This paper aims to provide a conceptual framework to examine competitive disadvantage of banks that suffer from poor performance. Banks generate revenues mainly from the interest rate spread on taking deposits and making loans while collecting fees in the process. To maximize firm value, banks seek loan growth and expense control while managing risk associated with loans with respect to non-performing borrowers or narrowing interest spread between assets and liabilities. Competitive disadvantage refers to the failure to access imitable resources and to build managing capabilities to gain sustainable return given appropriate risk management. This paper proposes a four-quadrant framework of organizational typology is subsequently proposed to examine the features of competitive disadvantage in the banking sector. A resource configuration model, which is extracted from CAMEL indicators to examine the underlying features of bank failures.
[1] Boston Consulting Group (2009). "The financial crisis has slashed the
banking industry-s market value by $5.5 Trillion," Press Releases, 18
Feb. Accessed 1 November, 2011 at http://www.bcg.com/media/Press
Release Details.aspx?id= tcm:12-8043.
[2] A. N. Berger, and D. B. Humphrey, "Measurement and efficiency issues
in commercial banking," in Output Measurement in the Service Sectors,
Zvi Griliches, Ed.. Chicago: University of Chicago Press, 1992, pp.
245-279.
[3] R. S. Barr, and T. F. Siems, "Predicting bank failure using DEA to
quantify management quality," Financial Industry Studies working paper
no. 1-94, Federal Reserve Bank of Dallas, 1994.
[4] D. Wheelock, and P. Wilson, "Explaining bank failures: deposit
insurance, regulation and efficiency," Rev. Econ. Stat., vol. 77, no. 3, pp.
689-700, Nov. 1995.
[5] D. Wheelock, and P. Wilson, "Why do banks disappear? the determinants
of U.S. bank failures and acquisitions," Rev. Econ. Stat., vol. 82, no. 1, pp.
127-138, Feb. 2000.
[6] B. Wernerfelt, "A resource-based view of the firm," Strategic Magn. J.,
vol. 5, no. 2, pp. 171-180, Apr./Jun. 1984.
[7] J. B. Barney, "Firm resources and sustained competitive advantage," J.
Magn, vol. 17, no. 1, pp. 99-120, Mar. 1991.
[8] D. G. Hoopes, T. L. Madsen, and G. Walker, "Guest editors- introduction
to the special Issue: why is there a resource-based view? toward a theory
of competitive heterogeneity," Strategic Magn. J., vol. 24, no. 10, pp.
889-902, Oct 2003.
[9] R. P. Rumelt, "Towards a strategic theory of the firm," in Competitive
Strategic Management, R. B. Lamb Ed. Englewood Cliffs, NJ:
Prentice-Hall.
[10] J. B. Barney, "Strategic factor markets: expectations, luck and business
strategy," Magn. Sci., vol. 32, no. 10, pp 1231-1241, Oct. 1986.
[11] R. B. Mancke, "Causes of interfirm profitability differences: A new
interpretation of the evidence," Quart. J. Econ., vol. 88, no. 2, pp.
181-193, May 1974.
[12] A. L. Stinchcombe, "On equilibrium, organizational form, and
competitive strategy," in Economics Meets Sociology in Strategic
Management (Advances in Strategic Management, Volume 17), J. A. C.
Baum, F. Dobbin Ed., Bradford, West Yorkshire, UK: Emerald Group
Publishing Limited, 2000, pp. 271-284.
[13] P. A. Meyer, and H. W. Pifer, "Prediction of bank failures," Journal of
Finance, Vol. 25, pp. 853-868, Sep. 1970.
[14] D. Martin, "Early warning of bank failure: a logit regression approach," J.
Bank. Financ., vol. 1, no. 3, pp. 249-276, Jun. 1977.
[15] R. Pettway, and, J. Sinkey, "Establishing on-site bank examination
priorities: an early warning system using accounting and market
information," J. Financ., vol. 35, no. 1, pp. 137-150, Mar. 1980.
[16] W. S. Lane, S. Looney, and J. Wansley, "An application of the Cox
proportional hazards model to bank failure," J. Bank.Financ., vol. 10, no.
4, pp.511-531, Dec. 1986.
[17] R. Cole, and J. Gunther, "Separating the likelihood and timing of bank
failure," Journal of Banking and Finance, Vol. 19, pp. 1073-1089, Sep.
1995.
[18] R. Cole, and J. Gunther, "Predicting bank failures: a comparison of onand
off-site monitoring systems," J. Financ. Serv. Res., vol. 13, no. 2, pp.
103-117, Apr. 1998.
[19] J. Jagtiani, and C. Lemieux, "Market discipline prior to bank failure,"
J.Econ. Bus. vol. 53, no. 2-3, pp. 313-324, Mar.-Jun. 2001.
[20] T. Shumway, "Forecasting bankruptcy more accurately: a simple hazard
model," J. Bus., vol. 74, no. 1, pp. 101-124, Jan. 2001.
[21] M. Arena, "Bank failures and bank fundamentals: a comparative analysis
of Latin America and East Asia during the nineties using bank-level
data," J. Bank. Financ., vol. 32, no. 2, pp.299-310, Feb. 2008.
[22] R. H. Pettway, "Potential insolvency, market efficiency, and bank
regulation of large commercial banks," J. Financ. Quant. Anal., vol. 15,
no. 1, pp. 219-236, Mar. 1980.
[23] W. H. Beaver, "Financial ratios as predictors of failure," J. Account. Res.,
vol. 4, Empirical Research in Accounting: Selected Studies, pp. 71-111,
1966.
[24] E. I. Altman, "Financial ratios, discriminant analysis and the prediction of
corporate bankruptcy," J. Financ., vol. 23, no. 4, pp. 589-609, Sep. 1968.
[25] R. G. West, "A factor-analytic approach to bank condition," J. Bank.
Financ., vol. 9, no. 2, pp. 254-266, Jun. 1985.
[26] K. Y. Tam, and M. Y. Kiang, "Managerial applications of neural
networks: the case of bank failure predictions," Magn. Sci., vol. 38, no. 7,
pp. 926-947, Jul. 1992.
[27] S. Sarkar, and R.S. Sriram, "Bayesian models for early warning of bank
failures," Magn. Sci., vol. 47, no. 11, pp. 1457-1475, Nov. 2001.
[28] T. B. King, D. Nuxoll, and T.J. Yeager, "Are the causes of bank distress
changing? can researchers keep up?," FRB of St. Louis Supervisory
Policy Analysis Working Paper No. 2004-7, FDIC Center for Financial
Research Working Paper No. 2005-03. Accessed on 31 Mar. 2012 at
http://ssrn.com/abstract=631241.
[29] H. Zhao, A. P. Sinha, and W. Ge. "Effects of feature construction on
classification performance: an empirical study in bank failure prediction,"
Expert Syst. Appl., vol. 36, no. 2, pp. 2633-2644, Mar. 2009.
[30] J. W. Wilcox, A simple theory of financial ratios as predictors of failure, J.
Account. Res., vol. 9, no. 2, pp. 389-395, autumn 1971.
[31] J. W. Wilcox, "A prediction of business failure using accounting data," J.
Account. Res., vol. 11, Empirical Research in Accounting: Selected
Studies, pp. 163-179, 1973.
[32] B. J. Hirtle, and J. A. Lopez, "Supervisory information and the frequency
of bank examinations," FRBNY Econ. Policy Rev., vol. 5, no. 1, pp. 1-19,
Apr. 1999.
[33] J. B. Thomson, "Predicting bank failures in the 1980s," Federal Reserve
Bank of Cleveland Econ. Rev., vol. 27, no. Q1, pp. 9-20, Aug. 1991.
[34] D. Wheelock,, and P. Wilson, "Robust nonparametric quantile estimation
of efficiency and productivity change in U. S. commercial banking,
1985-2004," J. Bus. Econ. Stat., 27(3), 354-368, Sep. 2009.
[35] V. Ivashina, and D. Scharfstein, "Bank lending during the financial crisis
of 2008," J Financ. Econ., vol. 97, no. 3, pp. 319-338, Sep. 2010.
[36] Y. C. Tang, and F.M. Liou, "Does firm performance reveal its own
causes? the role of Bayesian inference," Strategic Magn. J., vol. 31, no. 1,
pp. 39-57, Jan. 2010.
[37] T. C. Powell, "Complete advantage: logical and philosophical
considerations," Strategic Magn. J. vol. 22, no. 9, pp. 875-888, Sep. 2001.
[38] T. C. Powell, "The philosophy of strategy," Strategic Magn. J., vol. 23,
no. 9, pp.873-880, Sep. 2002.
[39] T. C. Powell, "Strategy without ontology," Strategic Magn. J., 24(3), pp.
285-291, Mar. 2003.
[40] F. M. Liou, "The effects of asset-light strategy on competitive advantage
in the telephone communications industry," Tech. Anal. Strategic Magn.,
vol. 23, no. 9, pp. 951-967, Oct. 2011.
[41] D. S. Sivia, D.S. Data Analysis: A Bayesian Tutorial. Oxford, UK:
Oxford University Press, 1996.
[42] R. W. Coff, R.W., "When competitive advantage doesn't lead to
performance: the resource-based view and stakeholder bargaining
power," Organ. Sci., vol. 10, no. 2, pp. 119-133, Mar.-Apr. 1999.
[43] S. A. Lippman, and R. P. Rumelt, "Uncertain imitability: an analysis of
interfirm differences in efficiency under competition." Bell J. Econ., vol.
13, no. 2, pp.418-438, autumn 1982.
[44] M. A. Peteraf, "The cornerstones of competitive advantages: a
resource-based view," Strategic Magn J., vol. 14, no. 3, pp. 179−191, Mar.
1993.
[45] M. E. Porter, Competitive Advantage: Creating and Sustaining Superior
Performance. New York, NY: Free Press, 1985.
[46] R. Reed, and R. J. DeFillippi, "Causal ambiguity, barriers to imitation,
and sustainable competitive advantage," Acad. of Magn. Rev., vol. 15, no.
1, pp. 88-102, Jan. 1990.
[47] M. Boisot, and A. Canals, "Data, Information and Knowledge: Have We
Got It Right?," J. Evol. Econ., vol. 14, no. 1, pp. 43-67, Sep. 2004.
[48] K. J. Arrow, "On the agenda of organizations," in The Economics of
Information, K. J. Arrow Ed., Cambridge, MA: Belknap Press of Harvard
University Press, 1984, pp. 167-184.
[49] T. S. Kuhn, The Structure of Scientific Revolutions. Chicago, IL:
University of Chicago Press, 1974.
[50] S. Singh, The Code Book: The Science of Secrecy from Ancient Ehypt to
Quantum Cryptography. New York, NY: Anchor Books, 1999.
[51] O. Williamson, "The economies of organization: the transaction cost
approach," American J. Social., vol. 87, no. 3, pp. 548-577, Nov. 1981.
[52] T. J. Frecka, and C. F. Lee, "Generalized financial ratio adjustment
process and their implications," J. Account. Res., vol. 21, no. 1, pp.
301-316, spring 1983.
[53] C. F. Lee, and C. Wu, "Expectation formation and financial ratio
adjustment process," Account. Rev., vol. 63, no. 2, pp. 292-306, Apr.
1988.
[54] B. Lev, "Industry averages as targets for financial ratios," J. Account.
Res., vol. 7, no. 2, pp. 290-299, Autumn 1969.
[55] T. Salmi, and T. Martikainen, "A review of the theoretical and empirical
basis of financial ratio analysis" Finn. J. Bus. Econ., vol. 4/94, pp.
426-448, 1994.
[56] A. N. Berger, and D.B. Humphrey, "The dominance of inefficiencies over
scale and product mix economies in banking," J. Monetary Econ. Vol., 28,
no. 1, pp. 117-148, Aug. 1991.
[1] Boston Consulting Group (2009). "The financial crisis has slashed the
banking industry-s market value by $5.5 Trillion," Press Releases, 18
Feb. Accessed 1 November, 2011 at http://www.bcg.com/media/Press
Release Details.aspx?id= tcm:12-8043.
[2] A. N. Berger, and D. B. Humphrey, "Measurement and efficiency issues
in commercial banking," in Output Measurement in the Service Sectors,
Zvi Griliches, Ed.. Chicago: University of Chicago Press, 1992, pp.
245-279.
[3] R. S. Barr, and T. F. Siems, "Predicting bank failure using DEA to
quantify management quality," Financial Industry Studies working paper
no. 1-94, Federal Reserve Bank of Dallas, 1994.
[4] D. Wheelock, and P. Wilson, "Explaining bank failures: deposit
insurance, regulation and efficiency," Rev. Econ. Stat., vol. 77, no. 3, pp.
689-700, Nov. 1995.
[5] D. Wheelock, and P. Wilson, "Why do banks disappear? the determinants
of U.S. bank failures and acquisitions," Rev. Econ. Stat., vol. 82, no. 1, pp.
127-138, Feb. 2000.
[6] B. Wernerfelt, "A resource-based view of the firm," Strategic Magn. J.,
vol. 5, no. 2, pp. 171-180, Apr./Jun. 1984.
[7] J. B. Barney, "Firm resources and sustained competitive advantage," J.
Magn, vol. 17, no. 1, pp. 99-120, Mar. 1991.
[8] D. G. Hoopes, T. L. Madsen, and G. Walker, "Guest editors- introduction
to the special Issue: why is there a resource-based view? toward a theory
of competitive heterogeneity," Strategic Magn. J., vol. 24, no. 10, pp.
889-902, Oct 2003.
[9] R. P. Rumelt, "Towards a strategic theory of the firm," in Competitive
Strategic Management, R. B. Lamb Ed. Englewood Cliffs, NJ:
Prentice-Hall.
[10] J. B. Barney, "Strategic factor markets: expectations, luck and business
strategy," Magn. Sci., vol. 32, no. 10, pp 1231-1241, Oct. 1986.
[11] R. B. Mancke, "Causes of interfirm profitability differences: A new
interpretation of the evidence," Quart. J. Econ., vol. 88, no. 2, pp.
181-193, May 1974.
[12] A. L. Stinchcombe, "On equilibrium, organizational form, and
competitive strategy," in Economics Meets Sociology in Strategic
Management (Advances in Strategic Management, Volume 17), J. A. C.
Baum, F. Dobbin Ed., Bradford, West Yorkshire, UK: Emerald Group
Publishing Limited, 2000, pp. 271-284.
[13] P. A. Meyer, and H. W. Pifer, "Prediction of bank failures," Journal of
Finance, Vol. 25, pp. 853-868, Sep. 1970.
[14] D. Martin, "Early warning of bank failure: a logit regression approach," J.
Bank. Financ., vol. 1, no. 3, pp. 249-276, Jun. 1977.
[15] R. Pettway, and, J. Sinkey, "Establishing on-site bank examination
priorities: an early warning system using accounting and market
information," J. Financ., vol. 35, no. 1, pp. 137-150, Mar. 1980.
[16] W. S. Lane, S. Looney, and J. Wansley, "An application of the Cox
proportional hazards model to bank failure," J. Bank.Financ., vol. 10, no.
4, pp.511-531, Dec. 1986.
[17] R. Cole, and J. Gunther, "Separating the likelihood and timing of bank
failure," Journal of Banking and Finance, Vol. 19, pp. 1073-1089, Sep.
1995.
[18] R. Cole, and J. Gunther, "Predicting bank failures: a comparison of onand
off-site monitoring systems," J. Financ. Serv. Res., vol. 13, no. 2, pp.
103-117, Apr. 1998.
[19] J. Jagtiani, and C. Lemieux, "Market discipline prior to bank failure,"
J.Econ. Bus. vol. 53, no. 2-3, pp. 313-324, Mar.-Jun. 2001.
[20] T. Shumway, "Forecasting bankruptcy more accurately: a simple hazard
model," J. Bus., vol. 74, no. 1, pp. 101-124, Jan. 2001.
[21] M. Arena, "Bank failures and bank fundamentals: a comparative analysis
of Latin America and East Asia during the nineties using bank-level
data," J. Bank. Financ., vol. 32, no. 2, pp.299-310, Feb. 2008.
[22] R. H. Pettway, "Potential insolvency, market efficiency, and bank
regulation of large commercial banks," J. Financ. Quant. Anal., vol. 15,
no. 1, pp. 219-236, Mar. 1980.
[23] W. H. Beaver, "Financial ratios as predictors of failure," J. Account. Res.,
vol. 4, Empirical Research in Accounting: Selected Studies, pp. 71-111,
1966.
[24] E. I. Altman, "Financial ratios, discriminant analysis and the prediction of
corporate bankruptcy," J. Financ., vol. 23, no. 4, pp. 589-609, Sep. 1968.
[25] R. G. West, "A factor-analytic approach to bank condition," J. Bank.
Financ., vol. 9, no. 2, pp. 254-266, Jun. 1985.
[26] K. Y. Tam, and M. Y. Kiang, "Managerial applications of neural
networks: the case of bank failure predictions," Magn. Sci., vol. 38, no. 7,
pp. 926-947, Jul. 1992.
[27] S. Sarkar, and R.S. Sriram, "Bayesian models for early warning of bank
failures," Magn. Sci., vol. 47, no. 11, pp. 1457-1475, Nov. 2001.
[28] T. B. King, D. Nuxoll, and T.J. Yeager, "Are the causes of bank distress
changing? can researchers keep up?," FRB of St. Louis Supervisory
Policy Analysis Working Paper No. 2004-7, FDIC Center for Financial
Research Working Paper No. 2005-03. Accessed on 31 Mar. 2012 at
http://ssrn.com/abstract=631241.
[29] H. Zhao, A. P. Sinha, and W. Ge. "Effects of feature construction on
classification performance: an empirical study in bank failure prediction,"
Expert Syst. Appl., vol. 36, no. 2, pp. 2633-2644, Mar. 2009.
[30] J. W. Wilcox, A simple theory of financial ratios as predictors of failure, J.
Account. Res., vol. 9, no. 2, pp. 389-395, autumn 1971.
[31] J. W. Wilcox, "A prediction of business failure using accounting data," J.
Account. Res., vol. 11, Empirical Research in Accounting: Selected
Studies, pp. 163-179, 1973.
[32] B. J. Hirtle, and J. A. Lopez, "Supervisory information and the frequency
of bank examinations," FRBNY Econ. Policy Rev., vol. 5, no. 1, pp. 1-19,
Apr. 1999.
[33] J. B. Thomson, "Predicting bank failures in the 1980s," Federal Reserve
Bank of Cleveland Econ. Rev., vol. 27, no. Q1, pp. 9-20, Aug. 1991.
[34] D. Wheelock,, and P. Wilson, "Robust nonparametric quantile estimation
of efficiency and productivity change in U. S. commercial banking,
1985-2004," J. Bus. Econ. Stat., 27(3), 354-368, Sep. 2009.
[35] V. Ivashina, and D. Scharfstein, "Bank lending during the financial crisis
of 2008," J Financ. Econ., vol. 97, no. 3, pp. 319-338, Sep. 2010.
[36] Y. C. Tang, and F.M. Liou, "Does firm performance reveal its own
causes? the role of Bayesian inference," Strategic Magn. J., vol. 31, no. 1,
pp. 39-57, Jan. 2010.
[37] T. C. Powell, "Complete advantage: logical and philosophical
considerations," Strategic Magn. J. vol. 22, no. 9, pp. 875-888, Sep. 2001.
[38] T. C. Powell, "The philosophy of strategy," Strategic Magn. J., vol. 23,
no. 9, pp.873-880, Sep. 2002.
[39] T. C. Powell, "Strategy without ontology," Strategic Magn. J., 24(3), pp.
285-291, Mar. 2003.
[40] F. M. Liou, "The effects of asset-light strategy on competitive advantage
in the telephone communications industry," Tech. Anal. Strategic Magn.,
vol. 23, no. 9, pp. 951-967, Oct. 2011.
[41] D. S. Sivia, D.S. Data Analysis: A Bayesian Tutorial. Oxford, UK:
Oxford University Press, 1996.
[42] R. W. Coff, R.W., "When competitive advantage doesn't lead to
performance: the resource-based view and stakeholder bargaining
power," Organ. Sci., vol. 10, no. 2, pp. 119-133, Mar.-Apr. 1999.
[43] S. A. Lippman, and R. P. Rumelt, "Uncertain imitability: an analysis of
interfirm differences in efficiency under competition." Bell J. Econ., vol.
13, no. 2, pp.418-438, autumn 1982.
[44] M. A. Peteraf, "The cornerstones of competitive advantages: a
resource-based view," Strategic Magn J., vol. 14, no. 3, pp. 179−191, Mar.
1993.
[45] M. E. Porter, Competitive Advantage: Creating and Sustaining Superior
Performance. New York, NY: Free Press, 1985.
[46] R. Reed, and R. J. DeFillippi, "Causal ambiguity, barriers to imitation,
and sustainable competitive advantage," Acad. of Magn. Rev., vol. 15, no.
1, pp. 88-102, Jan. 1990.
[47] M. Boisot, and A. Canals, "Data, Information and Knowledge: Have We
Got It Right?," J. Evol. Econ., vol. 14, no. 1, pp. 43-67, Sep. 2004.
[48] K. J. Arrow, "On the agenda of organizations," in The Economics of
Information, K. J. Arrow Ed., Cambridge, MA: Belknap Press of Harvard
University Press, 1984, pp. 167-184.
[49] T. S. Kuhn, The Structure of Scientific Revolutions. Chicago, IL:
University of Chicago Press, 1974.
[50] S. Singh, The Code Book: The Science of Secrecy from Ancient Ehypt to
Quantum Cryptography. New York, NY: Anchor Books, 1999.
[51] O. Williamson, "The economies of organization: the transaction cost
approach," American J. Social., vol. 87, no. 3, pp. 548-577, Nov. 1981.
[52] T. J. Frecka, and C. F. Lee, "Generalized financial ratio adjustment
process and their implications," J. Account. Res., vol. 21, no. 1, pp.
301-316, spring 1983.
[53] C. F. Lee, and C. Wu, "Expectation formation and financial ratio
adjustment process," Account. Rev., vol. 63, no. 2, pp. 292-306, Apr.
1988.
[54] B. Lev, "Industry averages as targets for financial ratios," J. Account.
Res., vol. 7, no. 2, pp. 290-299, Autumn 1969.
[55] T. Salmi, and T. Martikainen, "A review of the theoretical and empirical
basis of financial ratio analysis" Finn. J. Bus. Econ., vol. 4/94, pp.
426-448, 1994.
[56] A. N. Berger, and D.B. Humphrey, "The dominance of inefficiencies over
scale and product mix economies in banking," J. Monetary Econ. Vol., 28,
no. 1, pp. 117-148, Aug. 1991.
@article{"International Journal of Business, Human and Social Sciences:53056", author = "F. May Liou and Y. C. Edwin Tang", title = "What Have Banks Done Wrong?", abstract = "This paper aims to provide a conceptual framework to examine competitive disadvantage of banks that suffer from poor performance. Banks generate revenues mainly from the interest rate spread on taking deposits and making loans while collecting fees in the process. To maximize firm value, banks seek loan growth and expense control while managing risk associated with loans with respect to non-performing borrowers or narrowing interest spread between assets and liabilities. Competitive disadvantage refers to the failure to access imitable resources and to build managing capabilities to gain sustainable return given appropriate risk management. This paper proposes a four-quadrant framework of organizational typology is subsequently proposed to examine the features of competitive disadvantage in the banking sector. A resource configuration model, which is extracted from CAMEL indicators to examine the underlying features of bank failures.
", keywords = "Bank failure, CAMEL, competitive disadvantage, resource configuration.", volume = "6", number = "6", pages = "1188-7", }
