Current Capital Budgeting Procedures in Commercial Banks

By Matz, Lizbeth A.; Coulmas, Nancy | The Journal of Bank Cost & Management Accounting, January 1, 1995 | Go to article overview

Current Capital Budgeting Procedures in Commercial Banks


Matz, Lizbeth A., Coulmas, Nancy, The Journal of Bank Cost & Management Accounting


The banking industry has experienced many changes in the last several years, and there are no indications the future will be different. One of the most significant drivers of the future change is likely to be the Riegle-Neal Interstate Banking and Branching Efficiency Ad of 1994, which will allow banks to open branches nationwide starting in 1997. Analysts who track bank acquisitions predict a major upsurge in merger and acquisition activity, especially in small to medium size banks. Some experts predict that the number d banks by the year 2000 will be approximately half the current 10,000.(1)

This movement of banks and bank holding companies into new markets and the concomitant capital expenditures will increase the potential for using a variety of capital budgeting techniques. In an effort to gauge current industry practices for capital budgeting and to serve as a basis for measuring change, a survey of commercial banks was undertaken. This paper presents the findings of that survey.

THE SURVEY

A survey instrument was mailed to the chief financial officers of 490 commercial banks. The banks were chosen at random from the banks listed in the 1993 Moody's Bank and Finance Manual. The respondents were not asked to identify themselves or their institution.

The questionnaire asked about bank characteristics, such as total assets and deposits, and capital budgeting procedures. Fifty-five surveys were returned, a rate of approximately 11%. This response rate is low; however, it has become increasingly difficult to entice financial executives to respond to mail surveys from finance and accounting professors.(2) In addition, there were no follow-up mailings to banks that did not return the first mailing.

The survey was designed to gather information both about bank characteristics and about capital budgeting procedures. Bank characteristics were examined from a number of perspectives, including size, control, and state in which the bank operated. Questions about capital budgeting procedures included not only tool preference, but also risk acknowledgment, project review, and annual capital expenditure.

ANALYSIS OF RESPONSES

Bank Characteristics. The first questions on the survey were designed to determine the characteristics of the responding banks. We inquired about total assets, capital assets, deposits, the number of banking locations, and the state in which the bank conducted business. Responding banks conduct business in 33 different states. The characteristics of the banks that responded are summarized in Table 1 at the end of this article. (Table 1 omitted) In order to estimate any response bias, we collected this same data from Moody's on the sample. There is no significant difference between the distribution of the responses and the distribution of the sample, leading us to assume that the banks that responded were representative of the industry as a whole.

Additional questions were asked about the control of the surveyed banks. 77% of the respondents indicated that the bank was controlled by a holding company. Again, there appears to be no significant difference between respondents and survey sample for this question. Of the controlled banks, a large majority, 74%, do not have a capital budgeting process determined by the controlling organization.

Capital Budgeting Procedures. The results of the survey indicate that almost all the responding banks are involved in spending at least some funds for capital assets each year. Only four banks indicated that they either made no capital expenditures, or else did not disclose information about their annual capital budgets.

Just over 25% (14) of the responding banks do not use any capital budgeting techniques for evaluating capital expenditure decisions. The annual capital expenditures for these firms range from $25,000 to $30,000,000, with all but five banks spending less the $1,000,000 annually. the average annual capital budgets for firms using some form of capital budgeting procedure range from $5,000 to $30,000,000. …

The rest of this article is only available to active members of Questia

Sign up now for a free, 1-day trial and receive full access to:

  • Questia's entire collection
  • Automatic bibliography creation
  • More helpful research tools like notes, citations, and highlights
  • Ad-free environment

Already a member? Log in now.

Notes for this article

Add a new note
If you are trying to select text to create highlights or citations, remember that you must now click or tap on the first word, and then click or tap on the last word.
One moment ...
Default project is now your active project.
Project items

Items saved from this article

This article has been saved
Highlights (0)
Some of your highlights are legacy items.

Highlights saved before July 30, 2012 will not be displayed on their respective source pages.

You can easily re-create the highlights by opening the book page or article, selecting the text, and clicking “Highlight.”

Citations (0)
Some of your citations are legacy items.

Any citation created before July 30, 2012 will labeled as a “Cited page.” New citations will be saved as cited passages, pages or articles.

We also added the ability to view new citations from your projects or the book or article where you created them.

Notes (0)
Bookmarks (0)

You have no saved items from this article

Project items include:
  • Saved book/article
  • Highlights
  • Quotes/citations
  • Notes
  • Bookmarks
Notes
Cite this article

Cited article

Style
Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

(Einhorn, 1992, p. 25)

(Einhorn 25)

1

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Cited article

Current Capital Budgeting Procedures in Commercial Banks
Settings

Settings

Typeface
Text size Smaller Larger Reset View mode
Search within

Search within this article

Look up

Look up a word

  • Dictionary
  • Thesaurus
Please submit a word or phrase above.
Print this page

Print this page

Why can't I print more than one page at a time?

Full screen

matching results for page

Cited passage

Style
Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn, 1992, p. 25).

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences."1

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Cited passage

Thanks for trying Questia!

Please continue trying out our research tools, but please note, full functionality is available only to our active members.

Your work will be lost once you leave this Web page.

For full access in an ad-free environment, sign up now for a FREE, 1-day trial.

Already a member? Log in now.