Abstract

This paper, using annual data from 2003 to 2006, examines overall performance differentiation between banks in financial holding companies and independent banks. Overall performance is measured in terms of profitability, liquidity, and safety. In view of interaction between profitability, liquidity, and safety, a simultaneous equations regression model is constructed with profitability, liquidity, and safety, treated as dependent variables. To get the regression model workable, the rate on equity (ROE) is taken as a proxy for profitability, the liquidity reserve ratio as a proxy for liquidity, and the bank of international settlement ratio as well as the debt ratio as two proxies for safety. In view of two proxies for safety, two simultaneous equations regression models, model 1 and model 2, are constructed and estimated using two-stage least squares (2SLS). Evidence shows that 1) banks in financial holding companies performed better in terms of profitability than independent ones in 2005 while estimating both model 1 and model 2; 2) banks in financial holding companies performed better in terms of liquidity than independent ones in 2003 and 2006 while estimating model 2 and in 2005, while estimating model 1; 3) no statistically significant differences in safety are found between banks in financial holding companies and independent ones while estimating model 1 and model 2.

Key words: Performance, profitability, liquidity, safety, two-stage least squares (2SLS).