Showing papers in "Journal of Banking and Finance in 1980"
TL;DR: In this article, a model is presented in which demand deposits backed by fractional currency reserves and public insurance can be beneficial, and the case for demand deposits, reserves, and deposit insurance rests on costs of illiquidity and incomplete information.
Abstract: A model is presented in which demand deposits backed by fractional currency reserves and public insurance can be beneficial. The model uses Samuelson's pure consumption-loans model. The case for demand deposits, reserves, and deposit insurance rests on costs of illiquidity and incomplete information. The effect of deposit insurance depends upon how, and at what cost, the government meets its insurer's obligation — something which is not specified in practice. It remains possible that demand deposits and deposit insurance are a distortion, and reserve requirements serve only to limit the size of this distortion.
992 citations
TL;DR: In this paper, the authors tried to determine whether financial analysts' forecasts of earnings are useful to investors by devising and evaluating the performance of trading rules under which transactions are triggered by revisions in earnings forecasts.
Abstract: This paper attempts to determine whether financial analysts' forecasts of earnings are useful to investors. This is accomplished by devising and evaluating the performance of trading rules under which transactions are triggered by revisions in earnings forecasts. The main finding is that an investor who acts upon the publicly available revisions of earnings forecasts can consistently outperform a buy-and-hold policy; in fact, such an investor could more than double his return. The results are inconsistent with the efficient market-hypothesis and indicate that the market reacts gradually rather than instantaneously to new information.
122 citations
TL;DR: In this paper, a simple state-preference model with a complete capital market is derived, and some surprising implications of equilibrium in the banking industry are derived, for example, to limit a bank's probability of bankruptcy, it is sufficient for public regulators to control the composition and relative size of its portfolio or marketable securities.
Abstract: In a simple state-preference model with a complete capital market, some surprising implications of equilibrium in the banking industry are derived. For example, to limit a bank's probability of bankruptcy, it is sufficient for public regulators to control the composition and relative size of its portfolio or marketable securities. Generally, its loans need not be restricted. Also, under most publicly subsidized deposit insurance, bankers select very risky portfolios of bonds and loans with or without any risk adjustment in the insurance premium. In fact, with many types of subsidized insurance, public monitoring of bank loans is essential.
91 citations
TL;DR: This paper examined the impact of certain types of qualified auditors' report on bank lending decisions and credit analysts' decisions in the United Kingdom, and found that two types of audit qualification, namely going concern problems and asset valuation problems, significantly affected decisions and that firms suffering these types of qualifications had their credit standing significantly impaired.
Abstract: This paper examines the impact of certain types of qualified auditors' report on bank lending decisions and credit analysts' decisions in the United Kingdom. The research design involved sending a set of financial statements, which contained one of four different types of audit report, to a large sample of bankers and credit analysts. They were asked to state how much they would lend, or how much credit they would give, for each of the hour audit report situations. The mean loan-credit responses for each audit report type were then examined to see if there were any significant differences. It was found that two types of audit qualification, namely going concern problems and asset valuation problems, significantly affected decisions and that firms suffering these types of qualifications had their credit standing significantly impaired.
86 citations
TL;DR: In this article, the authors investigated the efficiency of the gold market with respect to the information contained in sequences of successive price changes and found that gold's "alpha" and "beta" were positive, but not significantly different from zero.
Abstract: This paper investigates the efficiency of the gold market with respect to the information contained in sequences of successive price changes. Tests for serial correlation and modelling the changes as first-order Markov processes indicate some short-term dependence. While there is no reason to believe outsiders can profit from knowledge of these relationships, insiders might, though this is not certain. In addition, the application of a market model to monthly returns for the period 1974–1977 results in the finding that gold's ‘alpha’ and ‘beta’ were positive, but not significantly different from zero.
65 citations
TL;DR: In this paper, the authors developed contingent claims models of loan guarantees in various circumstances: (1) a fully guaranteed issue of non-callable coupon debt; (2) a partially-guaranteed issue of Non-Callable Coupon Debt (NCD); (3) junior and senior NCD with guarantees; (4) callable coupon Debt with guarantees.
Abstract: In this paper, the authors develop contingent claims models of loan guarantees in various circumstances: (1) a fully guaranteed issue of non-callable coupon debt; (2) a partially guaranteed issue of non-callable coupon debt; (3) junior and senior non-callable debt with guarantees; (4) callable coupon debt with guarantees. Numerical solutions of the resulting valuation models are performed using the method of Markov chains. Tables and graphs of the resulting values of loan guarantees are provided. The paper concludes with suggestions for extensions of this approach to the valuation of loan guarantees.
50 citations
TL;DR: In this article, the authors discuss the Gessler Commission's study of universal banking in Germany and discuss the main sources of potential conflicts of interest in universal banking and present the Commission's responses to these criticisms of the German banking structure.
Abstract: In this paper, the author, himself a member of the Gessler Commission, discusses the Commission's study of universal banking in Germany. Following a description of the task of the Commission and a brief survey of the economics of universal banking, the author outlines the main sources of potential conflicts of interest in universal banking and presents the Commission's responses to these criticisms of the German banking structure. The final section of the paper considers the influence of universal banks over non-bank firms resulting from the fact that universal banks hold shares in such firms, vote the shares of bank customers, and hold supervisory board memberships in such firms.
26 citations
TL;DR: In this article, the authors analyzed 184 banking markets to determine whether net market entry over the period 1968-1974 (entry less exist) influenced rivalry (mobility and turnover among top five firms).
Abstract: Economic theory suggests that, ceteris paribus , new entry of firms will increase rivalry in a market. This study analyzes 184 banking markets to determine whether net market entry over the period 1968–1974 (entry less exist) influenced rivalry (mobility and turnover among top five firms). Results of a multivariate regression analysis indicate no relationship between entry and rivalry. Two possible explanations for this somewhat surprising finding are: (1) new entry into banking markets is typically on a relative small scale, and (2) if potential competition had been an effective factor prior to entry in some of the markets where net entry took place, the potential effect of new entry on rivalry may have been very small. This would tend to obscure a systematic relationship between net entry and rivalry.
20 citations
TL;DR: In this article, an analytical solution to a cash management problem when cash income and demand are described by compound Poisson processes is provided, where the authors employ a long-run average cost criterion to determine an optimal control barrier.
Abstract: This paper provides an analytical solution to a cash management problem when cash income and demand are described by Compound Poisson processes. The paper generalizes past results in the cash management literature to arbitrary income and demand distribution functions. Further, our results can be applied as well in the area of banking. Throughout the paper we restrict attention to the family of control barrier policies. These consist in hedging cash up to a critical level and investing all incoming cash exceeding this level. We employ a long-run average cost criterion to determine an optimal control barrier. A diffusion approximation of the cash level process (income less demand) is used to obtain a simpler expression for the average cost and to yield a closed form solution to the optimal control barrier. For demonstration purposes, an example is resolved.
19 citations
TL;DR: In this article, the authors investigated the nature of the news which appeared in the Wall Street Journal in the periods surrounding abnormal price movements of securities and developed a news classification system to classify the news for a sample of firms whose stock underwent abnormal price changes.
Abstract: This study investigates the nature of the news which appear in the Wall Street Journal in the periods surrounding abnormal price movements of securities. A news classification system is developed. This system classified the news for a sample of firms whose stock underwent abnormal price changes. Our findings are inconsistent with the efficient market hypothesis. The nature of the news regarding the average firm precedes the abnormal price changes.
15 citations
TL;DR: In this article, a model of the business loan market is examined and estimated for small and large commercial banks, and the major results of this study are that large bank and small bank markets are structurally dissimilar and thus should not be aggregated.
Abstract: In order to assess the cause of the 1975 weakness in business borrowing from commercial banks, a model of the business loan market is examined and estimated for small and large commercial banks. The major results of this study are that (1) large bank and small bank markets are structurally dissimilar and thus should not be aggregated (2) superior forecasts for total business loans can be achieved by forecasting from large and small bank equations, and (3) the model does forecast the weak business loan behavior in 1975, particularly at the large banks, and tracks the current period fairly well.
TL;DR: In this paper, a subset of the banking system in the Philippines was studied and the restricted profit functions of two groups of banks, hypothesis testing of their relative economic efficiency was carried out.
Abstract: Duality between profit functions and transformation functions is applied to a subset of the banking system in the Philippines. By estimating the restricted profit functions of two groups of banks, hypothesis testing of their relative economic efficiency is carried out. By duality a complete characterization of the transformation function representing the two banking systems studied is obtained. Cobb-Douglas and quadratic profit functions are estimated. The mathematical properties of the functions allow a derivation of systems of supply functions for bank services, bank demand functions for resources, and measures of long-term profitability of banking. The regulatory environment's impact on bank efficiency may also be assessed.
TL;DR: In this article, the authors explain the Quebec major credit union's deposit market by way of intergrating its public demand function with the institution's rate-setting operation using a dynamic stock adjustment model.
Abstract: The aim of the study is to explain Quebec major credit union's deposit market by way of intergrating its public demand function with the institution's rate-setting operation The demand for Caisses' deposits is specified as a dynamic stock adjustment model On the other hand, the intermediary's rate-setting reduced form is derived from a risk-return portfolio balance model which the managers maximize the expected utility of reserves The two models are integrated by means of a liability composite rate Econometric estimates of the integrated model provide us with interesting policy insights For instance, the Quebecois public views chartered banks' deposits as a weak substitute for Caisses' deposits; it is also more responsive to non-rate arguments, such as loan eligibility or the institution's ethnic appeal On the supply side, competitive liability rates are more important than returns on assets when the Caisses set its deposit rate Finally, the impact growth imbalance between loans and deposits is well captured by a flow variable, without infringing on the steady-state determination based on rates
TL;DR: In this paper, the authors examined the effect of deposit-rate ceilings on bank risk and showed that removing them would not increase the risk of a bank's overall risk. But they did not examine the effect on the systematic risk.
Abstract: In a recent issue of this journal, Mingo (1978) analyzed the effect of deposit-rate ceilings on bank risk. The analysis showed that deposit-rate ceilings increase a bank's total risk. The purpose of this note is to examine a different but related question: Is systematic risk affected by Regulation Q ceilings ceteris paribus? The results of our empirical test indicate that systematic risk is not affected by deposit-rate ceilings. Taken together then, Mingo's and the present results show that removal of deposit-rate ceilings would not increase bank risk.
TL;DR: This paper examined the relationship between the reserve base and the money supply in Australia and cast doubt on the ability of the Australian authorities to control the primary monetary aggregates on a short-run basis.
Abstract: Utilising the criteria of predictability, stability over time, and instrument stability this paper examines the relationship between the reserve base and the money supply in Australia. Various modifications to the money supply function are made to incorporate the influence of direct monetary controls, of the overdraft lending system, and of the increased substitutability of government securities for high powered money arising from the Reserve Bank of Australia's policy of pegging government security yields. Doubt is cast on the ability of the Australian authorities to control the primary monetary aggregates on a short-run basis.
TL;DR: In this article, the semi-strong form of the efficient market hypothesis is tested with a trading rule based on Box-Jenkins forecasts of earnings per share numbers for a number of firms.
Abstract: In this paper the semi-strong form of the efficient market hypothesis is tested with a trading rule based on Box-Jenkins forecasts of earnings per share numbers. The quarterly earnings per share series are modeled for a number of firms. The models are updated quarter by quarter and investments are made in the stocks with the largest forecasted growth rates for the next quarter. The risk-adjusted performance of such a strategy is shown to be inconsistant with semi-strong market efficiency.
TL;DR: In this paper, a study of a critical level of concentration in banking markets using switching regressions as the proper estimating technique is presented, which suggests that scarce bank regulatory resources be directed toward relatively more concentrated markets where the regulatory effort would seem to have the greatest impact.
Abstract: This paper reports on a study of a critical level of concentration in banking markets using switching regressions as the proper estimating technique. The technique employs a search procedure that yields maximum likelihood estimates of thecritical concentration level and of the coefficients of the concentration-performance relationship. A threshold level of concentration appears to exist, above which the impacts of changes in concentration are the greatest. These results suggest that scarce bank regulatory resources be directed toward relatively more concentrated markets where the regulatory effort would seem to have the greatest impact. The results conflict with the findings of the few previous studies of this relationship in banking, presumably because they employed inappropriate estimating techniques.
TL;DR: The authors examines the specific set of market and product conditions which could support the theoretical argument, widely held among commercial bankers, that deposit rate ceilings, especially the prohibition of interest on checking accounts, are beneficial to bank earnings.
Abstract: This paper examines the specific set of market and product conditions which could support the theoretical argument, widely held among commercial bankers, that deposit rate ceilings, especially the prohibition of interest on checking accounts, are beneficial to bank earnings. The analysis points to the conclusion that ceilings are beneficial to bankers only if (a) bank deposits are homogeneous goods, (b) deposit markets are non-collusive oligopsonies, and (c) the regulated ceiling rate is not set too far below the ceiling that would exist in an unregulated monopsony. Empirical studies done elsewhere seem to indicate that none of these three necessary conditions are normally met in the marketplace. The NOW account, which is really an interest-bearing checking account, also extends demand deposit powers to non-bank thrift institutions. Under our analysis, the NOW account adds to the number of competitors offering checking-type deposits, driving up the cost of funds, other things equal, to the oligopsonist banker — perhaps by enough to offset the cost-reducing effect of repeal of the interest prohibition.
TL;DR: In this paper, the authors apply competitive equality among types of institutions to three problems: permitting demand deposits in thrifts, imposing a reserve requirement on such deposits, and eliminating Regulation Q. But this is irrelevant; what matters is equitable treatment, not of institutions but of their owners and customers, and economic efficiency.
Abstract: Many arguments about financial reform appeal to competitive equality among types of institutions. But this is irrelevant; what matters is equitable treatment, not of institutions, but of their owners and customers, and economic efficiency. There are two rival definitions of the former, avoidance of unexpected regulatory changes, and changing regulations to maintain markets. If no externalities exist, equity to customers requires imposing the same burden on customers of all institutions. So does the efficiency criterion. These criteria are applied to three problems: permitting demand deposits in thrifts, imposing a reserve requirement on such deposits, and eliminating Regulation Q.
TL;DR: In this article, the authors report evidence that bank refinancing with the central bank is highly interest elastic, particularly with respect to the discount rate, and that banks fully adjust actual to desired refinancing within three months.
Abstract: This paper reports evidence that bank refinancing with the central bank is highly interest elastic, particularly with respect to the discount rate. It shows that banks fully adjust actual to desired refinancing within three months and that the apparent negative association of refinancing with a need variable is a spurious one. Discount rate changes are found to be largely effective as a policy instrument.
TL;DR: In this paper, a polynomial distributed lag regression model has been employed to determine the responsiveness of credit union consumer installment lending to changes in monetary policy, and the model provides an adequate statistical representation of credit unions reaction to monetary policy.
Abstract: In this paper, a polynomial distributed lag regression model has been employed to determine the responsiveness of credit union consumer installment lending to changes in monetary policy. Estimation of the model leads to the following conclusions: (a) the model provides an adequate statistical representation of credit union reaction to monetary policy, (b) over time, credit union lending behavior has come to react more quickly to changes in monetary policy, and (c) over time, the degree, or strength, of response of lending behaviour to changes in monetary policy has weakend. The model is also applied to commercial bank consumer installment lending with similar results.
TL;DR: In this paper, a two-stage least square regression analysis and cross-sectional data obtained from one bank holding company applications in the Tenth Federal Reserve District were used to determine if bank stock loan conflict of interest exists.
Abstract: The bank stock loan conflict of interest question arises when compensating balances are intermingled with a bank's correspondent balances for the benefit of those bank stockholders seeking a bank stock loan. This study attempts to determine if this practice exists usign two-stage least square regression analysis and cross-sectional data obtained from one-bank holding company applications in the Tenth Federal Reserve District. Our results suggest that bankers with established correspondent banking relationships capitalize on their correspondent balances to obtain favorable interest rates on bank stock loans.
TL;DR: The Baumol gain-confidence limit concept for selecting the set of efficient portfolios is commonly used, probably because of its intuitive relationships to the problem of ruin this paper. But the differences between the two concepts are discussed in this paper.
Abstract: The Baumol gain-confidence limit concept for selecting the set of efficient portfolios is commonly used, probably because of its intuitive relationships to the problem of ruin. This note shows the differences between Baumol's idea and the ruin constraint.
TL;DR: In this article, the optimal interest rate determination of a bank that learns about the repayment behavior of its customers from their past behavior is analyzed, and it is shown that such a bank determines lower than or equal interest rates than a bank which does not adapt its probability of default according to its past experience.
Abstract: We analyze here the optimal interest rate determination of a bank that learns about the repayment behavior of its customers from their past behavior. Optimal dynamic methods are first suggested for determining the interest rate for a bank that learns about the probability of default of its borrowers. It is shown that such a bank determines lower than or equal interest rates than a bank that does not adapt its probability of default according to its past experience. Similar results also obtain when the bank learns about the probabilities that its borrowers belong to each of K ( K larger than 2) quality groups.
TL;DR: In this article, the applicability of the Diamond and Mirrlees (1975) conditions concerning the optimality of externality cost transfers in accident and trading settings to the issue of the comparative allocative efficiency of financial institutions being mandated to pay premiums for deposit insurance versus assignment of liability to the depositor is demonstrated.
Abstract: This note demonstrates the applicability of the Diamond and Mirrlees (1975) conditions concerning the optimality of externality cost transfers in accident and trading settings to the issue of the comparative allocative efficiency of financial institutions being mandated to pay premiums for deposit insurance versus assignment of liability to the depositor. The result is a model which allows the isolation of the requisite quantitative values for such a preferred allocation.