Minority-Owned Banks Less Efficient Than Average, Chicago Fed Study

A study by the Federal Reserve Bank of Chicago found that minority-owned banks are on average five percentage points less efficient than others.

The study, released last week, used data from 1992 and gave banks efficiency scores ranging from 0% to 100%. A bank with a score of 0% would be perfectly efficient; a bank with a score of 100% would be totally inefficient.

On average, non-minority-owned banks had a 25% efficiency score; various minority-owned banks scored between 27% and 36%. Among minority-owned banks, women-owned banks were the most efficient.

The study's authors, Iftekhar Hasan, associate professor of finance at the New Jersey Institute of Technology, and William C. Hunter, senior vice president of research at the Chicago Fed, determined a bank's efficiency based on its cost of capital, labor, and funds. The authors compiled data from 95 minority-owned banks and 127 non-minority-owned banks.

"The study shows that minority banks are affected by many of the same factors that affect other banks," said Mike ter Maat, senior economist at the American Bankers Association.

The study found that banks serving new and less competitive markets tended to be the least efficient. Mr. ter Maat said minority banks might be less efficient because they tend to have less experience and often do business in less competitive markets.

The study also found that minority- and women-owned banks under holding companies tended to be more efficient than independent banks that were owned by minorities or women.

This finding may result from the lack of management expertise available to independent minority- and women-owned banks in adapting customer service delivery systems to unique markets, the study said.

Mr. Smith writes for Medill News Service.

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