Role Models Deserving of Regulatory Support or Pretenders With Obsolete Purpose? A Study of Mutual Banks in the U.S.

Abstract

The new Dodd-Frank era in bank regulation imposes stricter standards and requirements for banks. In contrast, there have been a number of attempts in Congress to legislatively protect with more accommodative regulation a specific type of banks that are in the mutual form, based on the notion that mutual banks are valuable to the banking system. In light of these developments, I investigate how mutual banks compare to stock banks, in order to assess whether there exists tangible evidence of mutual banks deserving regulatory protection. I examined the past 10-year financial data on all mutual and stock banks in the U.S. to determine how each type compared to the other in terms of performance, risk-taking, operational efficiency, and potential benefits to ownership. I found that stock banks had higher earnings than mutual banks on average, even during the most recent financial crisis when losses were severe. I found no compelling evidence that mutual banks were better than stock banks in terms of efficiency and providing benefits to ownership. I also confirmed findings of previous studies in this area that mutual banks take less risk than stock banks and exhibit expense-preference behaviors, probably for maximizing manager utility. Being mindful of the select number of variables tested and other limitations identified during the research process, I cautiously conclude that there is no obvious evidence revealing clear advantages of mutual banks over stock banks to the extent legislative and regulatory protection for mutual banks would be warranted.