Analysis of the portfolio behavior of black-owned commercial banks

Journal of the Academy of Business and Economics, Jan, 2003 by Valentine Okonkwo

Bates and Bradford (1980) disagreed with Brimmer's conclusion that black banks did not have the potential and managerial skills to effectuate black urban economic development. They wrote; "Our conclusion is that Black and non-minority banks respond similarly to the relevant stock and flow variables that shape their environments, with observed differences in portfolio composition tracing to differences in their particular vectors of operative influences. Black banks should be viewed as institutions facing typical small bank problems. Thus, the analysis of Brimmer and others critiquing the liquidity of these banks' portfolio is deemed inappropriate."

The study by Clair (1988), on operating efficiency of black-owned banks concluded that, when black-owned banks are compared to non-minority owned banks in the same zip-code region, the differences in "loan losses or in labor or occupancy expenses" tend to disappear. However, even after adjusting for location differences, the return on assets is still lower in black-owned banks compared to non-black-owned banks. However, more recent studies conclude that "minority-owed banks had significantly improved their capital ratios and decrease their holdings of liquid assets, while expanding their use of purchased funds" Hasan and Hunter (2000). Using a production function efficiency model approach instead of a review of financial ratios, Hasan and Hunter arrived at similar conclusions as previous studies--"it appears that minority and women-owned banks were relatively inefficient institutions" (Hasan and Hunter, 2000).

3. THE THEORY AND MODEL

This study is different from other studies already mentioned. It does not seek to compare the economic performance of black-owned banks to non-black-owned banks, rather, it seeks to find out, on a macro sense, if black-owned bank asset choice is governed by profit maximization principles or are they just accommodating load demands? This knowledge is important because whatever approach defines not only their asset choices but also their reaction to Federal Reserve monetary policy and/or broad changes in economic activities. The study of bank portfolio behavior is an important explanatory factor for changes not only of the aggregate economic activities but also a key determinant of the cost and flow of credits to specific sectors of the economy. However, given the nature of the scarcity of data on black-owned banks, this study is restricted to looking at their loan portfolio. A more exhaustive model would consider bank behavior towards total deposits, excess reserve, investments, etc.

The study validation of any of the proposed theory has implication for the entrepreneurial stance or approach of the management of these banks. Black banks like private enterprises in a market economy have among other goals, the goal of maximizing the wealth of shareholders. Asset choice is one of the components in the myriad of decisions management has to make that eventually leads to the goal of maximizing the wealth of shareholders.