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Showing results 1 to 10 of approximately 22.
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Conference Paper
Bank consolidation and consumer loan interest rates
Working Paper
Estimating real and nominal term structures using Treasury yields, inflation, inflation forecasts, and inflation swap rates
This paper develops and estimates an equilibrium model of the term structures of nominal and real interest rates. The term structures are driven by state variables that include the short term real interest rate, expected inflation, a factor that models the changing level to which inflation is expected to revert, as well as four volatility factors that follow GARCH processes. We derive analytical solutions for the prices of nominal bonds, inflation-indexed bonds that have an indexation lag, the term structure of expected inflation, and inflation swap rates. The model parameters are estimated ...
Working Paper
Harming depositors and helping borrowers: the disparate impact of bank consolidation
A model of multimarket spatial competition is developed where small, single-market banks compete with large, multimarket banks (LMBs) for retail loans and deposits. Consistent with empirical evidence, LMBs are assumed to have different operating costs, set retail interest rates that are uniform across markets, and have access to wholesale funding. If LMBs have significant funding advantages that offset any loan operating cost disadvantages, then market-extension mergers by LMBs promote loan competition, especially in concentrated markets. However, such mergers reduce retail deposit ...
Working Paper
A structural model of contingent bank capital
This paper develops a structural credit risk model of a bank that issues deposits, shareholders' equity, and fixed or floating coupon bonds in the form of contingent capital or subordinated debt. The return on the bank's assets follows a jump-diffusion process, and default-free interest rates are stochastic. The equilibrium pricing of the bank's deposits, contingent capital, and shareholders' equity is studied for various parameter values haracterizing the bank's risk and the contractual terms of its contingent capital. Allowing for the possibility of jumps in the bank's asset value, as might ...
Conference Paper
Deposit insurance premiums and the value of the banking insurance fund: should they be linked?
A common feature of many insurance systems is that they are "backed" by an insurance fund and insurance premiums are adjusted to target this fund's balance. This study analyzes the fund targeting policy of the Federal Deposit Insurance Corporation (FDIC). It examines the distortions to banks' cost of deposit financing that result from setting premiums in this manner. The study's framework is a multi-period, multi-bank contingent claims model where the stochastic rates of return on individual banks' assets are assumed to be correlated and match the actual empirical distribution of a sample ...
Conference Paper
Bank deposit insurance and business cycles: controlling the volatility of risk-based premiums
Proposals to make deposit insurance risk-based need to consider how premiums would fluctuate over the business cycle. This paper derives a new deposit insurance contract that has the following three features: 1) it is fairly priced in the sense that the insurer conveys no subsidy to the bank; 2) the insurance rate can be made as stable as desired by lengthening the "average" maturity of the contract; 3) the rate can be frequently updated as new information regarding the bank's financial condition is obtained. These characteristics are achieved with a contract that is a combination of ...
Discussion Paper
Why Do Banks Target ROE?
Nonfinancial corporations focus on the growth in earnings per share (EPS) to benchmark their performance. Banks used to follow a similar practice, but starting in the late 1970s they began to emphasize return on equity (ROE) instead. In this blog post, we outline findings from our recent staff report, which argues that banks had an incentive to make this change when their charter values eroded owing to increased competition, and the incentive to change was magnified by risk-insensitive deposit insurance.