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Working Paper
Can feedback from the jumbo-CD market improve off-site surveillance of community banks?
We examine the value of feedback from the jumbo-certificate-of-deposit (CD) market in the off-site surveillance of community banks. Using accounting data, we construct proxies for default premiums on jumbo CDs. Then, we produce rank orderings of community banks -- defined as institutions holding less than $500 million in assets (constant 1999 dollars) -- based on these proxies. Next, we use an econometric surveillance model to generate rank orderings based on the probability of encountering financial distress. Finally, we compare these rank orderings as tools for flagging emerging problems. ...
Working Paper
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 model allows for the co-existence of (for-profit) banks and (not-for-profit) credit unions. Using annual county-level data on banking market concentration and credit-union participation rates for the period 1989-96, we find empirical evidence of two-way ...
Working Paper
Investigating output cycles under two alternative financial systems
Different financial systems vary in the way they contribute to the process of resource allocation in the economy and in the risk-sharing pattern that they bring about. It would therefore be plausible to expect different financial systems to differ in the way they affect real economic activity. I hereby provide a theoretic framework for the comparison and analysis of output cycles under two alternative financial systems: an equity-based financial system (EFS), in which a mutual fund functions as a financial intermediary, versus a debt-based financial system (DFS), in which a bank plays that ...
Working Paper
Scale economies and geographic diversification as forces driving community bank mergers
Mergers of community banks across economic market areas potentially reduce both idiosyncratic and local market risk. Idiosyncratic risk may be reduced 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. Geographic dispersion of banking activities across economic market areas may reduce local market risk because an adverse economic development that is unique to one market area will not affect a ...
Working Paper
The demise of community banks? local economic shocks aren't to blame
A potentially troubling characteristic of the U.S. banking industry is the geographic concentration of many community banks* offices and operations. If geographic concentration of operations exposes banks to local market risk, we should observe a widespread decline in their financial performance following adverse local economic shocks. In addition, geographic diversification should help banks reduce risk significantly. By analyzing the performance of geographically concentrated U.S. community banks exposed to severe unemployment shocks in the 1990s, I find that banks are not systematically ...
Working Paper
Financial condition of community banks
This article examines the condition of the banking industry in the United States, with an emphasis on community banks. In spite of the recent recession, the condition of the banking industry is substantially better than during the recession of 1990-91. There has been an increase in problem loans at both large and small banks during recent quarters, and nonperforming loans have risen relative to the allowance for loan and lease losses. Among the banks in each of the size groups in this article, however, ratios of equity to total assets in recent quarters are at about their highest levels since ...
Working Paper
The British tripartite financial supervision system in the face of the Northern Rock run
The Northern Rock debacle - Britain's first bank run in 141 years - was the Tripartite regulatory system's first live ammunition test since its establishment in 1997. The aftermath of the crisis lists the destruction of Britain's fifth largest mortgage lender, the tarnishing of the Bank of England's well-established reputation, and the loss of confidence in the reformed regulatory system - a system that had been considered a paragon by policymakers and reformers around the world. As market observers, politicians, investors and bankers criticize not only the mortgage lender for its extreme ...
Working Paper
Labor productivity and job-market flows: trends, cycles, and correlations
I derive measures of U.S. job-separation and job-matching rates from aggregate Current Population Survey data. Using an unrestricted unobserved-components approach, I decompose these series into trends and cycles and compare the results with the trend and cyclical behavior of labor-productivity growth. Both transitory and permanent shocks to productivity are strongly positively correlated with fluctuations in the rate of job matching and negatively correlated with cyclical fluctuations in separation rates. Productivity growth thereby accounts for about a third of the overall variation in the ...
Working Paper
Are the causes of bank distress changing? can researchers keep up?
Since 1990, the banking sector has experienced enormous legislative, technological and financial changes, yet research into the causes of bank distress has slowed. One consequence is that current supervisory surveillance models may no longer accurately represent the banking environment. After reviewing the history of these models, we provide empirical evidence that the characteristics of failing banks has changed in the last ten years and argue that the time is right for new research employing new empirical techniques. In particular, dynamic models that utilize forward-looking variables and ...
Working Paper
The Financial Modernization Act: evolution or revolution?
The Gramm-Leach-Bliley Act (GLBA) removed the barriers that separated commercial banking from investment banking, merchant banking, and insurance activities. Did this legislation revolutionize the financial services industry by allowing Financial Holding Companies (FHCs) to exploit revenue efficiencies and cost economies, or did it merely formalize an evolutionary process of deregulation that was already well underway? Our evidence refutes the notion that the GLBA was a revolutionary event, at least in the short run. Using a combination of market and accounting data, we find that, to date, ...