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Is There Excess Capacity in Rural Banking Markets?
Author(s) -
McNulty James E.,
Akhigbe Aigbe
Publication year - 1998
Publication title -
financial review
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.621
H-Index - 47
eISSN - 1540-6288
pISSN - 0732-8516
DOI - 10.1111/j.1540-6288.1998.tb01400.x
Subject(s) - capacity utilization , profitability index , business , loan , excess return , financial system , monetary economics , economics , finance , microeconomics , context (archaeology) , paleontology , biology
The literature indicates that it is difficult to identify and quantify the degree of excess capacity in banking. Economic theory indicates that there are at least three indicators of excess capacity in banking: (a) low loan‐to‐asset ratios, (b) low profitability and (c) high per unit operating expense relative to some norm. If excess capacity exists, it will be easiest to identify, through these indicators, at small rural banks. This paper finds significant evidence of excess capacity at rural Colorado banks using univariate analysis; simultaneous equations analysis reinforces this conclusion. It appears that the “excess capacity effect”outweighs the “market power effect”in these rural banking markets.