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Working Paper
Gains from financial integration in the European union: evidence for new and old members
We estimate potential welfare gains from financial integration and corresponding better insurance against country-specific shocks to output (risk sharing) for the twenty-five European Union countries. Using theoretical utility-based measures we express the gains from risk sharing as the utility equivalent of a permanent increase in consumption. We report positive potential welfare gains for all the EU countries if they move toward full risk sharing. Ten country-members who joined the Union in 2004 have more volatile or counter-cyclical consumption and output and would obtain much higher ...
Working Paper
Labor productivity and job-market flows: trends, cycles, and correlations
I derive measures of U.S. job-separation and job-matching rates from aggregate Current Population Survey data. Using an unrestricted unobserved-components approach, I decompose these series into trends and cycles and compare the results with the trend and cyclical behavior of labor-productivity growth. Both transitory and permanent shocks to productivity are strongly positively correlated with fluctuations in the rate of job matching and negatively correlated with cyclical fluctuations in separation rates. Productivity growth thereby accounts for about a third of the overall variation in the ...
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
Executive compensation at Fannie Mae and Freddie Mac
Corporate governance-and executive-compensation arrangements in particular-should be an important component of the agenda to reform the housing GSEs. The GSEs' safety-and-soundness regulator-who is essentially the debtholders' and taxpayers' representative-must be admitted to the GSEs' boardroom in a way that is atypical of an ordinary publicly held company. This intrusion into the board's oversight of executive-compensation plans is justified given the GSEs' public purposes and their large potential cost to taxpayers. Prudent public policy requires greater supervisory control over executive ...
Working Paper
The future of small banks
This paper is a report to the Banking Supervision and Regulation Division on research that I conducted on the future of small banks while working in the Division as a Visiting Scholar. In this paper, small banks are identified as those with total assets less than $1 billion. Small banks have an important role in financing economic activity in the U.S., through their loans to small businesses. In addition, the Banking Supervision and Regulation Division of the St. Louis Fed has a vital interest in the future of small banks because most of the staff in this Division are involved in supervising ...
Working Paper
What does the Federal Reserve’s economic value model tell us about interest rate risk at U.S. community banks?
The savings and loan crisis of the 1980s revealed the vulnerability of some depository institutions to changes in interest rates. Since that episode, U.S. bank supervisors have placed more emphasis on monitoring the interest rate risk of commercial banks. One outcome developed by economists at the Federal Reserve Board of Governors was a duration-based Economic Value Model (EVM) designed to estimate the interest rate sensitivity of banks. ; We test whether measures derived from the Fed?s EVM are correlated with the interest rate sensitivity of U.S. community banks. The answer to this question ...
Working Paper
Relationship loans and regulatory capital: why fair-value accounting is inappropriate for bank loans
Banks have been required to report many securities and all derivatives at fair values under U.S. GAAP rules for many years. Soon, International Accounting Standards will provide some banks with a ?fair-value option? for loans, also. A similar movement toward applying fair values to loans may occur in the U.S. in the near future, too. ; This paper argues that fair-value accounting is inappropriate for banks? relationship loans from the standpoint of safety-and-soundness supervision?that is, for the purposes of calculating a bank?s regulatory capital. The argument is straightforward, although ...
Working Paper
Scale economies and geographic diversification as forces driving community bank mergers
Mergers of community banks across economic market areas potentially reduce both idiosyncratic and local market risk. Idiosyncratic risk may be reduced because the larger post merger bank has a larger customer base. Negative credit and liquidity shocks from individual customers would have smaller effects on the portfolio of the merged entity than on the individual community banks involved in the merger. Geographic dispersion of banking activities across economic market areas may reduce local market risk because an adverse economic development that is unique to one market area will not affect a ...
Working Paper
Discipline and liquidity in the market for federal funds
I find that high-risk banks pay more for federal funds and are less likely to utilize them as a source of liquidity. The extent of this discipline has risen in recent years, following legislation designed to impose more of the costs of bank failure on uninsured creditors. However, the risk-pricing remains imperfect, and additional results suggest that information problems persist in the fed-funds market. The findings have implications for interest-rate determination, risk contagion in the financial system, the use of market data in banking supervision, and recent efforts to reform Discount ...
Working Paper
Consumer-finance myths and other obstacles to financial literacy
The consumer-finance market for middle and upper-income households in the United States is characterized by a wide range of choices, both in terms of financial-services providers and the specific products and services available.1 Prices generally are determined in competitive markets. Consumer-protection regulation is extensive. Why then is there so much dissatisfaction with the U.S. consumer-finance market, even for prime-quality customers? ; This paper focuses not on inadequate choices, inadequate competition or regulation, but on the difficulty many middle and upper-income households ...