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Maintaining adequate liquidity while preserving profitability remains a central challenge for commercial banks because liquid assets strengthen resilience but typically generate lower returns than loans and other earning assets. This study investigates the effect of liquidity on the profitability of U.S. commercial banks using 8,000 quarterly bank observations for 2010–2024. Profitability is measured by return on assets (ROA), with return on equity (ROE) used for robustness, while liquidity, capital adequacy, the loan-to-asset ratio, and bank size are modeled as explanatory variables. Pooled OLS, fixed-effects, and random-effects estimators are compared, and diagnostic tests support a two-way fixed-effects model with standard errors clustered by bank and quarter. The preferred estimates show that a one-percentage-point increase in the liquidity ratio reduces annualized ROA by 0.0183 percentage points (SE = 0.0031; p < 0.001). A one-standard-deviation rise in liquidity, equal to 5.52 percentage points, lowers ROA by approximately 0.101 percentage points, representing 9.2% of the sample mean ROA of 1.097%. Capital adequacy increases ROA by 0.0530 percentage points, and the loan-to-asset ratio increases it by 0.0148 percentage points, both at p < 0.001, whereas bank size is insignificant (β = 0.1008; p = 0.352). The ROE robustness model also yields a negative liquidity coefficient of −0.1074 (p < 0.001). The findings confirm a measurable liquidity–profitability trade-off and support risk-sensitive liquidity regulation that protects financial stability without encouraging persistently excessive holdings of low-yield liquid assets.

This paper examines how uninsured deposits influence credit union funding and whether private excess deposit insurance alters the stability, pricing, and lending capacity of uninsured deposits — deposits that exceed the federal deposit insurance limit. Using U.S. credit union Call Report data from 1995–2022, we exploit variation across institution size, insurance regime, and participation in optional private excess deposit insurance.  We distinguish between pre-crisis (1995–2007) and post-crisis (2009–2022) periods surrounding the 2008 expansion of federal insurance limits.  We document pronounced heterogeneity across the size distribution.  For small credit unions, uninsured deposits are limited in scale and are associated with lower loan intensity.  In contrast, uninsured deposits play a central funding role for large credit unions, which account for 94% of industry assets and 97% of uninsured deposits. For these institutions, uninsured deposits support lending and command higher funding costs — effects that are significantly moderated by excess deposit insurance, reducing funding costs by approximately 27 basis points during the pre-crisis period.  Following 2008, excess insurance participation declines among large institutions but increases modestly among small firms.  Overall, excess deposit insurance functions as a partial substitute for federal coverage, stabilizing uninsured funding without increasing delinquency rates — evidence against moral hazard.

Is credit card lending by credit unions within the United States primarily a service to members or a profit generating product?  This paper examines the impact of credit card lending on the performance of U.S. credit unions from 2000-2017. A panel data approach using fixed effects regression methodology is undertaken to make comparative analyses of credit union performance across several dimensions including the percentage of the firm’s assets in credit card loans and percent of members with a credit card. Credit unions are stratified into deciles by size and significant results are found using this methodology. Controlling for delinquencies and charge-offs among other variables, credit card lending significantly increases ROA for both large and small credit unions, but only after the Financial Crisis of 2008, and the establishment of the CARD Act in 2009. Interestingly, the ROA of small credit unions significantly increases with the percentage of members using the institution’s credit card.  This result suggests that small credit unions would benefit by increasing the penetration of credit cards within their membership base.

Although community banks hold a small proportion of U.S. banking assets and market share, they perform a crucial function in the U.S. economy by offering vital financial services to businesses and individuals in regions where major banks do not operate. Their diseconomies of scale put them at a competitive disadvantage in relation to large, national commercial banks when coping with digital transformation and regulatory requirements. These challenges mounted after the Great Recession. This research, with the usage of four key financial ratio categories and the implementation of logit regression, looks into how U.S. community banks evolved in the aftermath of the financial crisis, 2009-2017. It divides the entire sample period into two sub-sample periods, 2009-2012 and 2013-2017, and comparing community banks with their larger counterpart and within the community bank sector between the largest and the smallest asset size quartiles of the group. This study, to the best of our knowledge, represents the only known research at the time of publication that compares recovery of banks post the Great Recession based on whether they are community or non-community banks. It finds that community banks tended to recover more slowly in terms of the bottom line, ROE, after the Great Recession than large national banks. Additionally, community banks are more likely to carry even less capital than their national counterparts in the later time period as compared with the earlier time period. In contrast, banks with higher liquidity and greater operating efficiency are more associated with community banks than non-community banks. Also, the empirical findings posit that size matters, to a certain extent. That is, while size does not command an absolute advantage, a certain threshold may be necessary for a bank to stay competitive. This provides a rationale for mergers and acquisitions taking place in the banking sector.

This paper aims to analyse the effects of financial statement indicators and off-balance sheet items affecting risk measures among Indian banks employing both panel data regression and a non-parametric decision tree approach. We explore the effects of bank size, leverage, exposure to contingent liabilities including off-balance sheet derivatives usage and macroeconomic factors on risk measures for banks. In this paper, it is also aimed to examine the effects of the major financial liberalization policy period in the domestic market in India that started in the mid-1990s and ended around 2004 as well as impacts of the 2008 global financial crisis on the risk measures of banks operating in India.  As risk measures, we present a comparative analysis of liquidity, solvency, and interest rate risk measures of Indian banks across public (government) and private ownership categories. Main findings from our study demonstrate (i) significant impact of capital adequacy and the bank size on all the risk measures, (ii) contingent liabilities (including derivatives usage) at banks is observed to significantly impact the asset management measure of liquidity risk and the solvency risk of banks, (iii) GDP growth is observed to impact the asset management and liability management measure of liquidity risk, (iv) the global financial crisis is found to have a significant impact on the liquidity risk measures and interest rate risk, but a weak effect on solvency risk of Indian banks, (v) bank ownership category (government owned versus private sector banks) is observed to have a significant impact on all the risk measures, and finally (vi) financial liberalization reforms had a highly significant effect on the liquidity risk at banks.

The crux of bank accounting is how to measure and disclose ex ante credit risk, as loan yields and cost of funds are determined by managerial effectiveness and the financial market. This paper examines how the practice of setting up provisions for loan losses by bank managers had changed to preserve regulatory capitals around the 2008 financial crisis. This paper examines the empirical relationship between ex ante credit loss, which is proxied by loan losses provisions, and realized credit loss, which is measured by net charge-off. The empirical relations are examined before, during, and after the 2008 financial crisis to find the patterns of prediction errors of the incurred loss model. This paper obtains evidence that the empirical relation between non-performing assets and provisions for loan losses weakened at the time of a financial crisis. The relations of net charge-offs and allowance for loan losses on provisions for loan losses amplified during a financial crisis by accounting design. After the financial crisis is over, the empirical relation between non-performing assets and provisions for loan losses does not return back to the pre-crisis relation, but to a different, new post-crisis relation. This paper obtains evidence that financially stable banks in terms of the tier 1 capital ratio, return on assets, market-to-book ratio, or dividend payout ratio tend to adjust provisions for loan losses in a larger scale in response to a financial crisis than less stable banks.

This paper describes how behavioral biases influence the resolution of financial covenant violations. Prior literature documents that violation waivers are common; however, there is a lack of discussion on the determinants that lead loan officers to waive covenant violations. We rely on the escalation of commitment bias (or the sunk cost phenomenon) to discuss how loan officers may become attached to a selected course of action and fail to incorporate new information, increasing the likelihood of covenant waivers. We explain the implications of this bias on bank financial reports by detailing how accounting links loan quality to bank financial statements. We further draw on the psychology literature to offer potential solutions to mitigate overcommitment in the context of loan officers. Future research can examine the extent to which loan officers knowingly or unknowingly steer away from rational decision-making. This study has practical implications as users of bank financial reports, including investors, auditors, examiners, and bank managers, learn about processes and challenges on how accounting mechanics link bank loan portfolios to financial statements.

This paper researches the impact that shadow banking in China has upon credit creation and the potential effectiveness of monetary policy. Using a credit creation model, we derive the effect that shadow banking has upon the money multiplier and the money supply. The model shows that shadow banking can change the money multiplier, potentially increasing it during an expansion and decreasing it during a contraction. Introducing shadow banking in a CC-LM model results in a shift of the CC and LM curves resulting in a higher equilibrium output. A vector autoregressive model is used to empirically estimate the impact of shadow banking deposits' growth rate on the growth rates of the broad money supply, GDP, and the CPI. The results show that shadow banking's credit creation function in China has a pro-cyclical characteristic, potentially reducing the money supply's controllability and increasing the difficulty in effectively regulating monetary policy. This paper introduces shadow banking into the currency creation process of traditional commercial banks, accounting for the reserve requirement ratio, the excess reserve ratio, the shadow bank leakage rate, and the reserved deduction rate. Future research can determine whether coordinating monetary policy and leverage ratio regulation mitigates the impact of shadow banking. Another area of research is how the shadow banking of non-financial companies affect monetary policy.

Financial crises have regularly afflicted economies throughout history and the United States has been no exception.  This paper examines the Panic of 1907, the Crash of 1929 and the Great Depression and the Great Recession of 2007-08 and discusses the responses of the government and regulators.  The short version of the story is that the while the government response has varied in terms of monetary and fiscal policy, the regulatory response has remained essentially the same.  The typical reactive regulation sounds good and gives the appearance of accomplishing something but, in fact, only serves to sow the seeds of future crises. The ineffective implementation of existing regulation has had a similar result. Indeed, several authors note that most financial innovation in recent years has its origins in circumventing new regulations. Likewise, government monetary and fiscal responses may or may not help the economy and often give the appearance of great arbitrariness.  Our conclusion is that there will be unforeseen financial crises in the future, sweeping regulation and promises of recent politicians notwithstanding.  Serious study of the unanticipated consequences of this regulation and the development of more robust risk management systems will help us mitigate the effects of future crises but will be of little assistance when it comes to avoiding them. Developing the analyses and risk management systems requires a detailed study of financial history keep both successes and failures fresh in our collective memory.

Many U.S. banks failed or performed poorly during the recent financial crisis.  Although the costliest failures were large institutions, the majority of failures were community banks (less than $1 billion in total assets).  Community banks, which are considered instrumental in small business lending and employment growth, face different risks and challenges than their larger counterparts, including a lack of economies of scale and scope and exclusion from “too-big-to-fail” status.  These challenges, coupled with the recent failures, motivate research into potential strategies managers can use to improve performance.  This study examined the relationship between three potential diversification strategies and community bank risk-adjusted performance from 2007 to 2011.  Understanding these relationships could improve management’s decision-making, allowing them to choose risk-mitigating strategies during a severe economic downturn.  Herfindahl-Hirschman Indexes (HHIs) were calculated as proxies for geographic, activity, and asset diversification.  Multiple regression models for each of the five years were used to calculate the impact of diversification variables on risk-adjusted ROA.  The results show that diversification in all areas is directly related to performance; however, only the asset diversification relationship is significant.  To the extent possible for community banks, diversification may improve risk-adjusted performance.