The determinants of the wealth effects of banks' expanded securities powers
After several unsuccessful attempts by Congress to repeal Glass-Steagall restrictions on banks, the Federal Reserve more than doubled the revenue that commercial banking organizations' securities subsidiaries may earn from certain securities activities. The wealth effects associated with this event for a sample of publicly traded banking organizations are examined. We find evidence that indicates the revenue limit resulted in a less-than-optimal mix of activities for securities subsidiaries. However, subsequent merger activity that could have been generated by the revenue increase was not ...
Adverse selection and competing deposit insurance systems in pre-depression Texas
In 1910, Texas instituted a highly unique deposit insurance program for its state chartered banks consisting of two separate plans: the depositors guaranty fund, similar in operation to the deposit insurance schemes adopted in several other states; and the depositors bond security system, which required the procurement of a privately issued insurance policy. We hypothesize that the provision of a choice in funds led to risk-sorting among the banks, with the relatively conservative institutions opting for the comparatively rigorous bond security system. Employing a probit model with ...
Moral hazard and Texas banking in the 1920s.
Using recently collected examination data from a sample of Texas state-chartered banks over the period 1919-26, the role of moral hazard in increasing ex-ante asset risk is analyzed. During this period, a state-run deposit insurance system was in place that was mandatory for all state-chartered banks in Texas. Nationally chartered banks were not allowed to participate in the insurance program. Analyzing individual bank-level data, we find evidence that declines in capitalization were positively correlated with increases in loan concentrations at insured banks. We argue that this is consistent ...
What was behind the M2 breakdown?
A deterioration in the link between the M2 monetary aggregate and GDP, along with large errors in predicting M2 growth, led the Board of Governors to downgrade the M2 aggregate as a reliable indicator of monetary policy in 1993. In this paper, we argue that the financial condition of depository institutions was a major factor behind the unusual pattern of M2 growth in the early 1990s. By constructing alternative measures of M2 based on banks and thrifts capital positions, we show that the anomalous behavior of M2 in the early 1990s disappears. Specifically, after accounting for the effect of ...
Separating the likelihood and timing of bank failure