How do banks adjust to changing input prices? A dynamic analysis of U.S. commercial banks before and after the crisis

The 2000–2013 period was characterized by substantial regulatory, monetary and technological change, especially after the onset of the global financial crisis. This study assesses the total impact of these policy shifts and technological changes on U.S. commercial banks’ short-run and long-run substitution elasticities. An endogenous-break test divides the sample into a pre-crisis period and a (post-) crisis period. During the former period, banks’ inputs tend to be inelastic substitutes. After the onset of the crisis, particularly the long-run substitutability of most input factors decreases to even lower levels due to changes in both cost technology and economic conditions. At the same time, banks’ response to input price changes becomes more sluggish. Hence, especially after the onset of the crisis, banks have little flexibility regarding input factor usage and are thus sensitive to input price changes from a cost perspectiveLaura Spierdijk gratefully acknowledges financial support by a Vidi grant (452.11.007) in the Vernieuwingsimpuls-program of the Netherlands Organization for Scientific Research. The authors are grateful to the audiences at several conferences, including the CFE 2015 conference in London and the 2016 Banking and Finance conference in Portsmouth. Finally, the authors would like to thank an anonymous referee for useful comments and suggestions