Is There Excess Capacity in Rural Banking Markets?

James E McNulty and Aigbe Akhigbe

The Financial Review, 1998, vol. 33, issue 4, 107-24

Abstract: The literature indicates that it is difficult to identify and quantify the degree of excess capacity in banking. Economic theory indicates that there are at least three indicators of excess capacity in banking: (a) low loan-to-asset ratios, (b) low profitability, and (c) high per unit operating expense relative to some norm. If excess capacity exists, it will be easiest to identify, through these indicators, at small rural banks. This paper finds significant evidence of excess capacity at rural Colorado banks using univariate analysis; simultaneous equations analysis reinforces this conclusion. It appears that the "excess capacity effect" outweighs the "market power effect" in these rural banking markets. Copyright 1998 by MIT Press.

Date: 1998
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