Search Results
Working Paper
Regulatory incentives and consolidation: the case of commercial bank mergers and the Community Reinvestment Act
Bank regulators are required to consider a bank?s record of providing credit to low- and moderate-income neighborhoods and individuals in approving bank applications for mergers and acquisitions. We test the hypothesis that banks strategically prepare for the regulatory and public scrutiny associated with a merger or acquisition by increasing their lending to low-and moderate-income individuals in anticipation of acquiring another institution. We find evidence in favor of this hypothesis. In particular, we show that the higher the percentage of the institution?s mortgage originations in a ...
Journal Article
Banks with something to lose: the disciplinary role of franchise value
As protectors of the safety and soundness of the banking system, banking supervisors are responsible for keeping banks' risk taking in check. The authors explain that franchise value--the present value of the stream of profits that a firm is expected to earn as a going concern--makes the supervisor's job easier by reducing banks' incentives to take risks. The authors explore the relationship between franchise value and risk taking from 1986 to 1994 using both balance-sheet data and stock returns. They find that banks with high franchise value operate more safely than those with low franchise ...
Report
Looking beyond the CEO: executive compensation at banks
The literature on executive compensation at banks has proceeded largely under the assumption that a single elasticity can adequately describe the sensitivity of executive pay to firm performance, but theories of performance based pay and tournament pay suggest that this assumption may be incorrect. We test the single-elasticity assumption by comparing the components of compensation and the pay-performance relationship across banks with different characteristics and bank executives of different positions. We find that the structure of compensation varies significantly across firms, with firm ...
Journal Article
Are banks still important for financing large businesses?
As more corporations turn to the securities markets to meet their funding needs, the role of banks as providers of credit to large businesses seems increasingly uncertain. But a look at developments during the financial market turmoil last fall suggests that banks are still a critical source of liquidity at times of economic stress.
Journal Article
How effective is lifeline banking in assisting the 'unbanked'?
Many consumers who lack checking accounts are paying relatively high costs to access the nation's payments system. Legislation aimed at opening the system to these unbanked individuals has centered on requiring commercial banks to offer low-cost "lifeline" accounts. But will cost savings alone motivate these consumers to access the payments system through banks?
Conference Paper
Franchise value, ownership structure, and risk taking at banks
Report
Agency problems and risk taking at banks
The moral hazard problem associated with deposit insurance generates the potential for excessive risk taking on the part of bank owners. The banking literature identifies franchise value--a firm's profit-generating potential--as one force mitigating that risk taking. We argue that in the presence of owner/manager agency problems, managerial risk aversion may also offset the excessive risk taking that stems from moral hazard. Empirical models of bank risk tend to focus either on the disciplinary role of franchise value or on owner/manager agency problems. We estimate a unified model and find ...
Conference Paper
Community lending and commercial bank mergers
Report
Franchise value, ownership structure, and risk at savings institutions
This paper examines the relationship between asset risk and franchise values and between asset risk and ownership structure. Stock price data from publicly traded S&L is used to measure portfolio risk and franchise or charter values. The empirical results provide support for the moral hazard hypothesis. The standard deviation of equity returns is negatively related to S&L franchise values, as measured by the market-to-book asset ratio. This research also finds empirical support for models of managerial entrenchment in the thrift industry. We find evidence of a nonlinear relationship between ...