Showing papers by "Federal Reserve System published in 1978"

Problems in applying discriminant analysis in credit scoring models

Abstract: Since the mid-1960s financial institutions and other creditors with increasing frequency have applied credit scoring and related loan review procedures to appraise the creditworthiness of loan applicants. The passage of the Equal Credit Opportunity Act and promulgation of the Federal Reserve's Regulation B to implement this act place an important burden on institutions that are subject to the regulation and that employ screening models to ensure that their procedures are statistically and methodologically sound. This paper reviews the types of credit scoring models that have been described in various journals. It gives particular attention to the methodological approaches that have been employed and the statistical problems associated with those models using discriminant analysis techniques. The paper points out that the statistical scoring models discussed in the literature have focused primarily on the minimization of default rates, which is in fact only one dimension of the more general problem of granting credit. To the extent that for the lender profit maximization or cost minimization is, or should be, the objective of a scoring model, then most of the applied literature seems incomplete. The paper also shows that, even ignoring these shortcomings, the models used typically suffer from statistical deficiencies. And it finds that some of the problems of these models seem to be inherent in the discriminant analysis techniques employed or seem to be hard to remedy, given the state of the art concerning estimation and sampling procedures.

Two methods of evaluating hoerl and kennard's ridge regression

Abstract: We formulate a modified version of the Hoerl-Kennard ridge regression method to solve the problem of estimating coefficients in economic relationships. We investigate two approaches for determining the biasing parameter One approach utilizes prior information in choosing jr, the other approach estimates y from the sample data. Monte Carlo experiments are used to evaluate the relative efficiencies of alternative ridge estimators.

The Implicit Deposit Rate Concept: Issues and Applications

Abstract: On June 16, 1933, President Roosevelt signed into law the banking act of 1933, Section 11 of which specified that "No bank shall, directly or indirectly, by any device whatsoever, pay an interest on any deposit which is payable on demand."

A random coefficient approach to seasonal adjustment of economic time series

Abstract: A new seasonal adjustment procedure based on a random coefficient model that permits vector serial correlation in the coefficient errors is introduced. The principal advantages of the model are (i) it allows both deterministic and stochastic trend and seasonal components and their interactions to be simultaneously (rather than sequentially, by repeated filter application) identified and estimated (rather than assumed known), (ii) it allows continuous change in both first and second moments of all components ( a propo Anderson's (1971, pp. 46–49) argument in favor of moving average deterministic trend models for changing processes), and (iii) it makes explicit the identification problem associated with individual parameters (often concealed in sequential techniques) and establishes instead estimable functions appropriate for seasonal adjustment. In addition, the model is sufficiently general as to nest virtually every previous seasonal adjustment procedure as a subcase. The final section of the paper applies the procedure to a monthly demand deposit series for the U.S.

The Monetary Approach to Exchange Rates: Its Historical Evolution and Role in Policy Debates

Abstract: One of the oldest debates in economics is that between the monetary and balance of payments approaches to the determination of exchange rates in a flexible exchange rate regime

Problems in applying discriminant analysis in credit scoring models

Abstract: Since the mid-1960s financial institutions and other creditors with increasing frequency have applied credit scoring and related loan review procedures to appraise the creditworthiness of loan applicants. The passage of the Equal Credit Opportunity Act and promulgation of the Federal Reserve's Regulation B to implement this act place an important burden on institutions that are subject to the regulation and that employ screening models to ensure that their procedures are statistically and methodologically sound. This paper reviews the types of credit scoring models that have been described in various journals. It gives particular attention to the methodological approaches that have been employed and the statistical problems associated with those models using discriminant analysis techniques. The paper points out that the statistical scoring models discussed in the literature have focused primarily on the minimization of default rates, which is in fact only one dimension of the more general problem of granting credit. To the extent that for the lender profit maximization or cost minimization is, or should be, the objective of a scoring model, then most of the applied literature seems incomplete. The paper also shows that, even ignoring these shortcomings, the models used typically suffer from statistical deficiencies. And it finds that some of the problems of these models seem to be inherent in the discriminant analysis techniques employed or seem to be hard to remedy, given the state of the art concerning estimation and sampling procedures.

A criticism of the traditional analysis of banking competition

Abstract: The conventional Structure-Conduct-Performance approach to the study of banking competition has failed to produce the understanding sought by bankers, students of banking, and policymakers. While the unsatisfactory empirical results may derive, in part, from inadequate data and improper statistical techniques--i.e., from imperfect applications of the approach__the available evidence suggests that they are explained instead by the fUndamental defects in the approach itself. In this paper we examine the conceptual problems inherent in the traditional approach and suggest an alternative line of inquiry which may be more fruitful. A Criticism of Traditional Research on Banking Competition Dale Osborne* and Jeanne Wendel** The shop seemed to be full of all manner of curious things. But whenever Alice looked hard at any shelf, to make out exactly what it had on it, that particular shelf was always quite empty. Lewis Carroll, Alice in Wonderland Public policy toward banking competition in this country rests, as all public policy in every field must rest, on the assumptions, hypotheses, conventions, and selected empirical findings that constitute a conventional wisdom. In this case the conventional wisdom is that of the Structure-Conduct-Performance model of competition. It has two earmarks. First, competition in the sense of action, or competitive behavior, is conceptually distinct from--indeed, it is explained by--competition in the sense of conditions, or competitive potential. Second, competitive potential is a matter of concentration in the local market. It is doubtful that competitive potential can be defined in a way that completely excludes behavior, since the actions of one bank must, *Federal Reserve Bank of Dallas. **Miami University, Oxford, Ohio.

Some Two-Level Multiple-Response Factorial Plans

Abstract: This article deals with the construction of plans for two-level factorial experiments in which there are p response variables and each response is affected by one or more factors. The plans are orthogonal for each response variable. Estimates of the parameters in the models for such plans are obtained when Σ, the dispersion matrix of an observation vector, is known. The properties of these estimates indicate how to design the experiment so that the variances of the estimates of the parameters can be influenced by their relative importance. The case when Σ is unknown is discussed briefly.

Automatic Transfers from Savings to Checking: Perspective and Prospects

Abstract: On May 1, 1978, the Board of Governors of the Federal Reserve System amended its Regulation Q to allow member banks to transfer funds from a customer's savings account to his checking account automatically under certain stipulated conditions.

Some Recent Developments in Phillips Curve Analysis

Abstract: Economists’ views of the Phillips curve concept have changed drastically in recent years. The original interpretation of the Phillips curve as a stable trade-off relationship between inflation and unemployment has given way to the view that no such trade-off esists for policymakers to esploit. As a result, some economists now argue that economic stabilization policies are incapable of influencing output and employment, even in the short-run. Instrumental to this change were several key developments in Phillips curve analysis, most notably the so-called natzrral rate and rational expectations hypotheses. The purpose of this article is to esplain these developments and their policy implications and to show how they altered economists perceptions of the Phillips curve. Accordingly, the first half of the article traces the evolution of Phillips curve analysis focusing particularly on the natural rate hypothesis. The second half concentrates on the rational expectations idea, currently the most hotly-debated aspect of Phillips curve analysis.