The impact of the 2008 Global Financial Crisis on the efficiency and profitability of the U.S. small banks

Rasoul Rezvanian and Seyed Mehdian

Finance Research Letters, 2024, vol. 67, issue PB

Abstract: This paper uses data from 732 U.S. small banks operating between 2001 and 2021 to examine the cost efficiency, profitability, and the association between cost efficiency and profitability pre-during and post-2008 Global Financial Crisis (2008 GFC). In step 1, using Data Envelopment Analysis (DEA), the cost efficiency of small U.S. banks is estimated. The results indicate that the overall efficiency of U.S. small banks pre-during-post 2008 GFC has been continuously low, and the sources of the low level of overall efficiency have been the low level of technical rather than allocative efficiency. In turn, the basis of the low level of technical efficiency has been pure technical rather than scale efficiency. In step 2, the profitability of U.S. small banks is analyzed using the same data. The results indicate that the 2008 GFC had a significant negative impact on the profitability of U.S. small banks: The small U.S. banks had high profitability scores pre-2008 GFC, a declining trend that started three years before the 2008 GFC, a sharp decline during the 2008 GFC, and profitability recovery began in 2010 and continues until 2021. In step 3, the association between cost efficiency and profitability is investigated, and there is a strong positive association between overall efficiency and technical efficiency measures with the ROA.

Keywords: Banking efficiency; Financial ratios; Small banks performance; The 2008 global financial crises (search for similar items in EconPapers)
JEL-codes: D61 G20 G21 G29 (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finlet:v:67:y:2024:i:pb:s1544612324009097

DOI: 10.1016/j.frl.2024.105879

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