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Branch Banking and Risk

Published online by Cambridge University Press:  19 October 2009

Richard F. Wacht
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Extract

The recent literature in the field of commercial banking has centered to a considerable extent around the branch banking controversy and bank merger activities, particularly as regards their economic effects on banking structure and performance. Much has been said, moreover, about the effects of branching on the “public interest,” whether such branching is carried out through merger or de novo branching. Public interest is usually defined as including deposit safety, adequate compensation by banks to depositors for the use of their money, availability of credit for borrowers at competitive rates of interest, and, in more general terms, increased competition in banking without sacrificing safety.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 3 , Issue 1 , March 1968 , pp. 97 - 107
Copyright
Copyright © School of Business Administration, University of Washington 1968

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References

1 For a summary of some of these studies, see Board of Governors, Federal Reserve System, Federal Reserve Bulletin, November 1964, pp. 1383–1399.

2 Crosse, Howard D., “Banking Structure and Competition,”Journal of Finance, 05 1965, p. 351Google Scholar.

3 Edwards, Franklin R., “The Banking Competition Controversy,” The National Banking Review, 09 1965, pp. 1–3Google Scholar.

4 Cohen, Kalman J. and Reid, Samuel Richardson, “The Benefits and Costs of Bank Mergers,”Journal of Financial and Quantitative. Analysis, 12 1966, p. 53Google Scholar.

5 Ibid., p. 43.

6 Markowitz, Harry, “Portfolio Selection,” Journal of Finance, 03 1952, pp. 77–91Google Scholar. The approach used here is also similar to a treatment of project selection in Quirin, David G., The Capital Expenditure Decision (Homewood, Illinois: Irwin, 1967), pp. 223–240Google Scholar.

7 This rate is used since additional reserves can usually be acquired by borrowing from the Federal Reserve Bank at the discount rate.

8 These investments are more or less uses of bank funds and should not be thought of as providing additional liquidity to the bank's portfolio of assets. See Crosse, Howard D., Management Policies for Commercial Banks (Englewood Cliffs, New Jersey: Prentice-Hall, 1962)Google Scholar.

9 Ibid., pp. 134–142. Crosse divides total bank liquidity needs into “deposit liquidity” and “portfolio liquidity,” noting that the larger portion of a bank's liquidity needs is related directly to the volume and character of its deposit liabilities (pp. 134–135).

10 The derivation of equation (2) is found in Yule, G. Udny and Kendall, M. G., An Introduction to the Theory of Statistics, 14th ed. (New York: Hafner Publishing Company, 1950), pp. 326–327Google Scholar.

11 By way of contrast to the above example, σi would be approximately equal to σa in intra-city branching. Thus σj = σi,σa +(cova:ai)1/2, and the secondary reserve requirement would be the same for the combined operation as for the sum of the individual operations.

12 The term “risk assets ” used in connection with capital adequacy formulae, for example, is applied to all bank assets except cash and short term governmental securities. Varying amounts of risk are assigned to different categories of assets, which amounts seem to bear no concrete relationship with actual or measurable risk. See Crosse, op. cit., pp. 157–90

13 The same could be said if bank a established a de novo branch under the same set of circumstances.

14 Crosse, op. cit., p. 194.