused by the separation of ownership from control, with ownership dispersion leading to higher compensation. In addition, there is evidence that bank influence has a negative impact on compensation.

Recent widespread consolidation in the banking industry has elicited concern that lending to small businesses will be reduced by the banking industry. The consolidation, though, has stimulated an upsurge in new bank charters. This study compares the lending by de novo banks to small businesses with the lending by similarly sized incumbent banks for the years 1987–1994. We find that the portfolios of de novo banks consistently contain a substantially higher percentage of small business loans than do the portfolios of similar incumbents. These results indicate that de novo banks can be part of the solution to the problems that consolidation may create.

Abstract The informational opacity of small businesses makes them an interesting area for the study of banks' lending practices and procedures. We use data from a survey of small businesses to analyze the micro level differences in the loan approval processes of large and small banks. We provide evidence that large banks ($1 billion or more in assets) employ standard criteria obtained from financial statements in the loan decision process, whereas small banks rely to a greater extent on information about the character of the borrower. These cookie-cutter and character approaches are compatible with the incentives and environments facing large and small banks.