repudiation risk and restitution costs toward understanding premiums on insured deposits this paper contains a theoretical development of the relationship of cd premiums to both the risks of the cd issuer and the third party government guarantor of those deposits the theoretical development shows that the risk of the guarantor derives from the possibility that the guarantee could be repudiated and or the restitution of the depositor s claim could be costly the empirical analysis of the premiums for insured cds indicates that during the years preceding the ultimate collapse of the fslic the market priced the risk of both the guarantor as well as the firm the guarantor risk pricing was responsive to the insolvency of the guarantor the attempts to recapitalize the guarantor and the efforts to resolve the insolvent thrifts during this eventful time period cd premiums rose to 187 basis points and averaged 79 and 54 basis points copyright 1994 by ohio state university press

an analysis of default risk in mobile home credit abstract there are approximately us 22 billion in outstanding receivables and an active secondary market for mobile home credit in the united states this important segment of the financing industry shares some attributes with traditional home mortgage financing and other attributes with consumer credit in this paper we draw on the mortgage literature to postulate the determinants of default risk for mobile home loans using multivariate logit models we investigate the relevance of payment history loan terms borrower characteristics economic conditions and legal constraints in analyzing loan defaults and delinquencies payment history emerges as the overwhelming factor in predicting the likelihood of default

redemption costs and interest rates under the u s national banking system interest rates under the u s national banking system 1863 1914 appear to imply that banks failed to exploit an arbitrage opportunity for two reasons yields on government bonds exceeded the tax rate on note issue by approximately 150 basis points and short term interest rates varied seasonally this paper examines whether note redemption costs can explain observed interest rates we present a model in which redemption costs create a spread between the tax rate on note issue and bond yields and in which temporary seasonal fluctuations in currency demand generate seasonal movements in short term interest rates calibration of the model to actual data lends support to the model s implications further interest rates are shown not to vary seasonally when banks do not incur the costs of note redemption the banking system that existed in the united states between 1863 and 1914 the so called national banking system is unique in u s history under this system private commercial banks national banks were permitted to issue payable on demand liabilities banknotes that were required to be fully collateralized by government bonds and that carried an explicit government guarantee against noteholder loss should the issuing bank fail banks were taxed based on the quantity of their notes in circulation and each bani had to redeem its own notes at par in lawful money specie or greenbacks the national banking system gave rise to a national currency because each bank was required to accept the notes of other national banks at par a bank holding notes issued by another bank could redeem those notes at par in lawful money through redemption centers established by the u s treasury with the costs of redemption borne by the issuing bank during the period of the national banking system observed interest rates were characterized by two features first yields on intermediated government bonds ex

hedging and coordinated risk management evidence from thrift conversions we provide an explanation for hedging as a means of allocating rather than reducing risk we argue that when increases in total risk are costly firms optimally allocate risk by reducing increasing exposure to risks that provide zero positive economic rents our evidence shows that mutual thrifts that convert to stock institutions increase total risk following conversion consistent with their increased abilities and incentives for risk taking they achieve this increase by hedging interest rate risk and increasing credit risk we provide some evidence that risk management activities are related to growth capacity and management compensation structure attained at conversion

does deposit insurance retard the development of non bank financial markets whether and how the introduction of deposit insurance affects non bank financial market development depends on whether banks and non bank financial markets are substitutes or complements and theory has conflicting views using data on 134 countries over a 28 year period and several identification strategies we find that the introduction of deposit insurance retards the equity market the non bank depositaries sector and the banking sector when law and order is weak while strong law and order mitigates this effect it does not lead to a positive outcome for all markets for non bank financial markets the effect is greater in the long run so that while deposit insurance increases banking sector development in the long run it retards non bank financial markets regardless of the level of law and order finally several design features exacerbate the negative outcomes our results have important policy implications for implementing or altering deposit insurance schemes

fdicia after five years at year end 1991 congress enacted fundamental deposit insurance reform for banks and thrifts the fdic improvement act this reform followed the failure of more than 2 000 depository institutions in the 1980s many failed because the incentive incompatibility of the structure of federal government provided deposit insurance encouraged moral hazard behavior by banks and poor agent behavior by regulators insurance was put on a more incentive compatible basis providing for a graduated series of sanctions mimicking market discipline that first may and then must be applied by the regulators on floundering banks this article reviews these changes and evaluates early results

emigration and wages in source countries evidence from mexico abstract this paper examines empirically the effect of mexican emigration to the united states on wages in mexico using data from the mexican and us censuses from 1970 to 2000 the main result in the paper is that emigration has a strong and positive effect on mexican wages there is also evidence for increasing wage inequality in mexico due to emigration simple welfare calculations based on a labor demand supply framework suggest that the aggregate welfare loss to mexico due to emigration is small however there is a significant distributional impact between labor and other factors

coalition proof trade and the friedman rule in the lagos wright model the lagos wright model a monetary model in which pairwise meetings alternate in time with a centralized meeting has been extensively analyzed but always using particular trading protocols here trading protocols are replaced by two alternative notions of implementability one that allows only individual defections and one that also allows cooperative defections in meetings it is shown that the first best allocation is implementable under the stricter notion without taxation if people are sufficiently patient and if people are free to skip the centralized meeting then lump sum taxation used to pay interest on money does not enlarge the set of implementable allocations

federal financial guarantees and the occasional market pricing of default risk evidence from insured deposits abstract this paper develops a two date state preference model which demonstrates that investors valuation of third party guaranteed debt depends on the financial condition of the guarantor as the solvency ratio of the guarantor declines investors demand higher promised rates on the firm s debt securities and price the firm risk variables more sensitively the empirical results are derived from sample data of fslic guaranteed obligations from the late 1980s evidence shows differences in the market s perception of fsllc s insolvency between 1987 and 1988 the market response to a decline in the financial condition of the guarantor affected the value of insured cds raising cd rates in relation to the treasury curve and firm risk pricing of insured deposits emerged

regulating banks through market discipline a survey of the issues abstract the interest in the application of market discipline to regulate the financial industry has boomed recently due to the proposed new capital accord this paper reviews the potential role market discipline can play in financial regulation we start with a discussion of the rationale for financial regulation and with a brief history of the current regulatory mechanisms next a definition of market discipline as a regulatory mechanism is advanced we evaluate the disciplining power various market participants have finally we argue that more external risk management disclosure is a condition sine qua non in order to enable market discipline as a regulatory mechanism in this respect the basle committee has taken the right approach

the regulatory treatment of utility diversification recent regulatory reform has gradually relaxed the constraints on vertical and horizontal diversification of public utilities after earlier strategies of conglomerate diversification utilities more recently started to expand into domestic and international activities more closely related to their core business sound diversification may improve corporate performance but raises complicated policy issues in firms operating in both regulated and unregulated markets the paper studies the problems of cross subsidization risk shifting and profit shifting that may result under conditions of partial regulation policy approaches that enable firms to pursue efficient diversification while reducing inefficient diversification incentives created by partial regulation are being analyzed

are bank shareholders enemies of regulators or a potential source of market discipline abstract in moral hazard models bank shareholders have incentives to transfer wealth from the deposit insurer that is maximize put option value by pursuing riskier strategies for safe banks with large charter value however the risk taking incentive is outweighed by the possibility of losing charter value focusing on the relationship between tobin s q and an ex ante measure of the failure probability this paper develops a semi parametric model for estimating the critical level of bank risk at which put option value starts outweighing charter value from these estimates we infer the prevalence of moral hazard examining publicly held bank holding companies bhc during the tumultuous 1986 1992 period we find that shareholders risk taking incentives were confined to a small fraction of highly risky institutions furthermore our analysis shows that the inflection point at which banks begin to tilt in favor of moral hazard increased substantially in 1993 2005 these findings are encouraging to bank regulators and legislators because they indicate that tighter capital rules and more rigorous supervision introduced by several legislative initiatives in the 1990s have helped squeeze a lot of the moral hazard incentives out of the banking system

accounting window dressing and template regulation a case study of the australian credit union industry this article documents the response of cooperative institutions that were required to adhere to new capital adequacy regulations traditionally geared for profit maximising organisations using data from the australian credit union industry we demonstrate that the cooperative philosophy and internal corporate governance structure of cooperatives will lead management to increase capital adequacy ratios through the application of accounting window dressing techniques this is opposite to the intended purpose of template regulation aimed at efficiently increasing operating margins and lowering risk our results raise several debatable issues regarding the ethics of accounting management and the imposition of one shoe fits all external regulation

float on a note abstract from 1863 1914 banks in the u s could issue notes subject to full collateral a tax on outstanding notes redemption of notes on demand and a clearing fee per issued note cleared through the treasury the system failed to satisfy a purported arbitrage condition the yield on collateral exceeded the tax rate plus the product of the clearing fee and the average clearing rate of notes the failure is explained by a model in which note issuers choose to issue notes only in trades that produce a low clearing rate high float but in which there are diminishing returns to additional note issue

emigration to south africa s mines this paper presents a simultaneous econometric model of both the determinants of international migration to the south african mines and of some of the economic consequences for each of the labor supplying countries not only are the short run effects of labor withdrawal on traditional crop cultivation and the domestic wage labor markets considered but also the long term effects of savings from mine earnings invested in crops and cattle in the home countries the experiences of botswana lesotho malawi mozambique and the south african homelands are compared it is shown that emigration to the south african mines has reduced crop production in the subsistence sectors of botswana lesotho malawi and the south african homelands in the short run but the results also suggest that earnings of migrants have enhanced both crop productivity and cattle accumulation in the longer run except in lesotho excerpt

u s real exchange rate fluctuations and relative price fluctuations abstract traditional theory attributes fluctuations in real exchange rates to changes in the relative price of nontraded goods this paper studies the relation between the united states bilateral real exchange rate and the associated bilateral relative price of nontraded goods for five of its most important trade relationships we find that this relation depends crucially on the choice of price series used to measure relative prices and on the choice of trade partner the relation is stronger when we measure relative prices using producer prices rather than consumer prices the relation is stronger the more important is the trade relationship between the united states and a trade partner even in cases where there is a strong relation between the real exchange rate and the relative price of nontraded goods however a large fraction of real exchange rate fluctuations is due to deviations from the law of one price for traded goods

organizational form and risk taking in the savings and loan industry abstract i hypothesize that risk taking is greater in stock thrifts than in mutual thrifts because the residual and fixed claims are separable i find that stock thrifts exhibit greater profit variability during the 1982 1988 period and that conversions from mutual to stock ownership are associated with increased investment in risky assets and increased profit variability these findings illustrate the relation between the structure of residual claims incentives and firm performance as well as the unintended consequences resulting from changes in thrift regulations

a global assessment of human capital mobility the role of non oecd destinations discussions of high skilled mobility typically evoke migration patterns from poorer to wealthier countries which ignore movements to and between developing countries this paper presents for the first time a global overview of human capital mobility through bilateral migration stocks by gender and education in 1990 and 2000 and calculation of nuanced brain drain indicators building on newly collated data the paper uses a novel estimation procedure based on a pseudo gravity model then identifies key determinants of international migration and subsequently uses estimated parameters to impute missing data non oecd destinations account for one third of skilled migration while oecd destinations are declining in relative importance

the relative termination experience of adjustable to fixed rate mortgages our study uses a multinomial logit model to analyze the concurrent termination experience of adjustable rate and fixed rate mortgages a new set of arm specific interactive determinants expands the conventional frm specification to isolate the unique termination behavior of arms we find that expected rate adjustments and large lifetime caps are positively related to arm termination probabilities while long adjustment frequencies are inversely related caps both periodic and lifetime have a secondary inverse effect on termination probabilities when interest rate movements exceed cap limits the model also shows that interest rate expectations affect frm terminations more strongly than arm terminations in september 1981 commitment rates on fixed rate mortgages frms peaked at 18 after a 3 year 850 basis point rise lenders encumbered with losses from devalued frm portfolios faced insolvency while mortgage applicants constrained by large payment burdens contended with disqualification adjustable rate mortgages arms emerged as a solution to both problems the adjusting note rate allowed lenders to hedge their portfolios against rising interest rates and the discounting of initial arm rates kept household payment ratios within underwriting guidelines the benefit of arms remains questionable however because of the uncertainty surrounding their future payment streams in particular the shift of interest rate risk to borrowers may result in higher default and prepayment risks to lenders uncertainty is further compounded by nonstandard contracts for buydown terms period caps life caps indexes and adjustment periods originators and insurers of arms as well as investors in the emerging market for arm backed securities need arm specific methods for evaluating the cashflow risks of these unique instruments in this paper we address these issues by examining the concurrent default and prepayment experience of arms

a note on the risk adjusted price concentration relationship in banking abstract price concentration studies in banking typically find a significant and negative relationship between consumer deposit rates i e prices and market concentration this implies highly concentrated banking markets are bad for depositors it also provides support for the structure conduct performance hypothesis and rejects the efficient structure hypothesis however these studies have focused almost exclusively on supply side control variables and neglected demand side variables when estimating the reduced form price concentration relationship for example previous studies have not included in their analysis bank specific risk variables as measures of cross sectional derived deposit demand we find that when bank specific risk variables are included in the analysis the magnitude of the relationship between deposit rates and market concentration decreases by over 50 we offer an explanation for these results based on the correlation between a bank s risk profile and the structure of the market in which it operates these results suggest that it may be necessary to reconsider the well established assumption that higher market concentration necessarily leads to anticompetitive deposit pricing behavior by commercial banks this has direct implications for the antitrust evaluations of bank merger and acquisition proposals by regulatory agencies and in a more general sense these results suggest that any structure conduct performance based study that does not explicitly consider the possibility of very different risk profiles of the firms analyzed may indeed miss a very important set of explanatory variables and thus the results from those studies may be spurious

taxpayer subsidies in failed thrift resolution the impact of firrea abstract we compare the wealth effects of acquisitions of failed thrifts before and after the passage of firrea in august 1989 in contrast to fslic assisted deals in the pre firrea period we find no evidence of significant acquirer gains in rtc assisted transactions in addition there is no significant correlation between acquirer gains and either the number of bidders or the amount of assistance provided by the rtc these results suggest the absence of any symmetric tax payer overpayments in rtc assisted transactions and indicate that regulatory and institutional changes instituted by firrea resulted in an improvement in the resolution process for failed thrifts

existence of a monetary steady state in a matching model indivisible money abstract existence of a monetary steady state is established for a random matching model with divisible goods indivisible money an arbitrary bound on individual money holdings and take it or leave it offers by consumers the background environment is that in papers by shi and by trejos and wright the monetary steady state shown to exist has nice properties the value function defined on money holdings is strictly increasing and strictly concave and the measure over money holdings has full support

remittances and the real effective exchange rate we examine the long run relationship between remittances and the real exchange rate for less developed countries in a key departure from the literature we employ a panel cointegration approach using an innovative method for the measurement of the multilateral real effective exchange rate and we focus on high remittance economies we find a small inelastic but significant long run relationship which confirms a dutch disease type effect the short run relationship is explored using a panel vector error correction model which confirms that short run causality is unidirectional running from remittances to the exchange rate potential asymmetries in this relationship are identified using quantile regression analysis

inside and outside money as alternative media of exchange we study a random matching model of money in which a subset of people called bankers have known histories and the rest called nonbankers have unknown histories earlier we showed that if there are no outside assets then an optimal arrangement has bankers issuing objects banknotes that are used in trades involving nonbankers here the same model is used to compare such exclusive use of inside money to the exclusive use of outside money we show that the set of implementable outcomes using outside money is a strict subset of the set using inside money

migration and development research is moving far beyond remittances research on migration and development has recently changed in two ways first it has grown sharply in volume emerging as a proper subfield second while it once embraced principally rural urban migration and international remittances migration and development research has broadened to consider a range of international development processes these include human capital investment global diaspora networks circular or temporary migration and the transfer of technology and cultural norms for this special issue we present a selection of frontier migration and development research that instantiates these trends

cross country variation in the impact of international migration canada mexico and the united states using data drawn from the canadian mexican and u s censuses we find a numerically comparable and statistically significant inverse relation between immigrant induced shifts in labor supply and wages in each of the three countries a 10 labor supply shift is associated with a 3 4 opposite signed change in wages despite the similarity in the wage response theimpactofmigrationonthewagestructuredifferssignificantlyacrosscountries international migration narrowed wage inequality in canada increased it in the united states and reduced the relative wage of workers at the bottom of the skill distribution in mexico jel j31 j61

the market valuation effects of the financial institutions reform recovery and enforcement act of 1989 abstract this paper evaluates the stock market effects of events leading to the passage of the financial institutions reforms recovery and enforcement act of 1989 the evidence suggests that the signing of the act by president bush produced positive abnormal returns for both banks and s ls and that the addition of tougher capital standards produced positive returns for s ls in addition the act increased the risk of both banks and s ls

single factor duration models in a discrete general equilibrium framework single factor duration models sfdms for valuing debt securities have gained rapid acceptance by bond practitioners in recent years but slower acceptance by academics in large measure the slower academic acceptance reflects the lack of a rigorously developed underlying economic or financial theoretic base partially as a result some sfdms have undesirable behavioral characteristics foremost among these is that they appear to be inconsistent with accepted general equilibrium conditions this paper has two purposes the first is to construct explicitly the theoretical underpinnings of the model and the second is to develop the conditions under which the model does satisfy general equilibrium conditions this is done in sections i and ii respectively

an analysis of bank loan rate indexation this paper examines the economic rationale for the use of bank loan commitments and the effect on the allocation of bank credit of indexing the loan rate offered through the commitment to the prime a simple model of the loan market is constructed and used to examine the effect changes in loan demand and the cost of bank funds have on the allocation of bank credit under indexation it is shown that indexing implies changes in the relative cost of borrowing for certain groups of bank customers for nonprime customers an increase in the cost of bank funds results in a decline in the relative cost of borrowing under commitments the pattern of commitment use is found to be consistent with the predictions of the model recent surveys have found that the majority of commercial and industrial loans are made under pre existing loan commitments these surveys also find that for most commercial and industrial loans the interest rate is tied or indexed to the prime rate although indexing loan rates is widespread there has been little theoretical or empirical work on the effect of this pricing scheme on the allocation of bank credit the paucity of research in this area is surprising considering the frequency with which indexed contracts are used and the current controversy surrounding the use of the prime as an index 2 the purpose of this paper is to provide an analysis of the effect of indexed loan rates on the intertemporal allocation of bank credit a simple model of the loan market is constructed and used to examine the effect changes in the cost of bank funds and changes in loan demand have on the allocation of credit under indexation use of this model demonstrates that indexed contracts do not result in an efficient allocation in the sense that the resulting allocation does not replicate the allocation obtained with complete contingent contracts finally the model is tested empirically using data on commitment use from the quarterly survey of the terms of commercial bank lending it is shown that indexing

the real consequences of market segmentation we study the real effects of market segmentation due to credit ratings using a matched sample of firms just above and just below the investment grade cutoff these firms have similar observables including average investment rates however flows into high yield mutual funds have an economically significant effect on the issuance and investment of the speculative grade firms relative to their matches especially for firms likely to be financially constrained the effect is associated with the discrete change

an empirical test of the incentive effects of deposit insurance the case of junk bonds at savings and loan associations this paper analyzes how financial markets reacted to s l diversification into junk bonds the authors report that junk bond holdings are positively correlated with both the volatility of s l equity returns and the interest rates paid on large cds next they examine the impact of junk bonds on equity returns for poorly capitalized s ls greater risk taking increases the value of deposit insurance and should lead to higher stock returns however a well capitalized institution that increases junk bond holdings should not experience stock price gains the authors find that this is the case for the sample of s ls they studied copyright 1994 by ohio state university press

search bargaining money and prices the goal of this paper is to extend existing search theoretic models of fiat money which until now have assumed that the price level is exogenous by explicitly incorporating bilateral bargaining this allows us to determine the price level endogenously and leads to additional insights concerning the role of money for example we find that monetary equilibria are generally inefficient in the sense that output and prices differ from the solution to a social planner s problem although the difference can become small as the discount rate or search friction vanishes we also find that there exist nonstationary inflationary equilibria

payments and liquidity under adverse selection informational asymmetries regarding the future value of assets affect their role in exchange i construct a random matching economy composed of two assets a risk free bond and a lucas tree whose terminal value is privately known to its holder no restrictions are imposed on payment arrangements the main finding supports a pecking order theory of payments agents use their risk free bonds first in order to finance their spending shocks and they use their information sensitive assets only if their holdings of bonds are depleted the theory has implications for the optimal provision of risk free bonds the structure of asset returns and liquidity

workers remittances and the real exchange rate a paradox of gifts abstract we test the impact of workers remittances on the real exchange rate using a panel of 13 latin american and caribbean countries the analysis reveals that workers remittances have the potential to inflict economic costs on the export sector of receiving countries by reducing its international competitiveness our findings raise concerns parallel to those raised by dutch disease or resource boom models where resource discoveries result in real exchange rate appreciation and shifting of resources from the traded to the nontraded sectors of the economy

financial development and pathways of growth state branching and deposit insurance laws in the united states 1900 1940 abstract this paper studies the effect of state level banking regulation on financial development and on components of state level growth in the united states from 1900 to 1940 we use these banking laws to assess the findings of a large recent literature that has argued that financial development contributes to economic growth we contend that the institutional mechanism leading to financial development is important in determining its consequences and that some types of financial development can even retard economic growth for the united states from 1900 to 1940 we argue that the financial expansion induced by expanded bank branching accelerated the mechanization of agriculture and spurred growth in manufacturing in contrast financial expansions induced by state deposit insurance had negative consequences for both the agricultural and manufacturing sectors

variable rate debt instruments and corporate debt policy sustained high rate of inflation has led to the creation of debt instruments with variable interest rate the availability of these debt instruments presents management with the problem of the choice of the optimal debt portfolio this paper deals with this problem assuming a given and optimal debt to equity ratio given expected monetary value maximization an efficient frontier is derived in terms of the expected net income and probability of bankruptcy where net income is defined as operating income minus debt repayment this efficient frontier is shown to be also mean variance efficient it is also shown that in most cases the optimal debt portfolio includes more than one debt instrument in other words the firm will avoid the policy of minimizing the expected cost of its debt repayments or the policy of minimizing the costs of bankruptcy the optimal solution itself is affected by market variables like the relative expected cost of different debt instruments and by firm specific variables like the variability of its operating income stream and the covariance between the operating income and the debt repayments

three paradigms for the role of capitalization requirements in insured financial institutions standard models for deposit insurance strike analogies to more familiar financial contracts and conceive of risk as exogenous the oldest model of deposit insurance likens it to passively underwriting casualty insurance a more sophisticated but still bilateral model likens deposit insurance to writing a passive put option on the enterprise whose funding is insured delays in acknowledging the wreck of the s l industry and its federal insurer fslic discredit these models as guides to managing a deposit insurance fund deposit insurance is better interpreted as a trilateral performance bond that enhances the credit of an insured institution this interpretation endogenizes risk emphasizes incentive conflict and underscores the need to optimize loss control activity the bonding model clarifies that a subset of the monitoring and disciplinary activities traditionally undertaken by government officials can usefully be privatized

deposit insurance banking crises and market discipline evidence from a natural experiment on deposit flows and rates published in journal of money credit and banking volume 45 issue 1 february 2013 pages 179 200 as as deposit insurance banking crises and market discipline evidence from a natural experiment on deposit flows and rates

discussion of information and liquidity i discuss the model of asset liquidity by lester postlewaite and wright 2011 this issue forthcoming i consider a model with bilateral matching and bargaining in which a perfectly divisible asset serves as means of payment a recognizability problem is introduced by assuming that the asset can be counterfeited at a positive cost in contrast to lester postlewaite and wright in equilibrium sellers always accept objects that they do not recognize the private information problem manifests itself by smaller quantities traded in uninformed matches

fixed versus variable rate loans this paper discusses the nature of fixed and variable loan contracts and derives the conditions which determine the optimal quantity of each the results indicate that the payoff functions are quite different and dependent upon the project financed the appropriate conditions for the allocation of loan terms to a set of borrowers are then developed finally the analysis derives the optimal portfolio frontier and risk return trade off for the banking firm here it is demonstrated that the solution is unlikely to be at a point of zero interest rate risk

on money as a medium of exchange we analyze economies in which individuals specialize in consumption and production and meet randomly over time in a way that implies that trade must be bilateral and quid pro quo nash equilibria in trading strategies are characterized certain goods emerge endogenously as media of exchange or commodity money depending both on their intrinsic properties and on extrinsic beliefs there are also equilibria with genuine fiat currency circulating as the general medium of exchange we find that equilibria are not generally pareto optimal and that introducing fiat currency into a commodity money economy may unambiguously improve welfare velocity acceptability and liquidity are discussed

bank failures as poisson variates abstract the elasticity of bank failures with respect to a set of explanatory variables is estimated using a maximum likelihood poisson estimator the resulting estimates are compared with their ols counterparts

effects of deregulation on failing thrift institutions the purpose of this paper is to test the hypothesis that much of the decline in the net worth of the failing saving and loan institutions was a result of deregulation variables are developed to represent major actions to deregulate sltime series analysis is developed to estimate the effects of financial deregulation on failing thrifts net worth the data are 1984 89 balance sheet adn income statement data for thrift institutions prior to the enactment of the 1989 legislation to solve the crisis the reuslts of the analysis indicate that deregulation of asset and deposit activities was not the cause of the financial distress of failing us thrift institutions the primary cause appears to be the increase in the federal deposit insurance limit to 100 000 and how attractive this legislative action made brokering deposits that became insured up to 100 000

when and why did fslic resolve insolvent thrifts abstract this paper develops an optimal resolution triage strategy for a deposit insurance regulator the regulator seeks to maximize the market value of the deposit insurance enterprise subject to budget personal bureaucratic political informational and legal restraints testable hypotheses are derived concerning the timing of insolvency resolutions the paper tests these hypotheses using a two step hazards model and a data set of thrift resolutions during 1985 1989 the tests focus on the relative roles of value maximization and constraint pressures in decisions to grant capital forbearance the results suggest that regulators seldom conformed to the benchmark resolution timing strategy that an unconflicted agent would follow under only a budget constraint instead the evidence shows that the resolution timing decision was distorted by personal political informational and legal constraints

differences in income elasticities and trends in real exchange rates abstract one might expect that differences in income elasticities in trade and or differences in growth rates among countries would give rise to strong secular trends in real exchange rates for example fast growing countries might need steady depreciation to get the world to accept their growing exports in fact however income elasticities are systematically related to growth rates by the 45 degree rule under which fast growing countries appear to face high income elasticities of demand for their exports while having low income elasticities of import demand the net effect of this relationship between elasticities and growth rates is that secular trends in real exchange rates are much smaller than one might otherwise have expected relative ppp holds fairly well this paper documents the existence of a 45 degree rule and suggests an explanation in terms of increasing returns and product differentiation

booming sector and de industrialisation in a small open economy this paper presents a theoretical analysis of the dutch disease the phenomenon whereby a boom in one traded goods sector squeezes porfitability in other traded goods sectors both by directly bi

measuring the true profile of taxpayer losses in the s l insurance mess abstract this research shows that conservative methods of projecting and discounting cash flows if applied to information already collected in the fhlbb s reporting system would have reflected the size of the s l deposit insurance losses long before taxpayers were aware of the extent of the mess official data show fslic reserves of 4 6 billion in 1986 in sharp contrast our conservative estimate puts imbedded losses for that year at 45 3 billion these methods prove insensitive to arbitrariness in the assumptions needed to operationalize the discounting process and measure the extent of guilty knowledge it is fair to presume officials possessed supporting an incentive breakdown theory of the problem over presumptions of innocent ignorance the policy implication is that taxpayers need to impose on government regulatory agents a better information system and better enforcement of those agents obligations to the public

the effect of skilled emigration on real exchange rates through the wage channel abstract building on an analytical model we provide cross country empirical evidence that net skilled emigration appreciates bilateral real exchange rates through the wage channel in source countries chains of causality in the presence of the law of one price run through the spending effect and the resource allocation effect analogous to the remittance based dutch disease effect a pricing to market model allows pass through for both traded and nontraded prices when the law of one price is violated the skilled emigration elasticity of real exchange rate is estimated to be in the range of between 0 6 and 0 8 with internal prices playing a dominant role alternative model specifications show robust outcomes

discriminant characteristics of us banks acquired with or without federal assistance abstract an extensive literature review of statistical studies on merger acquisition and takeover activities in various sectors is presented it reveals a large number of efforts models and pitfalls to classify and predict acquired or bankrupt vs non acquired or healthy firms in this study we considered twenty endogenous bank variables in order to determine the most important characteristics that differentiate us bank mergers acquisitions with or without federal assistance we developed several logistic regression models with only three to five significant variables which classified correctly about 93 of the 299 actual 1987 1988 cases and 89 in the 56 case 1989 holdout sample

a model of a currency shortage abstract until the mid 19th century shortages of currency were common moreover a frequent policy response was a prohibition on the export of coins we use a random matching model with indivisible money to explain a shortage and to judge the desirability of a prohibition on the export of coins the model although extreme in many regards represents better than earlier models a demand for outside money and the problems that arise when that money is indivisible it can also rationalize a prohibition on the export of money

principal agent problems in s l salvage new legislation and traditional fdic insolvency resolution procedures transform and intensify the principal agent problems most responsible for the fslic mess these problems explain counterproductive constraints on the governance and operating policies of the agency responsible for rescuing and salvaging assets in insolvent thrifts the rtc the constraints slow insolvency resolution increase interim financing costs and undermine rtc recovery of asset value operationalizing its task as preserving evanescent and economically misconceived franchise values the rtc allows insolvents to seek financing on an unconsolidated basis initiates bidding for one institution at a time holds back seriously troubled assets and recruits an overly narrow range of bidders although the federal savings and loan insurance corporation fslic is officially defunct its corporate corpse lives on in two successor institutions its deposit insurance business has been taken over by the savings association insurance fund saif while its liquidation or salvage business has been assigned to the resolution trust corporation rtc both saif and rtc have the same stockholder principals federal taxpayers also both are operated by the federal deposit insurance corporation fdic nevertheless their governing structures differ markedly and in a perverse way to maximize net returns from salvage experience suggests the theory that a salvage or value recovery operation requires the aggressive operating flexibility of an automobile junkyard in a junkyard essentially everything in the salvor s inventory is open for inspection stripping and sale to anyone at any time hardto market hulks are compacted into scrap metal i e pooled and shipped out on what can be compared to a bulk sales or auction basis on a strict timetable the yard either owns or transacts with a fleet of tow trucks and has enough operating capital to bring in new wrecks as they appear this paper argues that unlike a private salvor the rtc is saddled with the additional objective of slowing down official recognition of the full size of fslic s losses to this end the financial institutions reform recovery and enforcement act firrea underfunds the rtc requires delayed sales of residential properties ostensibly to promote the availability of affordable housing and creates a superfluous five person rtc oversight board whose incentives are to deprive rtc decisionmakers of desirable operating flexibility the rtc oversight board creates an appearance of improved accountability to taxpayers that runs exactly opposite to its true economic effects three of the

bank failures and bank fundamentals a comparative analysis of latin america and east asia during the nineties using bank level data abstract this paper uses bank level data from recent banking crises in east asia and latin america to address the following two questions 1 to what extent did individual bank conditions explain the failures 2 in terms of their fundamentals was it mainly the weak banks ex ante that failed in the crisis countries the results show that for the two regions bank level fundamentals significantly affect the likelihood of collapse for these banks systemic shocks both macroeconomic and liquidity that triggered the crises mainly destabilized the weak banks ex ante particularly in east asia which raises questions about the role that regional differences play for the degree of banking sector resilience to systemic shocks in the financial and macroeconomic environment

a unified framework for monetary theory and policy analysis search theoretic models of monetary exchange are based on explicit descriptions of the frictions that make money essential however tractable versions of these models typically make strong assumptions that render them ill suited for monetary policy analysis we propose a new framework based on explicit micro foundations within which macro policy can be studied the framework is analytically tractable and easily quantifiable we calibrate the model to standard observations and use it to measure the cost of inflation we find that going from 10 percent to 0 percent inflation is worth between 3 and 5 percent of consumption much higher than previous estimates

asset returns and economic disasters evidence from the s l crisis abstract this paper shows that depositors lost confidence in fslic during the two years prior to passage of firrea legislation which recapitalized the deposit insurance fund in 1989 during this period promised returns on retail cds reflected the expected loss and return standard deviation on these securities in the absence of government insurance cross sectional analysis is used to estimate both the probability and the conditional price of risk associated with fslic default the results suggest that increased uncertainty about both output and inflation in this disaster scenario drove the price of fslic default risk to extremely high levels the results also indicate that the market for retail deposits is characterized by less than perfect arbitrage across geographical regions

money and prices a model of search and bargaining abstract this paper makes commodities divisible and incorporates bargaining into the search theoretic model of money to determine the purchasing power of money or price it is shown that two monetary equilibria always coexist where fiat money is universally accepted the two equilibria differ in price output welfare and the velocity of money sunspot monetary equilibria exist in which money is universally accepted in all states of the economy multiplicity has novel implications on the effectiveness of currency substitution and exchange market intervention journal of economic literature classification numbers c78 e40

borrower risk under alternative mortgage instruments this paper analyzes differences in borrower risk under alternative mortgage instruments and various borrower characteristics the traditional approach of measuring borrower risk in terms of actual delinquency and foreclosure data is rejected in favor of a model based on potential delinquency that is changes in the mortgage payment to income ratio the combinations of mortgage terms and borrower characteristics that are most likely to produce a potential delinquency are isolated based on the calculation of hypothetical payment to income ratios over an eight year period recent studies have attributed problems of instability in the housing market to a combination of inflation and the terms of the traditional mortgage instrument 1 these studies have concluded that the standard mortgage instrument with a fixed nominal interest rate is incapable of meeting the needs of either borrowers or lenders during inflationary periods lenders may earn negative real rates of return while borrowers must face a time stream of real payments which is unlikely to match their real income alternative mortgage instruments ami s with payments that are allowed to vary have been proposed as a partial solution to these problems 2 the prospect of the widespread use of mortgages whose payments have the potential for variation has not met with universal enthusiasm however particularly important is the assertion that such mortgage instruments would increase risk to borrowers while under the standard fixed rate mortgage the risk of unanticipated inflation is carried by the lender the use of ami s would shift this risk to the borrower in addition it is argued that lenders would be reluctant to grant such mortgages to borrowers felt to be more prone to income fluctuations such as young or minority families if lending institutions offered only variable payment mortgages these groups could be squeezed out of the mortgage market 3 while there seems to be a consensus that mortgages with variable payments will involve higher borrower risk few studies have been undertaken to examine

deposit insurance and the risk premium in bank deposit rates abstract by placing a ceiling on the amount of possible depositor loss deposit insurance should result in a lower deposit risk premium however this effect may be modified if either the insurance promise has low credibility or the moral hazard incentives generated by deposit insurance result in a greater probability of bank default using financial and institutional panel data from thirteen countries we find that the risk premium is over 40 basis points higher on average in uninsured countries than in countries that offer insurance up to some pre specified maximum however the risk premium has a non linear relationship with the level of maximum insurance coverage suggesting that the market recognizes the moral hazard potential moreover the effect of deposit insurance on the risk premium is weaker in countries with strong creditor rights consistent with the view that investors view the latter as a substitute for explicit deposit insurance

determinants of thrift institution resolution costs this paper provides a detailed examination of the cost imposed by thrift institutions resolved during the period 1980 1988 a simple model is presented to explain the cost of resolution this model is tested empirically with a comprehensive data set that permits us to avoid some of the econometric problems present in earlier studies the empirical evidence suggests that the model that explains resolution costs in the late 1980s is significantly different from the model for either the middle or early 1980s this evidence is consistent with the changing nature of the thrift crisis and changes in the regulator s closure rule our econometric evidence moreover is consistent with the hypothesis that for troubled institutions tangible net worth systematically understates market value net worth in addition the importance of including time effects as well as institution effects as determinants of the cost of resolution is revealed the sharp increase in market interest rates in late 1979 and early 1980 and the deregulation of deposit rates led to record losses in the thrift industry in the early 1980s and to a major erosion of the industry s capital many institutions never fully recovered from these problems and most currently insolvent thrift

interest rates under the u s national banking system abstract according to previous studies the demand liability feature of national bank notes did not present a problem for note issuing banks because the nonbank public treated notes and other currency as perfect substitutes however that view when combined with nonbindingness of the collateral restriction against note issue itself an implication of the fact that some eligible collateral was not used for that purpose implies that the safe short term interest rate is pegged at the tax rate on note circulation since evidence on short term interest rates is inconsistent with such a peg that view must be rejected

emigration and wage inequality abstract we look at the implications of labor emigration from a small open economy on pre existing wage gap between the skilled and the unskilled unskilled emigration may worsen the wage gap whereas skill emigration can reduce wage inequality although absolute wages increase with emigration

search based models of money and finance an integrated approach many applications in monetary economics of search and bargaining theory use shi trejos wright hereafter stw many applications in finance use duffie g rleanu pedersen hereafter dgp these models share several features and both concern liquidity yet they also differ in stw agents use assets as payment instruments when trading goods in dgp they pay with goods or transferable utility when trading assets we integrate the two this clarifies connections between the literatures and generates novel insights several new results are provided for the baseline stw and dgp models while the integrated structure generates even more interesting outcomes including endogenous transactions patterns and belief based dynamics

managing interest rate risk in banking institutions abstract this paper develops and employs a multiperiod goal programming model to examine the normative effects of changing interest rates on the rearrangements of depository bank balance sheets and associated profits a two stage state preference framework allows a dynamic interpretation of the model s prescribed decisions as well as a natural incorporation of profit sensitivity to interest rate risk the model includes on and off the balance sheet decision variables experimental results indicate that constraining the latter decision can seriously curtail the bank s ability to achieve its profit objectives

deposit insurance and risk taking behavior in the credit union industry abstract this paper examines the relationship between deposit insurance and risk taking behavior within the credit union industry time series tests employing industry average financial ratios for federal and state credit unions did not support the increased risk taking hypothesis although federal credit union capital declined immediately following the adoption of deposit insurance this was most likely the result of reduced capital requirements not deposit insurance liquidity and loan delinquency ratios had a negative time trend coefficient implying a decline in risk taking behavior during the post insurance period cross sectional test results employing iowa state chartered credit union data indicated that insured credit unions were better capitalized and more liquid than their uninsured counterparts overall there was no evidence that the adoption of deposit insurance increased the risk taking behavior of credit unions

accounting for u s real exchange rate changes this study measures the proportion of u s real exchange rate movements that can be accounted for by movements in the relative prices of nontraded goods the decomposition is done at all possible h

asymmetric timely loss recognition adverse shocks to external capital and underinvestment evidence from the collapse of the junk bond market abstract using the collapse of the junk bond market in the early 1990s as an exogenous shock to external capital i document in both difference in differences and triple difference designs that speculative grade firms that recognize economic losses in a timely manner experience a smaller reduction in investment following the collapse the effect is more pronounced for speculative grade firms with a low level of asset liquidation value using the excess bond premium as a proxy for fluctuations in the supply of capital i also extend the generalizability of my findings to a broader sample of 84 421 firm years over the 1972 2011 period

a matching model with bounded holdings of indivisible money recent versions of pairwise random matching models of money with divisible and perishable goods are amended to allow individuals to hold more than one unit of an indivisible asset the asset resembles a fiat asset except that nominal holdings of it yield a small amount of utility there is a general upper bound on the number of units of the asset that individuals can hold a steady state with trade is shown to exist the model is applied to study numerically the effect on welfare of the degree to which the asset is divisible

risk regulation and s l diversification into nontraditional assets abstract risk exposure is a central issue in the debate over allowing savings and loan associations s ls to expand into nontraditional activities this paper examines the relationship between risk and portfolio composition of three distinct groups of s l lenders based on their investment strategies real estate specialized res s l lenders with high holdings of adjustable rate mortgages arms res s l lenders with low arms and not real estate specialized nres s l lenders the major findings of this paper suggest that diversification into nontraditional assets leads to lower risk and higher average returns for res firms with low arms but for nres firms it leads to higher risk and in some cases lower average returns this latter group of institutions appears to be using nontraditional assets as a means to increase their risk exposure and not necessarily their average stock returns in addition we find that risk increases for res s ls with high arms as additional adjustable rate mortgages are added to their portfolios this is not the case for the low arms group and may indicate that at some level the increase in credit risk dominates the decrease in interest rate risk associated with additional arms relative to fixed rate mortgages these results strongly suggest that while additional diversification provides risk reduction opportunities for some s ls it also provides opportunities for other s ls to increase their risk exposure

market discipline and deposit insurance cross country evidence presented in this paper suggests that explicit deposit insurance reduces required deposit interest rates while at the same time it lowers market discipline on bank risk taking internationally deposit insurance schemes vary widely in their coverage funding and management this reflects that there are widely differing views on how deposit insurance should optimally be structured to inform this debate we use a newly constructed data set of deposit insurance design features to examine how different design features affect deposit interest rates and market discipline

liquidity a new monetarist perspective this essay surveys the new monetarist approach to liquidity work in this literature strives for empirical and policy relevance plus rigorous foundations questions include what is liquidity is money essential in achieving desirable outcomes which objects can or should serve in this capacity when can asset prices differ from fundamentals what are the functions of commitment and collateral in credit markets how does money interact with credit and intermediation what can and should monetary policy do the research summarized emphasizes the micro structure of frictional transactions and studies how institutions like monetary exchange credit arrangements or intermediation facilitate the exchange process

the labour market effects of immigration and emigration in oecd countries in this paper we quantify the labor market effects of migration flows in oecd countries during the 1990 s based on a new global database on the bilateral stock of migrants by education level we simulate various outcomes using an aggregate model of labor markets parameterized by a range of estimates from the literature we find that immigration had a positive effect on the wages of less educated natives and it increased or left unchanged the average native wages emigration instead had a negative effect on the wages of less educated native workers and increased inequality within countries

regulatory incentives and the thrift crisis dividends mutual to stock conversions and financial distress during the 1980s insolvency of individual thrifts and the thrift deposit insurer created severe incentive problems lacking cash to close insolvent thrifts regulators induced nearly 10 billion of private capital to flow into the industry through mutual to stock conversions we test a theory of how regulators encouraged capitalimpaired mutual thrifts to convert by permitting them to pay dividends rather than rebuild capital we estimate the costs of this policy and interpret the 1991 federal deposit insurance corporation improvement act as requiring regulators to impose restraints on depository institutions parallel to debt covenants that prevent capital distributions by nonfinancial firms experiencing distress