Financial Industry Studies Working Papers 1996–2000.

FIS working papers after 2000 are incorporated with Economic Research working papers.

2000 | 1999 | 1997 | 1996

2000 Working Papers

1-00
Early Warning Models in Real Time [PDF]
Jeffery W. Gunther and Robert R. Moore

Each quarter, banks file a call report, or Report of Condition and Income, containing hundreds of accounting items pertaining to their financial condition. Because call reports are filed quarterly, whereas banks are typically examined about once every twelve to eighteen months, statistical early warning models using call report data potentially provide a more up-to-date picture of a bank's condition than on-site exams alone. Often neglected, however, is the fact that call report data are subject to revision. We find evidence of a strong relationship between on-site exams and call report revisions. In addition, we evaluate a major class of early warning models using both originally published and revised data to assess whether model accuracy in real time is appreciably lower than accuracy measured using revised data. The findings indicate revised data overstate the accuracy of early warning models. The substantial effect of revisions on the accuracy of early warning models, coupled with the finding of a relationship between revisions and exams, points to a substantial auditing role for on-site exams. More generally, our findings point to the need for care in the use of call report data for research in which the real-time flow of financial information is of some concern.

1999 Working Papers

3-99
Evaluating the Productive Efficiency and Performance of U.S. Commercial Banks [PDF]
Richard S. Barr, Kory A. Killgo, Thomas F. Siems and Sheri Zimmel

In this study, we use a constrained multiplier, input-oriented, data envelopment analysis (DEA) model to evaluate the productive efficiency and performance of U.S. commercial banks from 1984 to 1998. We find strong and consistent relationships between efficiency and our inputs and outputs, as well as independent measures of bank performance. Further, our results suggest that the impact of varying economic conditions is mediated to some extent by the relative efficiencies of the banks that operate in these conditions. Finally, we find a close relationship exists between efficiency and soundness as determined by bank examiner ratings.

2-99
What Was Behind the M2 Breakdown? [PDF]
Cara Lown, Stavros Peristiani and Kenneth J. Robinson

A deterioration in the link between the M2 monetary aggregate and GDP, along with large errors in predicting M2 growth, led the Board of Governors to downgrade the M2 aggregate as a reliable indicator of monetary policy in 1993. In this paper, we argue that the financial condition of depository institutions was a major factor behind the unusual pattern of M2 growth in the early 1990s. By constructing alternative measures of M2 based on banks’ and thrifts’ capital positions, we show that the anomalous behavior of M2 in the early 1990s disappears. Specifically, after accounting for the effect of capital constrained institutions on M2 growth, we are able to explain the unusual behavior of M2 velocity during this time period, obtain superior M2 forecasting results, and produce a more stable relationship between M2 and the ultimate goals of policy. Our work suggests that M2 may contain useful information about economic growth during periods of time when there are no major disturbances to depository institutions.

1-99
The Determinants of the Wealth Effects of Banks' Expanded Securities Powers [PDF]
David P. Ely and Kenneth J. Robinson

After several unsuccessful attempts by Congress to repeal Glass-Steagall restrictions on banks, the Federal Reserve more than doubled the revenue that commercial banking organizations' securities subsidiaries may earn from certain securities activities. The wealth effects associated with this event for a sample of publicly traded banking organizations are examined. We find evidence that indicates the revenue limit resulted in a less-than-optimal mix of activities for securities subsidiaries. However, subsequent merger activity that could have been generated by the revenue increase was not viewed favorably by investors.

1997 Working Papers

5-97
Competitive Viability in Banking: Looking Beyond the Balance Sheet [PDF]
Jeffery A. Clark and Thomas F. Siems

4-97
Adverse Selection and Competing Deposit Insurance Systems in Pre-Depression Texas [PDF]
Jeffery W. Gunther, Linda M. Hooks and Kenneth J. Robinson

In 1910, Texas instituted a highly unique deposit insurance program for its state chartered banks consisting of two separate plans: the depositors guaranty fund, similar in operation to the deposit insurance schemes adopted in several other states; and the depositors bond security system, which required the procurement of a privately issued insurance policy. We hypothesize that the provision of a choice in funds led to risk-sorting among the banks, with the relatively conservative institutions opting for the comparatively rigorous bond security system. Employing a probit model with heteroskedasticity, the evidence we obtain from balance sheet data recorded at the time the banks were required to enlist in an insurance plan indicates that such was the case, as the alternative plan relying on privately issued insurance was widely unpopular except among relatively conservative and well-managed institutions.

3-97
Payments-Related Intraday Credit Differentials and the Emergence of a Vehicle Currency [PDF]
Sujit "Bob" Chakravorti

The U.S. dollar serves as a vehicle currency or medium of exchange in the global foreign exchange markets. After reviewing some of the existing theories on vehicle currencies, the hypothesis put forth is that the dollar's role is linked to the relatively low cost of payments-related intraday credit available to payment system participants. Differences in the types of measures used by payment system operators to reduce settlement and systemic risk in the payment system give rise to liquidity differentials between currencies.

After reviewing the types of intraday credit facilities extended to participants on payment systems settling the major currencies, a foreign exchange market is simulated. Results from the simulation indicate that if there are sufficient differences in the availability of intraday credit between one settlement system and the others, a vehicle currency emerges. Furthermore, vehicle currency trades have narrower bid-ask spreads than other foreign exchange transactions.

2-97
Bank Acquisition Determinants: Implications for Small Business Credit [PDF]
Robert R. Moore

1-97
Geographic Liberalization and the Accessibility of Banking Services in Rural Areas [PDF]
Jeffery W. Gunther

This study assesses the degree to which the liberalization of geographic banking restrictions has lived up to its promise of enhancing service accessibility in rural areas. The empirical framework is distinguished by a focus on changes in accessibility, as opposed to levels. While previous research has produced mixed results on the benefits of greater geographic powers for service accessibility in rural communities, the results reported here point unambiguously to a positive relationship between expansion opportunities and accessibility. Both OLS and ordinallevel probit regressions indicate that geographic banking liberalizations, particularly those leading to greater branching opportunities, have been associated with relatively strong growth in the number of banking offices serving rural areas.

1996 Working Papers

2-96
Analysis of Systemic Risk in the Payments System [PDF]
Sujit "Bob" Chakravorti

This paper investigates systemic risk in multilateral netting payments systems. A four-period model is constructed to investigate the effects of random liquidity shocks. There are three different types of agents in this model: banks, the payments system operator, and the central bank. Banks pay one another via the payments system. The payments system operator sets the rules for participation. These include total asset requirements, collateral requirements and net debit caps. The central bank serves as a source of liquidity during a financial crisis. The model is constructed along the lines of Diamond and Dybvig (1983). In period 0, banks optimize their holdings of noninterest-earning central bank reserves to meet their payment obligations and any additional liquidity obligation. Their alternative is to invest in a nonliquid asset that earns a rate of return R. In period 1, a number of banks are unable to make their payments. The number of banks defaulting is random and realized after banks decide their optimal reserve holdings. In period 2, the remaining banks must cover the net payments of defaulting banks minus the defaulting banks' collateral holdings. Each remaining bank has three options to meet its liquidity event: deliver reserves it holds at the time of the shock, borrow funds in the interbank market from banks in net credit positions, or default since it cannot meet its additional obligations. In period 3, final wealth of each due to bank is calculated. All banks want to maximize final wealth in period 3.

The model provides the following results. The model calculates the threshold point where the payments system collapses. An interbank funds market increases the efficiency of the payments system. Implementation of policy options such as total asset requirements, collateral requirements, and net debit caps decrease systemic risk. The central bank's role as provider of liquidity to the financial system is investigated in the context of the model.

1-96
Moral Hazard and Texas Banking in the 1920s [PDF]
Linda M. Hooks and Kenneth J. Robinson

Using recently collected examination data from a sample of Texas state-chartered banks over the period 1919–26, the role of moral hazard in increasing ex-ante asset risk is analyzed. During this period, a state-run deposit insurance system was in place that was mandatory for all state-chartered banks in Texas. Nationally chartered banks were not allowed to participate in the insurance program. Analyzing individual bank-level data, we find evidence that declines in capitalization were positively correlated with increases in loan concentrations at insured banks. We argue that this is consistent with a moral-hazard effect at work. No such relationship is found between capitalization and risk at uninsured banks.