Management efficiency in minority - and women - owned banks

Studies of the differences in operating performance of minorityand nonminorityowned commercial banks date back to the 1970s and early 1980s. The focal point of much of this research was to investigate the long-term viability of minority-owned institutions. Some studies investigated declining lending trends among minority institutions (Boorman and Kwast 1974 and Meinster and Elyasiani 1988), while others concerned the possible adverse consequences of these trends on the economic development of the inner cities (for example, Kwast and Black 1983). As more attention is devoted to economic development prospects in our nation’s core urban centers, the question of what role minority-owned banks (and other specially designated banks, including those owned by women) might play in the economic development of these communities naturally arises. Studies comparing the economic performance of minorityand nonminority-owned banks, for the most part, have revealed that the minority-owned banks have tended to be smaller, somewhat less profitable, and more expenditure prone than comparable groups of nonminority banks (Colby 1993). In addition, earlier studies reported that minority-owned banks tended to operate with lower ratios of equity capital to assets, to employ more conservative asset portfolio management policies, and to post higher loan losses than their nonminority peers (Brimmer 1971, Boorman and Kwast 1974, Bates and Bradford 1980, and Kwast 1981). In contrast to these negative findings, a more recent study by Meinster and Elyasiani (1988) found that minority-owned banks had significantly improved their capital ratios and decreased their holdings of liquid assets, while expanding their use of purchased funds. The authors also reported that there were no significant differences in the pricing and asset-liability management decisions in the overall financial performance of minority-owned banks compared with a sample of nonminority-owned banks. However, Meinster and Elyasiani observed that banks owned by African Americans continued to reflect the financial performance characteristics associated with minority-owned bank performance in the 1960s and 1970s. Caution must be exercised when comparing minority-owned with nonminority-owned banks on the basis of broadly defined markets or locational attributes. Studies by Clair (1988), Hunter (1978), and Mehdian and Elyasiani (1992) suggest that only when the two sets of banks are operating in identical or very similar market areas (in terms of economic and demographic characteristics) with similar customer bases is it safe to attribute differences in operating performance to differences in ownership and/or customer ethnicity. Given the inherent difficulty in constructing samples of minorityand nonminorityowned banks which serve identical market