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Working Paper Archives

Federal Reserve Bank of St. Louis working papers are preliminary materials circulated to stimulate discussion and critial comment.

Banking

A Spatial Analysis of State Banking Regulation

We use a spatial model to investigate a state's choice of branch banking and interstate banking regimes as a function of the regime choices made by other states and other variables suggested in the literature. We extend the basic spatial econometric model by allowing spatial dependence to vary by geographic region.

Can Feedback from the Jumbo-CD Market Improve Bank Surveillance?

We examine the value of jumbo certificate-of-deposit (CD) signals in bank surveillance. To do so, we first construct proxies for default premiums and deposit runoffs and then rank banks based on these risk proxies. Next, we rank banks based on the output of a logit model typical of the econometric models used in off-site surveillance. Finally, we compare jumbo-CD rankings and surveillance-model rankings as tools for predicting financial distress.

Year-End Seasonality in One-Month LIBOR Derivatives

We examine the markets for one-month LIBOR futures contracts and options on those futures for a year-end price effect consistent with the previously identified year-end rate increase in one-month LIBOR. The cash market rate increase appears in forward rates and derivative prices, which allows the derivatives to properly hedge year-end interest rate risk.

Robust Nonparametric Estimation of Efficiency and Technical Change in U.S. Commercial Banking

This paper examines the performance of the U.S. commercial banking industry over 1984–2002. Rather than measuring performance relative to the unknown (and difficult-to-estimate) boundary of the production set, performance for a given bank is measured relative to expected maximum output among m banks using no more of each input than the given bank.

Input Inefficiency In Commercial Banks: A Normalized Quadratic Input Distance Approach

A normalized quadratic input distance function is proposed with which to estimate technical efficiency on commercial banks regulated by the Federal Reserve System. The study period covers 1990 to 2000 using individual bank information from the Call and Banking Holding Company Database.

The Federal Reserve Responds to Crises: September 11th Was Not the First

A primary purpose of the Federal Reserve Act of 1913 was to prevent banking panics by establishing the Federal Reserve System to function as a lender of last resort. Other types of financial crisis require similar response, however, and the Federal Reserve has repeatedly used its capacity to generate liquidity to insulate the economy from crises in financial markets.

Entrepreneurship and the Deregulation of Banking

This paper presents evidence that banking deregulation led to decreases in entrepreneurship in some U.S. regions, and to increases in others. This is contrary to recent research that found an unambiguous positive relationship.

New Evidence on the Fed's Productivity in Providing Payments Services

As the dominant provider of payments services, the efficiency with which the Federal Reserve provides such services in an important public policy issue. This paper examines the productivity of Federal Reserve check-processing offices during 1980-1999 using non-parametric estimation methods and newly developed methods for non-parametric inference and hypothesis testing.

Intermediaries and Payments Instruments

We Study an economy in which intermediaries have incentives to issue circulating liabilities as part of an equilibrium. We show that, with arbitrarily small transactions costs, only the liabilities of intermediaries will circulate, and not those of other private sector agents.

The Importance of Scale Economies and Geographic Diversification in Community Bank Mergers

Mergers of community banks across economic market areas potentially reduce both idiosyncratic and local market risk. A merger may reduce idiosyncratic risk because the larger post-merger bank has a larger customer base. Negative credit and liquidity shocks from individual customers would have smaller effects on the portfolio of the merged entity than on the individual community banks involved in the merger.

Consolidation in US Banking: Which Banks Engage in Mergers?

The number of U.S. commercial banks has declined by some 40 percent since 1984, primarily through mergers of solvent institutions. The relaxation of legal impediments to branching has enabled this consolidation, but specific characteristics of banks that engage in mergers reflect the regulatory process and market structure, as well as the bank's own condition.

The Role of a CAMEL Downgrade Model in Bank Surveillance

This article examines the potential contribution to bank supervision of a model designed to predict which banks will have their supervisory ratings downgraded in future periods. Bank supervisors rely on various tools of off-site surveillance to track the condition of banks under their jurisdiction between on-site examinations, including econometric models.

Do Depositors Care About Enforcement Actions?

Since 1990, federal bank supervisors have publicly announced formal enforcement actions. This change in regime provides a natural laboratory to test two propositions: (1) claims by economists that putting confidential supervisory information in the public domain will enhance market discipline and (2) claims by bank supervisors that releasing such data will spark runs.

Banks VS. Credit Unions: Dynamic Competition in Local Markets

One interesting aspect of the financial services industry is that for-profit institutions such as commercial banks compete directly with not-for-profit financial intermediaries such as credit unions. In this article, we analyze competition among banks and between banks and credit unions using a dynamic model of spatial competition.

The Contribution of On-Site Examination Ratings to an Empirical Model of Bank Failures

This paper investigates how well regulator examinations predict bank failures, and how best to incorporate examination information into an econometric model of time-to-failure. We estimate proportional hazard models with time-varying covariates and find that examiner ratings help explain the failure hazard.

Effects of Federal Reserve Services on the Efficiency of the System for Collecting Checks in the United States: 1915-30.

This paper investigates whether the services of the Federal Reserve System improved the efficiency of the system in the United States for collecting checks relative to the efficiency of the system used by banks just prior to the formation of the Federal Reserve.

Conditional Heteroskedasticity in Qualitative Response Models of Time Series:A Gibbs Sampling Approach to the Bank Prime Rate.

Previous time series applications of qualitative response models have ignored features of the data, such as conditional heteroscedasticity, that are routinely addressed in time-series econometrics of financial data. This article addresses this issue by adding Markov-switching heteroscedasticity to a dynamic ordered probit model of discrete changes in the bank prime lending rate and estimating via the Gibbs sampler.

Conflict of Interest between Borrowers and Lenders in Credit Cooperatives: The Case of German Co-operative Banks

Over the last few decades, the co-operative banking sector in Germany has steadily increased its market share at the expense of other types of banks. This outcome is surprising from the standpoint of traditional economic thinking about co-operatives, which suggests that they are most appropriate for "backward" economies.

Do Bank Loan Rates Exhibit a Countercyclical Mark-up?

Based on a switching-cost model, we examine empirically the hypotheses that bank loan mark-ups are countercycical and asymmetric in their responsiveness to recessionaly and expansionary impulses. The first econometric model treats changes in the mark-up as a continuous variable. The second treats them as an ordered categorical variable due to the discrete nature of prime rate changes.

New Evidence on Returns to Scale and Product Mix Among U.S. Commercial Banks

Numerous studies have found that banks exhaust scale economies at low levels of output, but most are based on the estimation of parametric cost thnctions which misrepresent bank cost. Here we avoid specification error by using nonparametric kernel regression techniques.

Interbank Netting Agreements and the Distribution of Bank Default Risk

Central banks and private banks alike have advocated greater use of interbank netting agreements in recent years in order to reduce potential for transmitting economic shocks through interbank markets.

Why Do Banks Disappear: The Determinants of U.S. Bank Failures and Acquisitions

This paper examines the determinants of individual bank failures and acquisitions in the United States during 1984-1993. We use bank-specific information suggested by examiner CAMEL-rating categories to estimate competing-risks hazard models with time-varying covariates.

Banking and Deposit Insurance as a Risk-Transfer Mechanism

This paper models an economy in which risk-averse savers and risk-neutral entrepreneurs make investment decisions. Aggregate investment in high-yielding risky projects is maximized when risk-neutral agents bear all nondiversifiable risks.

Technical Progress, Inefficiency and Productivity Change in U.S. Banking, 1984-1993

Numerous studies have found that US commercial banks are quite inefficient, and we find that, on average, banks became more technically inefficient between 1984 and 1993. Our analysis of productivity change, however, shows that technological improvements adopted by a few banks pushed out the efficient frontier, and that, on average, commercial banks experienced productivity gains.

Asymmetry in the Prime Rate and Firms' Preference for Internal Finance

This article tests for asymmetry in the behavior of bank lending rates by testing the hypothesis that the prime rate responds more fully and quickly to increase than decreases in market interest rates. The econometric methodology used is better suited to the discreteness and rigidity of the prime rate than that of previous studies.

The Bank Capital Requirement and Information Asymmetry

This paper recognizes two main factors that cause the capital requirement to affect the weighted average cost of capital and hence the investment behavior of banks: underpriced debt resulting from the deposit insurance and information asymmetry between managers and the stock market. For a bank enjoying a low cost of debt (deposits), an increased proportion of equity financing raises the weighted average cost of capital.

Deposit Insurance, Regulation, and Efficiency

This paper uses micro-level historical data to examine the causes of bank failure. For state charactered Kansas banks during 19 10-28, time-to-failure is explicitly modeled using a proportional hazards framework.

Government Policy and Banking Instability: Overbanking in the1920s

Excess capacity, or “overbanking,” was cited by contemporaries as leading cause of bank failure during the 1920s. Many states that had high numbers of banks per capita in 1920 had high bank failure rates subsequently.

The Slack Banker Dances: Deposit Insurance and Risk-Taking in the Banking Collapse of the 1920s

This paper studies the effects of deposit insurance on bank behavior using individual bank data from Kansas in the 1920s. Kansas banks were severely stressed by the collapse of agricultural prices in 1920 and resulting increase in farm mortgage defaults.

Regulation and Bank Failures: New Evidence from the Agricultural Collapse of the 1920s

This article examines the contribution of government policies to the high number of bank failures in the United States during the l920s. I consider the state of Kansas, which had a system of voluntary deposit insurance and where branch banking was strictly prohibited, and find that bank failure rates were highest in counties suffering the greatest agricultural distress and where deposit insurance system membership was the highest.


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