Analysis of the portfolio behavior of black-owned commercial banks

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

Table 1 presents the calculated sign of the regression coefficients for both models of bank behavior--the profit and accommodation principles. The t-values are captured in parenthesis. The two competing theories about bank behavior propose alternative signs for the regression coefficients. For the Profit-Maximizing Hypothesis, the coefficient of the sign for [i.sub.S], is suppose to be positive ( ), [i.sub.L] to be negative (-), and GDP/D should have no (o) effect on the demand for loan (L/D). Conversely for the Accommodation Hypotheses, [i.sub.S], is suppose to be negative (-), [i.sub.L] to be positive ( ), and GDP/D should be positive ( ).

The regression results in Table 1 produced a mixed result. The signs of the coefficients of short-term ( ) and long-term (-) interest rates conform to the profit maximizing principles, although, both variables are not statistically significant at the 5 or 10 percent confidence intervals. The coefficient that represents the level of economic (GDP/D), has a statistically negative sign which neither supports the profit or the accommodation principles. The existing empirical evidence tends towards a profit maximization principle. Some will argue that management of these banks is straddling between the two principles. To judge from the results in the table above, as the ratio of GDP/D rises ceteris paribus, by 10 percent per year, loan ratio fall by 3.5 percent. A ceteris paribus rise of one percent rise in the treasury bill rate (short term interest rate), loan ratio decline by .094 percent, conversely, a one percent rise in the long-term interest rate (corporate bond rate) lead to decline of .333 percent in the loan ratio

The coefficient of adjustment (1-[lambda]) which is (1-.464) equal to .536, implying that about 54 percent of the discrepancy between the desired and actual respect to loan ratio is eliminated in one year. The low value of (1-[lambda]), signifies a slower speed of adjustment to close the gap between desired and actual values of loans.

Table 1. Regression Results: Equation (3) (variables
in natural logarithms)

Intercept   [i.sub. S]   [i.sub.L]   GDP/D

-0.699      0.094        -0.333      -0.349 *
(1.768)     (0.841)      (1.506)     (4.466)

-0.195      0.114        -0.237      -0.289 *
(0.600)     (1.317)      (1.380)     (4.686)

Intercept   Lagged     Standard   [R.sub.2]
            Variable   Error

-0.699                 0.172      .46
(1.768)

-0.195      0.464 *    0.133      .69
(0.600)     (4.460)

Numbers in parentheses are the t-values of the regression
coefficients.

* Statistically significant at 5 percent level

REFERENCES

Bates, Timothy and Bradford, William, "An Analysis of the Portfolio Behavior of Black-Owned Commercial Banks," The Journal of Finance, Vol. 35, No. 3,1980, 753-768.

Black, Harold and Kwast, Myron, "An Analysis of the Behavior of Matured Black-Owned Commercial Banks," Journal of Economics and Business, Vol. 35, No.1, 1983, 41-54.

Boorman, John T., "The Prospect for Minority-Owned Commercial Banks: A Comparative Performance Analysis," Journal of Bank Research, Vol. 4, No. 2, 1974, 263-279.