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March 1983, 
Vol. 65, No. 3
Posted 1983-03-01

Bank Holding Company Performance Studies and the Public Interest: Normative Uses for Positive Analysis

by Donald M. Brown

Donald M. Brown investigates whether performance studies actually are capable of identifying performance differences among banks and, hence, whether they are relevant to policy decisions about bank holding company acquisitions. The Board of Governors of the Federal Reserve System must make difficult normative judgments about the desirability of bank holding company acquisitions. Several of the prospective benefits that the Board has associated with such acquisitions can be measured by bank financial ratios. Brown reviews the results of previous studies that have investigated the effects of holding company ownership on these financial ratios and finds that there are significant weaknesses in their empirical results. Furthermore, the bank financial ratios used to measure performance are subject to serious distortions. Brown summarizes the methodological problems, most of which have been discussed previously in the literature, then explains how deposit interest rate ceilings and the nature of the banking firm and bank holding company organizations cause distortions in the financial ratios. He concludes that performance studies are not reliable guides to public policy toward bank holding company acquisitions.