Cost management is particularly important in the banking industry where pricing is competitive and interest rates are set by a combination of market forces and regulatory policies. Fictitious Bank Corp, is a midsized privately owned bank operating in multiple states. The company offers a range of traditional banking services including checking and savings accounts, IRAs, home and personal loans, and small business loans. In an effort to stay competitive in the marketplace, Fictitious’ top management has hired your team to perform an industry benchmark analysis of their different expense categories to assess their competitiveness in the market.
As an industry expert in banking, you have access to data on Fictitious’ competitors. You have compiled data on the non-interest expenses of 66 competitors with total assets between 300 and 700 million dollars. This data is provided the bankdata.xlsx file. The first tab titled “NonInterest Exp” includes non-interest cost and loan data, in thousands of dollars, for the 66 competitors. Additionally, you have gathered ATM expense data for 40 competitors provided in the second table titled (ATM Exp). Since Fictitious is looking to cut labor costs, they want to get a better idea of what competitors are paying for ATM expenses.
Selected Data Definitions
Total Non-Interest expense: all expenses incurred in the operation of the bank, which are not related to the interest paid on deposits and other liabilities.
Wage and Salary expense: total wages and salaries of bank employees excluding top executives. This expense includes insurance and other benefits.
Fixed Asset expense: expenses related to servicing physical assets such as rent, maintenance, and janitorial services. This number also includes depreciation on building and equipment owned.
ATM expense: expense related to ATMs including depreciation, maintenance, and service.
Demand deposits: total dollar value of time demand deposit accounts, which are funds available for immediate withdraw (i.e. upon demand).
Time deposits: total dollar value of time account deposits. Time accounts are funds that can only be withdrawn, without penalty, when the account matures, such as a certificate of deposit.
Savings deposits: total dollar value of savings account deposits.
*all data a presented in thousands of dollars
Assignment
1. Using the data provided in the “NonInterest Exp” tab, estimate the following OLS regression models for each of the three different types of expenses: wage expense, fixed asset expenses, and total non-interest expenses (i.e. run three different regressions).
Expense = α + β1*R.E. Loans + β2*Pers. Loans + β3*Small Bus. Loans + ε
2. Interpret the coefficients and explanatory power of the models in part1. Which costs are fixed and variable? Does the size and statistical significance of these coefficients seem to match what you would think about the three different types of costs?
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