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Journal Article
Could a CAMELS downgrade model improve off-site surveillance?
The Federal Reserve?s off-site surveillance system includes two econometric models that are collectively known as the System for Estimating Examination Ratings (SEER). One model, the SEER risk rank model, uses the latest financial statements to estimate the probability that each Fed-supervised bank will fail in the next two years. The other component, the SEER rating model, uses the latest financial statements to produce a ?shadow? CAMELS rating for each supervised bank. Banks identified as risky by either model receive closer supervisory scrutiny than other state-member banks.> Because many ...
Working Paper
Did FDICIA enhance market discipline on community banks? a look at evidence from the jumbo-CD market
The Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA) directed the FDIC to resolve bank failures in the least costly manner, shifting more of the failure-resolution burden to jumbo-CD holders. We examine the sensitivity of jumbo-CD yields and runoffs to failure risk before and after FDICIA. We also examine the economic significance of estimated risk sensitivities before and after the Act, looking at the implied impact of risk on bank funding costs and profits. The evidence indicates that yields and runoff were sensitive to risk before and after FDICIA, but that this ...
Working Paper
Can feedback from the jumbo-CD market improve bank surveillance?
We examine the value of jumbo certificate-of-deposit (CD) signals in bank surveillance. To do so, we first construct proxies for default premiums and deposit runoffs and then rank banks based on these risk proxies. Next, we rank banks based on the output of a logit model typical of the econometric models used in off-site surveillance. Finally, we compare jumbo-CD rankings and surveillance-model rankings as tools for predicting financial distress. Our comparisons include eight out-of-sample test windows during the 1990s. We find that rankings obtained from jumbo-CD data would not have improved ...
Journal Article
Are small rural banks vulnerable to local economic downturns?
A potentially troubling characteristic of the U.S. banking industry is the geographic concentration of many banks? offices and operations. Historically, banking laws have prevented U.S. banks from branching into other counties and states. A potential adverse consequence of these regulations was to leave banks?especially small rural banks?vulnerable to local economic downturns. If geographic concentration of bank offices leaves banks vulnerable to local economic downturns, we should observe a significant correlation between bank performance and the local economy. Looking at Eighth District ...
Journal Article
The future of community banks: lessons from banks that thrived during the recent financial crisis
The authors study the distinguishing features of community banks that maintained the highest supervisory ratings during the recent financial crisis (2006 to 2011). They identify balance sheet and income statement ratios that separate these thriving banks from other community banks and supplement that analysis with detailed interview evidence from a sample of thriving banks. They conclude that there is a strong future for well-run community banks and that the banks that prosper will be the ones with strong commitments to maintaining risk control standards in all economic environments. There is ...
Journal Article
Can feedback from the jumbo CD market improve bank surveillance?
Journal Article
Federal Reserve lending to troubled banks during the financial crisis, 2007-2010
Numerous commentaries have questioned both the legality and appropriateness of Federal Reserve lending to banks during the recent financial crisis. This article addresses two questions motivated by such commentary: Did the Federal Reserve violate either the letter or spirit of the law by lending to undercapitalized banks? Did Federal Reserve credit constitute a large fraction of the deposit liabilities of failed banks during their last year before failure? The Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA) imposed limits on the number of days that the Federal Reserve ...
Journal Article
Trends in community banks' net interest margins
Net interest margins are clearly under pressure at community banks, but this trend is not new. It is a product of a highly competitive banking industry and a direct result of today?s lower lending levels and abundant balance sheet liquidity. The net interest margin is the difference between interest income and interest expense. Interest income and interest expense fluctuated considerably through the business cycle, but the long-term trend indicates that asset yields are falling faster than deposit and other funding costs.
Working Paper
Federal Reserve lending to troubled banks during the financial crisis, 2007-10
Numerous commentaries have questioned both the legality and appropriateness of Federal Reserve lending to banks during the recent financial crisis. This article addresses two questions motivated by such commentary: 1) Did the Federal Reserve violate either the letter or spirit of the law by lending to undercapitalized banks? 2) Did Federal Reserve credit constitute a large fraction of the deposit liabilities of failed banks during their last year prior to failure? The Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA) imposed limits on the number of days that the Federal ...
Working Paper
Can feedback from the jumbo-CD market improve off-site surveillance of community banks?
We examine the value of feedback from the jumbo-certificate-of-deposit (CD) market in the off-site surveillance of community banks. Using accounting data, we construct proxies for default premiums on jumbo CDs. Then, we produce rank orderings of community banks -- defined as institutions holding less than $500 million in assets (constant 1999 dollars) -- based on these proxies. Next, we use an econometric surveillance model to generate rank orderings based on the probability of encountering financial distress. Finally, we compare these rank orderings as tools for flagging emerging problems. ...