| Title |
Date |
Publication |
Author(s) |
Type |
| Workshop on Entrepreneurial Finance: A Summary
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November, 2009 |
|
James B Thomson; Timothy Dunne; Scott Shane; |
Policy Discussion Papers |
| Abstract: This Policy Discussion Paper summarizes papers that were presented at the Workshop on Entrepreneurial Finance, which was held March 12–13, 2009, at the Federal Feserve Bank of Cleveland. Researchers presented new empirical research that exploits data sets on entrepreneurial activity that are based on broad and representative data samples. Papers in the workshop focused primarily on analyses of the sources and structure of start-up finance, including the importance of bank lending, venture capital, angel investors, and owner equity.
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| On Systemically Important Financial Institutions and Progressive Systemic Mitigation
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August, 2009 |
Federal Reserve Bank of Cleveland, Policy Discussion Paper, no. 27 |
James B Thomson; |
Policy Discussion Papers |
| Abstract: One of the most important issues in the regulatory reform debate is that of systemically important financial institutions. This paper proposes a framework for identifying and supervising such institutions; the framework is designed to remove the advantages they derive from becoming systemically important and to give them more time-consistent incentives. It defines criteria for classifying firms as systemically important: size (the classic doctrine of too big to let fail) and the four C’s of systemic importance (contagion, concentration, correlation, and conditions); it also discusses the concept of progressive systemic mitigation.
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| Identifying and Resolving Financial Crises: A Conference Overview
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August, 2008 |
Federal Reserve Bank of Cleveland, Policy Discussion Paper, no. 24 |
James B Thomson; Joseph G Haubrich; |
Policy Discussion Papers |
| Abstract: Financial crises remain a recurring problem despite, or perhaps, as some suggest, because of, extensive innovation in capital markets over the past several decades. Crisis interventions are fraught with trade-offs: What are the costs of doing nothing? What is the probability that markets will seize up? Are there viable alternatives? Will the intervention make further crises more likely? The Federal Reserve Bank of Cleveland and the FDIC sponsored a conference in April 2008 to debate and exchange ideas on these issues. The following document summarizes and ties together the contributions presented.
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| Does Government Intervention in the Small-Firm Credit Market Help Economic Performance?
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August, 2007 |
Federal Reserve Bank of Cleveland, Policy Discussion Paper, no. 22 |
James B Thomson; Ben R Craig; William E Jackson III; |
Policy Discussion Papers |
| Abstract: The guaranteed lending programs of the Small Business Administration (SBA) are large and growing rapidly. The SBA's fiscal year 2008 performance budget calls for $25 billion in guaranteed loans for small businesses-a new record for the agency. Some critics of SBA programs suggest they do not help small businesses or overall economic performance. Other critics suggest that these programs unfairly benefit the financial institutions that participate in SBA's guaranteed lending programs. While very little serious empirical evidence exists on whether the net economic impact of the SBA's guaranteed lending programs is positive or negative, a few recent studies provide some insight into the question. In general, they suggest a small positive impact of the SBA's programs on economic performance. However, the results are very tentative and further research is needed to declare a more definitive position. We provide a general overview of the SBA's guaranteed lending programs and summarize the results of these studies.
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| On Forecasting the Term Structure of Credit Spreads
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April, 2007 |
Federal Reserve Bank of Cleveland, Working Paper no. 0705 |
James B Thomson; C.N.V. Krishnan; Peter Ritchken; |
Working Papers |
| Abstract: Predictions of firm-by-firm term structures of credit spreads based on current spot and forward values can be improved upon by exploiting information contained in the shape of the credit-spread curve. However, the current credit-spread curve is not a sufficient statistic for predicting future credit spreads; the explanatory power can be increased further by exploiting information contained in the shape of the riskless-yield curve. In the presence of credit-spread and riskless factors, other macroeconomic, marketwide, and firm-specific risk variables do not significantly improve predictions of credit spreads. Current credit-spread and riskless-yield curves impound essentially all marketwide and firm-specific information necessary for predicting future credit spreads.
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| On Government Intervention in the Small-Firm Credit Market and Its Effect on Economic Performance
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March, 2007 |
Federal Reserve Bank of Cleveland, Working Paper no. 0702 |
James B Thomson; Ben R Craig; William E Jackson III; |
Working Papers |
| Abstract: In this paper we empirically test whether the Small Business Administration's main guaranteed lending program--the 7(a) program--has a greater impact on economic performance in low-income markets than in others. Using local labor market employment rates as our measure of economic performance, we find a quantitatively positive impact of SBA 7(a) guaranteed lending, which is significantly larger in low-income areas.
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| Credit Spreads and Subordinated Debt
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March, 2007 |
Federal Reserve Bank of Cleveland, Economic Commentary |
James B Thomson; Joseph G Haubrich; |
Economic Commentary |
| Abstract: Stock and bond prices contain all sorts of information about investors' beliefs and expectations. For example, the interest rate on bank debt not insured by the FDIC has information about the health of the banks issuing the debt. Unfortunately, difficulties in extracting information from these subordinated debt prices reduces the information' usefulness to regulators and policymakers.
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| National Bank Notes and Silver Certificates
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December, 2006 |
Federal Reserve Bank of Cleveland, Working Paper no. 0622 |
James B Thomson; Bruce A Champ; |
Working Papers |
| Abstract: From 1883 to 1892, the circulation of national bank notes in the United States fell nearly 50 percent. Previous studies have attributed this to supply-side factors that led to a decline in the profitability of note issue during this period. This paper provides an alternative explanation. The decline in note issue was, in large part, demand-driven. The presence of a competing currency with superior features caused the public to substitute away from national bank notes.
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| Small Firm Credit Market Discrimination, SBA-Guaranteed Lending, and Local Market Economic Performance
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November, 2006 |
Federal Reserve Bank of Cleveland, Working Paper no. 0613 |
James B Thomson; Ben R Craig; William E Jackson III; |
Working Papers |
| Abstract: We empirically test whether SBA-guaranteed lending has a greater impact on economic performance in markets with a high percentage of potential minority small businesses. This hypothesis is predicated on priors related to three overlapping assumptions. These three assumptions are: (1) The classic type of credit rationing developed in the seminal paper by Stiglitz and Weiss (1981) is more likely to occur in markets with a higher per capita percentage of minority small businesses because such markets are more likely to have more severe information asymmetry problems, (2) SBA-guaranteed lending is likely to reduce these credit rationing problems-thus improving the level of development of the local financial market, and (3) increased local financial market development helps to lubricate the wheels of economic performance (Rajan and Zingales, 1998). Using local labor market employment rates as our measure of economic performance, we find evidence consistent with this proposition. In particular, we find a positive and significant impact on the average annual level of employment in a local market of SBA-guaranteed lending in that local market. This impact is 200 percent larger in markets with a high percentage of potential minority small businesses. This result has important implications for public policy in general and SBA-guaranteed lending in particular.
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| Industrial Loan Companies
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October, 2006 |
Federal Reserve Bank of Cleveland, Economic Commentary |
James B Thomson; Ozgur Emre Ergungor; |
Economic Commentary |
| Abstract: Once Wal-Mart announced its intention to acquire an industrial loan company, a public furor arose that has brought a lot of attention to a type of institution that has existed for quite some time, but was not widely recognized outside of banking circles. What are ILCs and why have they become so controversial lately?
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| Small-Firm Credit Markets, SBA-Guaranteed Lending, and Economic Performance in Low-Income Areas
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January, 2006 |
Federal Reserve Bank of Cleveland, Working Paper no. 0601 |
James B Thomson; Ben R Craig; William E Jackson III; |
Working Papers |
| Abstract: SBA guaranteed-lending programs are one of many government-sponsored market interventions aimed at promoting small business. The rationale for providing SBA loan guarantees is often based on the argument that they reduce credit rationing in low-income markets for small business loans. In this paper we empirically test whether SBA-guaranteed lending has a greater impact on economic performance in low-income markets. Using local labor market employment rates as our measure of economic
performance, we find evidence consistent with this proposition. In particular, we find a positive and significant correlation between the average annual level of employment in a local market and the level of SBA-guaranteed lending in that local market. And the intensity of this correlation is relatively larger in low-income markets. Indeed, one interpretation of our results is that this correlation is positive and significant only in low-income markets. This result has important implications for public policy in general and SBA-guaranteed lending in particular.
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| Umbrella Supervision and the Role of the Central Bank
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December, 2005 |
Federal Reserve Bank of Cleveland, Policy Discussion Paper, no. 11 |
James B Thomson; Joseph G Haubrich; |
Policy Discussion Papers |
| Abstract: Deregulation and financial consolidation have led to the development of financial holding companies-allowing commercial banking, insurance, investment banking, and other financial activities to be conducted under the same corporate umbrella-and the Federal Reserve has been named supervisor of the consolidated enterprise. This Policy Discussion Paper will show that there likely are economies of scope between the Fed's inherent central-banking responsibilities and those of an umbrella supervisor and that these duel roles benefit both the Fed and functional regulators.
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| The Role of Relationships in Small-Business Lending
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October, 2005 |
Federal Reserve Bank of Cleveland, Economic Commentary |
James B Thomson; Ben R Craig; |
Economic Commentary |
| Abstract: In the presence of imperfect information, both large and small banks try to find alternative ways to identify creditworthy borrowers. Lending relationships are one way to go about this. Relationships between banks and small businesses tend to be much closer than those between banks and large businesses. This Commentary explains why lending relationships are valuable to both small businesses and banks, how they reduce information-lending problems, and what other solutions exist to help in the reduction
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| Umbrella Supervision
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September, 2005 |
Federal Reserve Bank of Cleveland, Economic Commentary |
James B Thomson; Joseph G Haubrich; |
Economic Commentary |
| Abstract: Deregulation and financial consolidation have led to the development of financial holding companies-allowing commercial banking, insurance, investment banking, and other financial activities to be conducted under the same corporate umbrella-and the Federal Reserve has been named supervisor of the consolidated enterprise. This Commentary explains the increasing importance of an umbrella supervisor amid the sea of regulatory agencies, and why the Fed may be the best natural choice, both practically and conceptually, to assume the role.
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| SBA-Loan Guarantees and Local Economic Growth
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April, 2005 |
Federal Reserve Bank of Cleveland, Working Paper no. 0503 |
James B Thomson; Ben R Craig; William E Jackson III; |
Working Papers |
| Abstract: Increasingly policymakers are looking to the small business sector as a potential engine of economic growth. Policies to promote small businesses include tax relief, direct subsidies, and indirect subsidies through government lending programs. Encouraging lending to small business is the primary policy objective of the Small Business Administration (SBA) loan-guarantee program. Using a panel data set of SBA-guaranteed loans we assess whether SBA-guaranteed lending has an observable impact on local and regional economic performance.
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| Systemic Banking Crises
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February, 2005 |
Federal Reserve Bank of Cleveland, Policy Discussion Paper, no. 9 |
James B Thomson; Ozgur Emre Ergungor; |
Policy Discussion Papers |
| Abstract: Systemic banking crises can have devastating effects on the economies of developing or industrialized countries. This Policy Discussion Paper reviews the factors that weaken banking systems and make them more susceptible to crises.
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| Are SBA Loan Guarantees Desirable?
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September, 2004 |
Federal Reserve Bank of Cleveland, Economic Commentary |
James B Thomson; Ben R Craig; William E Jackson III; |
Economic Commentary |
| Abstract: Over the last 10 years, the Small Business Administration has been responsible for well over $100 billion in small business credit extensions, more than any single private lender. This Commentary explores the motivations for such a large investment of taxpayer dollars.
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| On SBA-Guaranteed Lending and Economic Growth
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April, 2004 |
Federal Reserve Bank of Cleveland, Working Paper no. 0403 |
James B Thomson; Ben R Craig; William E Jackson III; |
Working Papers |
| Abstract: Increasingly, policymakers are looking to the small business sector as a potential engine of economic growth. Policies to promote small businesses include tax relief, direct subsidies, and indirect subsidies through government lending programs. Encouraging lending to small business is the primary policy objective of the Small Business Administration (SBA) loan-guarantee program. Using a panel data set of SBA-guaranteed loans we assess whether SBA-guaranteed lending has an observable impact on local and regional economic performance.
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| On Credit Spread Slopes and Predicting Bank Risk
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November, 2003 |
Federal Reserve Bank of Cleveland, Working Paper no. 0314 |
James B Thomson; CNV Krishnan; Peter Ritchken; |
Working Papers |
| Abstract: The authors examine whether credit-spread curves, engendered by a mandatory subordinated-debt requirement for banks, would help predict bank risk. They extract the credit-spread curves each quarter for each bank in our sample, and analyze the information content of credit-spread slopes. They find that credit-spread slopes are significant predictors of future credit spreads. However, credit-spread slopes do not provide significant additional information on future bank-risk variables, over and above other bank-specific and market-wide information.
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| The Evolving Role of the Federal Home Loan Banks in Mortgage Markets
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June, 2003 |
Federal Reserve Bank of Cleveland, Economic Commentary |
James B Thomson; |
Economic Commentary |
| Abstract: The Federal Home Loan Banks are part of a system created by the federal government to promote home ownership. This Commentary looks at new initiatives undertaken by these government-sponsored enterprises to expand their role in financial markets-and the attendant implications for their balance sheets.
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| Monitoring and Controlling Bank Risk: Does Risky Debt Serve Any Purpose?
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January, 2003 |
Federal Reserve Bank of Cleveland, Working Paper no. 0301 |
James B Thomson; CNV Krishnan; Peter Ritchken; |
Working Papers |
| Abstract: To examine whether mandating banks to issue subordinated debt would enhance market monitoring and control risk-taking, the authors extract the credit-spread curve for each banking firm in their sample. After controlling for changes in market and liquidity variables, they find that changes in credit spreads do not reflect changes in bank risk variables. The result is robust to firm type, examination rating, size, leverage, and profitability, as well as to different model specifications. They also find that issuing subordinated debt does not alter banks' risk-taking behavior. They conclude that a mandatory subordinated debt requirement for banks is unlikely to provide the intended benefits of enhancing risk-monitoring or controlling risk-taking.
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| Commercial Banks' Borrowing from the Federal Home Loan Banks
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July, 2002 |
Federal Reserve Bank of Cleveland, Economic Commentary |
James B Thomson; |
Economic Commentary |
| Abstract: Since 1990, when commercial banks were first eligible to join the Federal Home Loan Bank System, they have become an important constituency of the FHLBs. Currently, seven out of 10 banks are members, and nearly half of all banks have advances outstanding. Given the wide range of activities that commercial banks can engage in, this Commentary asks whether FHLB lending to them is consistent with their traditional housing finance mission, with the Gramm-Leach-Bliley extension of their mission to provide liquidity support to community banks, or with both.
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| Getting the most out of a mandatory subordinated debt requirement
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January, 2002 |
Federal Reserve Bank of Cleveland, Working Paper no. 0214 |
James B Thomson; Rong Fan; Joseph G Haubrich; Peter Ritchken; |
Working Papers |
| Abstract: Recent advances in asset pricing-the reduced-form approach to pricing risky debt and derivatives-are used to quantitatively evaluate several proposals for mandatory bank issue of subordinated debt. The authors find that credit spreads on both fixed- and floating-rate subordinated debt provide relatively clean signals of bank risk and are not unduly influenced by non-risk factors. Fixed-rate debt with a put is unacceptable, but making the putable debt floating resolves most problems. The authors' approach also helps to clarify several different notions of "bank risk."
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| Who Benefits from Increasing the Federal Deposit Insurance Limit?
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September, 2001 |
Federal Reserve Bank of Cleveland, Economic Commentary |
James B Thomson; |
Economic Commentary |
| Abstract: This Commentary seeks to shed light on the issue of deposit insurance coverage by examining who would benefit from increases in the insured-deposit limit.
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| Unitary thrifts: a performance analysis
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June, 2001 |
Federal Reserve Bank of Cleveland, Economic Review, vol. 37, no. 2, pp. 2-14 |
James B Thomson; |
Economic Review |
| Abstract: Title IV of the Gramm-Leach-Bliley Act of 1999 closed the unitary thrift holding company loophole, which allowed a limited commingling of banking and commerce. This article examines whether eliminating this loophole was beneficial by empirically comparing the performance of thrifts in holding companies owned by nondepository institutions (UTHC thrifts) with other thrifts. Important differences between these two types of thrifts are found. UTHC thrifts tend to outperform the others during the period studied and appear to be less risky-possibly because UTHC thrifts seem to have more diversified revenue streams, loan and asset portfolios, and funding sources than do other thrifts. No evidence is found to suggest that limited commingling of banking and commerce, in the form of the UTHC loophole, poses undue risks to the federal financial safety net.
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| Federal Home Loan Bank Lending to Community Banks. Are Targeted Subsidies Necessary?
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January, 2001 |
Federal Reserve Bank of Cleveland, Working Paper no. 0112 |
James B Thomson; Ben R Craig; |
Working Papers |
| Abstract: The Gramm-Leach-Bliley Act of 1999 amended the lending authority of the Federal Home Loan Banks to include advances secured by small enterprise loans of community financial institutions. Three possible reasons for the extension of this selective credit subsidy to community banks and thrifts are examined, including the need to subsidize community depository institutions, stabilize the Federal Home Loan Banks, and address a market failure in rural markets for small enterprise loans. We empirically investigate whether funding constraints impact the small-business lending decision by rural community banks. Specifically, we estimate two empirical models of small-business lending by community banks. The data reject the hypothesis that access to increased funds will increase the amount of small-business loans made by community banks.
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| PSAF, economic capital, and the new Basel Accord
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January, 2001 |
Federal Reserve Bank of Cleveland, Working Paper no. 0111 |
James B Thomson; |
Working Papers |
| Abstract: The 1980 Monetary Control Act requires Reserve Banks to recover their costs of providing payments services over time, including a normal return on capital-that is, the same after-tax return on equity that a private firm would require. To date, this private-sector adjustment factor has been estimated and applied as a single hurdle rate for all Reserve Bank payments services. Capital budgeting theory suggests that firms should use a different hurdle rate for each distinct type of activity according to its risks. For Reserve Bank payments services, this might entail estimating separate private-sector adjustment factors for paper-based services and for electronic services. Alternatively, a single hurdle rate of capital could be used for all services if capital were allocated to each service according to its risk.
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| Two Deposit Insurance Funds Are Not Necessarily Better than One
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October, 2000 |
Federal Reserve Bank of Cleveland, Economic Commentary |
James B Thomson; |
Economic Commentary |
| Abstract: With the passage of the Financial Modernization Act in 1999, the FDIC began reforming our system of federal deposit guarantees. Among the possibilities it has recently raised is a merger of its Bank Insurance Fund with its Savings Association Insurance Fund. This Economic Commentary explores that option.
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| Raising the Deposit-Insurance Limit: A Bad Idea Whose Time Has Come?
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April, 2000 |
Federal Reserve Bank of Cleveland, Economic Commentary |
James B Thomson; |
Economic Commentary |
| Abstract: Federal deposit insurance protects the savings of small depositors, but it increases the likelihood that banks will take risks they otherwise would not have. Some bankers have suggested doubling the level of coverage to $200,000. While such an increase may put smaller banks on a par with larger ones, it exceeds the amount necessary to protect small savers and is unfair to taxpayers.
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| The Exchange Stabilization Fund: How It Works
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December, 1999 |
Federal Reserve Bank of Cleveland, Economic Commentary |
James B Thomson; William P Osterberg; |
Economic Commentary |
| Abstract: The increasingly controversial Exchange Stabilization Fund is used to influence the international value of the U.S. dollar and to provide aid to foreign countries. The debate surrounding the Fund will become more informed, the authors suggest, when observers understand how to calculate the total amount of resources available to the Fund. This Economic Commentary explains how the Fund’s balance sheet figures must be adjusted to produce an accurate account of those resources.
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| Depositor-Preference Laws and the Cost of Debt Capital
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July, 1999 |
Federal Reserve Bank of Cleveland, Economic Review, vol. 35, no. 3 |
James B Thomson; William P Osterberg; |
Economic Review |
| Abstract: Under depositor-preference laws, depositors' claims on the assets of failed depository institutions are senior to unsecured general-creditor claims. As a result, depositor preference changes the capital structure of banks and thrifts, thereby affecting the cost of capital for depositories. Depositor preference has no impact on the total value of banks and thrifts, however, unless deposit insurance is mispriced.
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| The Truth about Hedge Funds
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May, 1999 |
Federal Reserve Bank of Cleveland, Economic Commentary |
James B Thomson; William P Osterberg; |
Economic Commentary |
| Abstract: Do hedge funds help or hurt the financial markets in which they operate? The highly publicized troubles of Long Term Capital Management have once again focused the attention of policymakers and the press on the hedge fund industry and the cry for its regulation. This Economic Commentary refutes some of the commonly held myths about hedge funds and examines the rationale for regulating them.
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| Banking Consolidation and Correspondent Banking
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January, 1999 |
Federal Reserve Bank of Cleveland, Economic Review, vol. 35, no.1 |
James B Thomson; William P Osterberg; |
Economic Review |
| Abstract: Banking consolidation, spurred on by interstate branching deregulation, is changing the competitive structure of banking markets. Policymakers and regulators have focused on the implications of the ongoing consolidation for customers of banks in retail and wholesale markets. Little attention, however, has been paid to the impact of interstate consolidation on correspondent banking markets-those markets where banks buy and sell inputs used to produce banking services. By studying the era of intrastate branching deregulation, the authors provide some insights on the implications of interstate branching for correspondent banking.
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| Bank Notes and Stored-Value Cards: Stepping Lightly into the Past
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September, 1998 |
Federal Reserve Bank of Cleveland, Economic Commentary |
James B Thomson; William P Osterberg; |
Economic Commentary |
| Abstract: Like the bank notes that circulated in this country from 1863 to 1913, stored-value cards substitute the liabilities of private banks for government and central-bank liabilities. This shift may have important implications for the federal budget, the money supply, and monetary policy.
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| Network externalities: the catch-22 of retail payments innovations
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February, 1998 |
Federal Reserve Bank of Cleveland, Economic Commentary |
James B Thomson; William P Osterberg; |
Economic Commentary |
| Abstract: An investigation of one of the reasons why electronic payments have not yet supplanted cash and checks in retail transactions: Consumers' willingness to use an innovation depends on the number of merchants who have already adopted it, and merchants' willingness to invest in the innovation depends on the number of consumers who are already using it.
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| Large shareholders and market discipline in a regulated industry: a clinical study of Mellon Bank
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January, 1998 |
Federal Reserve Bank of Cleveland, Working Paper no. 9803 |
James B Thomson; Joseph G Haubrich; |
Working Papers |
| Abstract: An analysis of the 1987 change in control at Mellon, which was one of only a few banks with a large shareholder. It finds that the large shareholder did not monitor the firm extensively before it experienced performance difficulties, but was able to enforce a management change when problems arose-without having to acquire a majority stake.
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| Depositor Preference Legislation and Failed Banks' Resolution Costs
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January, 1997 |
Federal Reserve Bank of Cleveland, Working Paper no. 9715 |
James B Thomson; William P Osterberg; |
Working Papers |
| Abstract: Included in the Omnibus Budget Reconciliation Act of 1993 was a provision that improved the priority of depositors and thus of the FDIC in the event of a depository institution's failure. While intended to reduce the FDIC's cost of resolving commercial bank failures, this provision might have induced general creditors to react so as to offset the intended benefit. Depositor preference legislation (DPL) might also have affected the FDIC's choice of resolution type.
Here we examine the empirical impact of DPL on resolution type and on resolution costs for commercial banks. Given the short time period since the passage of national DPL in 1993, we focus on the impact of state DPL statutes, utilizing call-report data and FDIC data on resolution costs and resolution types for all operating FDIC-BIF insured commercial banks that were closed or required FDIC financial assistance from January 1986 through December 1992. We improve on previous studies by controlling for the endogeneity of book capital and by adjusting for the sample selection bias induced by regulatory closure rules.
We find that DPL has 1) tended to increase, rather than reduce, FDIC resolution costs and 2) induced the FDIC to choose assisted mergers over liquidations. However, the source of the higher resolution costs is unclear and there is no evidence that general creditors reacted by increasing collateralization.
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| Reliability analysis of the Federal Reserve automated payments systems
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January, 1997 |
Financial Services Research Group Working Paper no. 0397 |
James B Thomson; Apostolos Burnetas; Gregory Reynolds; |
Working Papers |
| Abstract: A description of an analytic framework for the reliability assessment of the automated payments systems used by the Federal Reserve Banks. Alternative system configurations are also proposed and analyzed.
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| SAIF policy options
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June, 1995 |
Federal Reserve Bank of Cleveland, Economic Commentary |
James B Thomson; William P Osterberg; |
Economic Commentary |
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| The changing role of banks and the changing value of deposit guarantees
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January, 1995 |
Federal Reserve Bank of Cleveland, Working Paper no. 9502 |
James B Thomson; Ivilina Popova; Peter Ritchken; |
Working Papers |
| Abstract: This article develops a model for pricing deposit guarantees. The model treats the bank's investments as a portfolio of default-free bonds and risky loans. The risk of the loans is determined by individual firms' financing and investment decisions. Pushing back risk to the level of the borrowing firms allows us to link deposit guarantees to specific characteristics of these loans, such as their durations, and to correlations between business risk and interest rates. Since the nature of bank loans has been changing over time, our model should predict the accompanying change in value of the government guarantees.
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| Federal Funds Futures as an Indicator of Future Monetary Policy: A Primer
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January, 1995 |
Federal Reserve Bank of Cleveland, Economic Review, vol. 31, no.1 |
James B Thomson; John B Carlson; Jean M McIntire; |
Economic Review |
| Abstract: Unlike most futures contracts, which are drawn on commodities or financial instruments whose price or yield is determined in competitive markets, the federal funds futures rate is essentially determined by a deliberative decision of the Federal Open Market Committee (FOMC). As such, the fed funds futures market is a place where one can place a bet as to what future monetary policy will be. The FOMC can thus assess in fairly precise terms what markets expect it to do. In this paper, the authors examine the predictive accuracy of the fed funds futures market and consider some policy implications. They find that accuracy clearly improves in the two-month period leading up to the contract's expiration and that the largest prediction errors occur around policy turning points.
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| A Conference on Federal Credit Allocation
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July, 1994 |
Federal Reserve Bank of Cleveland, Economic Review, vol. 30, no. 3 |
James B Thomson; Joseph G Haubrich; |
Economic Review |
| Abstract: In October 1993, the Federal Reserve Bank of Cleveland and the Journal of Money, Credit, and Banking sponsored a conference that examined the costs, causes, and consequences of credit allocation by the federal government. The eight presenters looked at the broad rationale for government intervention in U.S. credit markets, analyzed some issues related to pensions and federal pension guarantees, and discussed a number of specific programs and regulations, including credit imperfections in housing markets, risk-based capital requirements for banks, and community reinvestment rules. This article is an overview of those proceedings.
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| The national depositor preference law
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February, 1994 |
Federal Reserve Bank of Cleveland, Economic Commentary |
James B Thomson; |
Economic Commentary |
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| Loan sales: Pacific Rim trade in nontradable assets
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January, 1994 |
Federal Reserve Bank of Cleveland, Working Paper no. 9414 |
James B Thomson; Joseph G Haubrich; |
Working Papers |
| Abstract: Foreign banks play a large role in the loan sales market. We examine this role using individual bank data on foreign-owned banks in the United States. We find that the motives for loan sales and purchases differ between U.S. and foreign-owned banks and between foreign banks of different regions. The evidence is consistent with foreign banks' using the market for diversification.
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| Anticipating Bailouts: the Incentive-Conflict Model and the Collapse of the Ohio Deposit Guarantee Fund
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January, 1994 |
Federal Reserve Bank of Cleveland, Working Paper no. 9407 |
James B Thomson; Ramon P DeGennaro; |
Working Papers |
| Abstract: An examination of the effect of the collapse of the Ohio Deposit Guarantee Fund on insured financial institutions in the context of the incentive-conflict model developed by Edward Kane, finding that differences in abnormal returns of FDIC and FSLIC firms tend to reaffirm that taxpayer-funded bailouts are a natural outgrowth of the moral-hazard problem that taxpayers face.
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| Depositor Preference and the Cost of Capital for Insured Depository Institutions
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January, 1994 |
Federal Reserve Bank of Cleveland, Working Paper no. 9404 |
James B Thomson; William P Osterberg; |
Working Papers |
| Abstract: Depositor-preference laws provide depositors with a claim on a failed depository institution's assets that is senior to unsecured general creditor claims. Therefore, depositor preference is correctly viewed as changing the capital structure of banks and thrifts and, consequently, these laws will affect the cost of capital for depositories. However, depositor preference will not have an impact on the total value of banks and thrifts unless deposit insurance is mispriced.
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| Underlying determinants of closed-bank resolution costs
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January, 1994 |
Federal Reserve Bank of Cleveland, Working Paper no. 9403 |
James B Thomson; William P Osterberg; |
Working Papers |
| Abstract: This paper looks at the underlying determinants of bank resolution costs. In the spirit of James (1991), resolution costs are modeled as functions of problem assets. However, we extend previous work by looking at more recent failures (from 1986 through 1992) and by extending our specification to include proxies for fraud, off-balance-sheet risk, brokered deposits, and both regional and size effects. Unlike James, we find no evidence that capital reflects net unbooked losses. On the other hand, we find roles for fraud, off-balance-sheet items, and both regional and size dummies. We also find evidence suggesting that regulators may have practiced forbearance.
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| Making the SAIF safe for taxpayers
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November, 1993 |
Federal Reserve Bank of Cleveland, Economic Commentary |
James B Thomson; |
Economic Commentary |
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| The Evolving Loan Sales Market
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July, 1993 |
Federal Reserve Bank of Cleveland, Economic Commentary |
James B Thomson; Joseph G Haubrich; |
Economic Commentary |
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| Loan sales, implicit contracts, and bank structure
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January, 1993 |
Federal Reserve Bank of Cleveland, Working Paper no. 9307 |
James B Thomson; Joseph G Haubrich; |
Working Papers |
| Abstract: We document some recent changes in the market for loan sales. We use a Tobit model to characterize the determinants of loan sales and purchases by banks, relating quantities bought and sold to bank size, capital, risk, and funding mode. The results, though not definitive, broadly confirm the Pennacchi model of sales. Other data cast doubt on the importance of mergers and acquisitions for this market and on the comparability of different data sources.
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| Regulatory taxes, investment, and financing decisions for insured banks
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January, 1993 |
Federal Reserve Bank of Cleveland, Working Paper no. 9303 |
James B Thomson; Anlong Li; Peter Ritchken; L Sankarasubramanian; |
Working Papers |
| Abstract: This article develops a two-factor model of bank behavior under credit and interest rate risk. In addition to flat-rate government deposit guarantees, we assume banks possess charter values that are lost if audits reveal that their tangible assets cannot cover their liabilities. Within this framework, we investigate the effects of interest rate and credit risk on optimal capital structure and investment decisions. We then show that with no uncertainty in interest rates, capital regulation will reduce the risk of the assets in the bank. However, with interest rate uncertainty, the impact of regulation may be detrimental and raise the risk of the deposits as well as the government subsidies to the shareholders of the bank.
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| The cost of buying time: lessons from the thrift debacle
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January, 1993 |
Federal Reserve Bank of Cleveland, Economic Commentary |
James B Thomson; |
Economic Commentary |
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| FDICIA's Prompt Corrective Action Provisions
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September, 1992 |
Federal Reserve Bank of Cleveland, Economic Commentary |
James B Thomson; Christopher J Pike; |
Economic Commentary |
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| Forbearance, Subordinated Debt, and the Cost of Capital for Insured Depository Institutions
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July, 1992 |
Federal Reserve Bank of Cleveland, Economic Review, vol. 28, no. 3 |
James B Thomson; William P Osterberg; |
Economic Review |
| Abstract: Requiring banks to issue subordinated debt has been proposed as a way to reduce the deposit insurance subsidy and to increase market discipline. Using a modified cost of capital framework, this article develops an explicit pricing model for subordinated debt that considers the possibility of Federal Deposit Insurance Corporation forbearances. The results reveal that forbearance alters the required rate of return on subordinated debt while increasing its value to debt holders. Moreover, the authors show that a policy of forbearance weakens the effectiveness of such debt in reducing deposit insurance premiums and as a source of market discipline.
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| Capital Forbearance And Thrifts: An Ex Post Examination Of Regulatory Gambling
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January, 1992 |
Federal Reserve Bank of Cleveland, Working Paper no. 9209 |
James B Thomson; Ramon P DeGennaro; |
Working Papers |
| Abstract: This paper estimates the losses embedded in the capital positions of the 996 FSLIC-insured savings and loan institutions that did not meet capital standards at the end of the 1970s. We compare the estimated cost of resolving the insolvencies of these institutions at the end of the 1970s with the actual failure-resolution costs for those that were closed by July 3 1, 1992, and the projected resolution costs for the remaining thrifts that are likely to be closed. Our results show that even when one considers only the direct costs associated with delayed closure of economically failed thrifts, these costs significantly exceed reasonable estimates of the cost of prompt failure resolution.
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| The RTC and the escalating costs of the thrift insurance mess
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May, 1991 |
Federal Reserve Bank of Cleveland, Economic Commentary |
James B Thomson; Christopher J Pike; |
Economic Commentary |
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| Predicting bank failures in the 1980s
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March, 1991 |
Federal Reserve Bank of Cleveland, Economic Review, vol. 27, no. 1, pp. 9-20 |
James B Thomson; |
Economic Review |
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| Troubled savings and loan institutions: voluntary restructuring under insolvency
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January, 1991 |
Federal Reserve Bank of Cleveland, Working Paper no. 9112 |
James B Thomson; Ramon P DeGennaro; Larry H. P. Lang; |
Working Papers |
| Abstract: Regulatory agencies are unwilling or unable to close thrift institutions immediately upon insolvency. Instead, they have progressively reduced the thrift capital requirement, refrained from enforcing that requirement, and allowed thrifts to hold more nonmortgage loans in the hope that the industry would recover. According to this study, only 13 percent of the largest 300 firms eventually recovered between the end of 1979 and the end of 1989. When the thrift crisis surfaced in the early 1980s, the firms that ultimately recovered operated in a fashion similar to those that eventually failed. But in the mid-1980s, recovered thrifts pursued a risk-minimizing strategy, while nonrecovered thrifts pursued a risky, high-growth strategy. We find no evidence that managers of unsuccessful firms consumed more perquisites than their successful counterparts.
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| On flexibility, capital structure, and investment decisions for the insured bank
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January, 1991 |
Federal Reserve Bank of Cleveland, Working Paper no. 9110 |
James B Thomson; Ramon P DeGennaro; Anlong Li; Peter Ritchken; |
Working Papers |
| Abstract: Most models of deposit insurance assume that the volatility of a bank's assets is exogenously provided. Although this framework allows the impact of volatility on bankruptcy costs and deposit insurance subsidies to be explored, it is static and does not incorporate the fact that equityholders can respond to market events by adjusting previous investment and leverage decisions. This paper presents a dynamic model of a bank that allows for such behavior. The flexibility of being able to respond dynamically to market information has value to equity holders. The impact and value of this flexibility option are explored under a regime in which flat-rate deposit insurance is provided.
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| Underlying causes of commercial bank failures in the 1980s
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September, 1990 |
Federal Reserve Bank of Cleveland, Economic Commentary |
James B Thomson; Lynn Seballos; |
Economic Commentary |
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| An Insider's View of the Political Economy of the Too-Big-to-Fail Doctrine
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January, 1990 |
Federal Reserve Bank of Cleveland, Working Paper no. 9017 |
James B Thomson; Walker F Todd; |
Working Papers |
| Abstract: An explanation of the relationship between interbank exposure and the too big to fail doctrine, with an examination of the interbank exposure of U.S. banks between March 1984 and March 1990.
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| The effect of subordinated debt and surety bonds on banks' cost of capital and on the value of federal deposit insurance
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January, 1990 |
Federal Reserve Bank of Cleveland, Working Paper no. 9012 |
James B Thomson; William P Osterberg; |
Working Papers |
| Abstract: This paper examines two proposals to correct the risk-taking incentives embedded in the current deposit insurance system and to provide protection to the deposit insurance fund. the first would require banks to issue subordinated debt, and the second would require bank stockholders to post surety bonds. We use the cash-flow version of the Capital Asset Pricing Model to show how each proposal would affect the values and rates of return on uninsured deposits and equity. We then indicate the impact that each proposal would have on the values of the Federal Deposit insurance Corporation claim and on the bank, emphasizing the role of deposit insurance pricing.
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| Optimal Financial Structure and Bank Capital Requirements: An Empirical Investigation
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January, 1990 |
Federal Reserve Bank of Cleveland, Working Paper no. 9007 |
James B Thomson; William P Osterberg; |
Working Papers |
| Abstract: This paper presents an empirical analysis of the determinants of the leverage ratios (the book value of liabilities divided by the total of the book value of liabilities' and the market value of equity) for 232 bank holding companies for December 1986, June 1987, and December 1987. Many theoretical models of bank behavior assume that bank capital requirements will be binding, and empirical research has generally shown that almost all- banks will meet capital guidelines. However, if the optimal leverage ratios differ among banks, then banks' responses to changes in capital requirements or to changes in factors that influence their optimal leverage ratio may vary in a cross section. the theoretical framework is a variant of the one developed in Bradley, Jarrell , and Kim (1984) . the optimal' leverage ratio balances the tax advantage of debt with the costs of bankruptcy. in addition to considering nondebt tax shields and tax rates as determinants of the optimal ratio, we analyze the simultaneity between leverage and investment in municipal securities (munis). Previous research indicates that banks utilize munis to' minimize tax liabilities.
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| Using Market Incentives to Reform Bank Regulation and Federal Deposit Insurance
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January, 1990 |
Federal Reserve Bank of Cleveland, Economic Review, vol. 26, no. 1 |
James B Thomson; |
Economic Review |
| Abstract: The current system of bank regulation and federal deposit insurance is not working and requires a massive overhaul. This paper looks at the issues involved in reforming the regulatory structure of the financial services industry, including the financial safety net. and presents the case for adopting market-oriemed reforms.
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| Economic Principles and Deposit-Insurance Reform
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May, 1989 |
Federal Reserve Bank of Cleveland, Economic Commentary |
James B Thomson; |
Economic Commentary |
| Abstract: A discussion of the fundamental economic principles to consider in evaluating proposals to reform the current system of federal deposit insurance.
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| Bank Lending to LBO's: Risks and Supervisory Response
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February, 1989 |
Federal Reserve Bank of Cleveland, Economic Commentary |
James B Thomson; |
Economic Commentary |
| Abstract: An examination of the risks associated with leveraged buyouts and a discussion of the current response of federal bank regulators to the increased participation of banks and bank holding companies in funding LBOs, stressing the need for appropriate internal controls.
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| Bank lending to LBO's: Risks and Supervisory Response
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February, 1989 |
Federal Reserve Bank of Cleveland, Economic Review |
James B Thomson; |
Economic Commentary |
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| An Analysis of Bank Failures: 1984 TO 1989
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January, 1989 |
Federal Reserve Bank of Cleveland, Working Paper no. 8916 |
James B Thomson; |
Working Papers |
| Abstract: A study that models the regulatory decision to close a bank as a call option. A two-equation model of bank failure that treats closings as regulatorily timed events is compared with two single-equation models for accuracy.
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| Bank Capital Requirements and the Riskiness of Banks: A Review
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January, 1989 |
Federal Reserve Bank of Cleveland, Economic Review, vol. 25, no. 1 |
James B Thomson; William P Osterberg; |
Economic Review |
| Abstract: A study of the impact of capital requirements on bank portfolio decisions, showing that the variance of earnings and the incentive to increase leverage are reduced with risk- and leverage-related deposit rates, and that the impact of increased capital requirements on portfolio behavior is generally ambiguous.
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| Using Financial Data to Identify Changes in Bank Condition
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April, 1988 |
Federal Reserve Bank of Cleveland, Economic Review, vol. 24, no. 2 |
James B Thomson; Gary Whalen; |
Economic Review |
| Abstract: An empirical study using an early-warning bank failure prediction model and call-report data to predict deterioration in a bank's condition.
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| Using SMVAM as a Linear Approximation to a Nonlinear Function: A Note
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January, 1988 |
Federal Reserve Bank of Cleveland, Working Paper no. 8810 |
James B Thomson; Asli Demirguc-Kunt; |
Working Papers |
| Abstract: A study contending that the linear statistical market-value accounting model (SMVAM) is a reasonable approximation of the relationship between market and book equity for firms with positive balance sheets, but that the linear approximation is inadequate when the data sample includes firms whose balance sheets show a low or negative liquidation value.
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| Capital Requirements and Optimal Bank Portfolios: a Reexamination
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January, 1988 |
Federal Reserve Bank of Cleveland, Working Paper no. 8806 |
James B Thomson; William P Osterberg; |
Working Papers |
| Abstract: An examination of the impact of increased capital requirements on bank portfolio behavior, finding that although the variance of earnings and the incentive to increase leverage are reduced with risk- and leverage-related interest rates, the impact of increased capital requirements on portfolio behavior is generally ambiguous.
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| FDIC Policies for Dealing with Failed and Troubled Institutions
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October, 1987 |
Federal Reserve Bank of Cleveland, Economic Commentary |
James B Thomson; Daria B Caliguire; |
Economic Commentary |
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| Interbank exposure in the fourth Federal Reserve District
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August, 1987 |
Federal Reserve Bank of Cleveland, Economic Commentary |
James B Thomson; |
Economic Commentary |
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| FSLIC Forbearances to Stockholders and the Value of Savings and Loan Shares
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July, 1987 |
Federal Reserve Bank of Cleveland, Economic Review, vol. 23, no. 3 |
James B Thomson; |
Economic Review |
| Abstract: An investigation of the value of FSLIC forbearances to the stockholders of insolvent stock-chartered thift institutions, concluding that these forbearances increase the stock-market value of thrift institutions
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| Deposit Insurance and the Cost of Capital
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January, 1987 |
Federal Reserve Bank of Cleveland, Working Paper no. 8714 |
James B Thomson; William P Osterberg; |
Working Papers |
| Abstract: The impacts of deposit insurance and forbearance on the costs and value of uninsured deposits and equity capital are shown under three regimes.
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| Alternative Methods for Assessing Risk-Based Deposit Insurance Premiums
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September, 1986 |
Federal Reserve Bank of Cleveland, Economic Commentary |
James B Thomson; |
Economic Commentary |
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| Equity, efficiency, and mispriced deposit guarantees
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July, 1986 |
Federal Reserve Bank of Cleveland, Economic Commentary |
James B Thomson; |
Economic Commentary |
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| Errors in Recorded Security Prices and the Turn-of-the Year Effect
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January, 1986 |
Federal Reserve Bank of Cleveland, Working Paper no. 8611 |
James B Thomson; |
Working Papers |
| Abstract: A study that concludes recorded security price errors are potential sources of misspecification in joint tests of the capital asset pricing model and market efficiency.
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| The Use of Market Information in Pricing Deposit Insurance
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January, 1986 |
Federal Reserve Bank of Cleveland, Working Paper no. 8609 |
James B Thomson; |
Working Papers |
| Abstract: An argument that information about the value of the deposit-insurance guarantee is available from market-generated data.
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