Financial Stability and the Resolution of Federal Reserve Goal and Implementation Conflicts
Forthcoming in Journal of Financial Services Research | With Eisenbeis and Wall
The Federal Reserve has been assigned the goal of fostering financial stability along with its monetary policy goals of maximum employment and stable prices. This paper considers whether the financial stability and monetary policy goals have consistent policy implications both in theory and in practice. It also considers how the implementation of monetary policy might conflict with financial stability and vice versa.
Data for Microprudential Supervision of U.S. Banks
In Handbook of Financial Data and Risk Information I: Principles and Context, ed. by Brose, Flood, Krishna, and Nichols | Cambridge University Press, 2013 | With Flood and Leonova
The 2007-2009 Financial Crisis and Bank Opaqueness
Journal of Financial Intermediation 22, January 2013, 55-84 | With Flannery and Nimalendran
Doubts about the accuracy with which outside investors can assess a banking firm’s value motivate many government interventions in the banking market. Although the available empirical evidence is somewhat mixed, the recent financial crisis has reinforced a common assessment that banks are unusually opaque. This paper examines bank equity’s trading characteristics during “normal” periods and two “crisis” periods between 1993 and 2009. We find only limited (mixed) evidence that banks are unusually opaque during normal periods. However, consistent with theory, crises raise the adverse selection costs of trading bank shares relative to those of nonbank control firms. A bank’s balance sheet composition significantly affects its equity opacity, but we cannot detect specific balance sheet categories that have robust effects.
Financial Contracting and the Choice between Private Placement and Publicly Offered Bonds
Journal of Money, Credit and Banking 42(5), 2009, 907-929 | With Carleton
The financial contracting in private placement bonds and publicly offered bonds are different. Our data show that private placement bonds are more likely to have restrictive covenants than public bonds. Private placement bonds are also more likely to be issued by smaller and riskier firms. For investment-grade firms that issue bonds in both markets, our analysis shows that firms select the bond type to minimize financing costs. We find significant differences in the pricing of private placement and publicly offered bonds, and some of these differences appear to be related to the different institutional features between the two markets.
The X-efficiency of Commercial Banks in Hong Kong
Journal of Banking and Finance 30(4), April 2006, 1127-1147
Using the stochastic frontier approach to investigate the cost efficiency of commercial banks in Hong Kong, this paper found that the average X-efficiency of Hong Kong banks was about 16 to 30 percent of observed total costs. However, X-efficiency was found to decline over time, indicating that Hong Kong banks were operating closer to the cost frontier than before, consistent with technological innovations in the banking industry. Furthermore, the average large bank was found to be less efficient than the average small bank, but the size effect appears to be related to differences in portfolio characteristics among different size banks.
Market Evidence on the Opaqueness of Banking Firms’ Assets
Journal of Financial Economics 71(3), March 2004, 419-460 | With Flannery and Nimalendran
We assess the market microstructure properties of U.S. banking firms’ equity to determine whether they exhibit more or less evidence of asset opaqueness than similar-sized nonbanking firms. The evidence indicates that large bank holding companies (BHCs), traded on the NYSE, have very similar trading properties to their matched nonfinancial firms. In contrast, smaller BHCs, traded on NASDAQ, trade much less frequently despite having very similar spreads. Analysis of IBES earnings forecasts indicates that banking assets are not unusually opaque; they are simply boring. The implications for regulatory policy and future market microstructure research are discussed.
Impact of Deposit Rate Deregulation in Hong Kong on the Market Value of Commercial Banks
Journal of Banking and Finance 27(12), December 2003, 2231-2248
This paper examines the effects of a series of events leading up to the
deregulation of deposit interest rates in Hong Kong on the market value of banks. All the evidence suggests that banks earned rents from deposit interest rate rules, and deregulation would lower these rents and hence bank market values. On average, the total abnormal return due to interest rate deregulation was around negative 4 percent. There is some evidence that large banks and banks with high deposit-to-asset ratios suffered a bigger drop in value, suggesting that these banks enjoyed a bigger subsidy under the interest rate rules.
Operating Performance of Banks among Asian Economies: An International and Time Series Comparison
Journal of Banking and Finance 27(3), March 2003, 471-489
Per unit bank operating costs are found to vary significantly across Asian countries and over time. The strong correlation between per unit labor cost and physical capital cost suggests that there exist systematic differences in bank operating efficiency across countries. The declining operating costs between 1992 and 1997 are consistent with improving operating performance. Since 1997, the run-up in operating costs coincided with the Asian financial crisis, suggesting that banks incurred additional costs to deal with problem loans while outputs declined simultaneously. Labor cost share is also found to decline significantly between 1997 and 1999, perhaps because banks were able to cut labor force faster than physical capital. Significant differences in labor cost share across countries suggest cross-country differences in bank production functions. The positive relation between labor cost share and wage rate indicates that banks using more labor is due to labor force productivity, rather than labor being cheap.
Hidden Cost Reductions in Bank Mergers: Accounting for More Productive Banks
In Research in Finance, 19, ed. by Chen | London: Elsevier Press, 2002. 109-124 | With Wilcox
The bank mergers of the 1990s often triggered upward adjustments in reported
depreciation and goodwill amortization expenses, apart from any
change in actual costs, due to the conventions of purchase accounting.
Thus, conventional measurements underestimated the sizable and longlasting
reductions in noninterest costs achieved following mergers.
The largest reductions in reported post-merger bank costs occurred
in labor expenses, which were not subject to accounting revaluations.
Reported premises expenses fell considerably less than that of labor
when buildings were revalued. Other noninterest expense rose, partly
because amortization increased due to the additional goodwill generated
Financial Modernization and Regulation
Journal of Financial Services Research 16 (2/3), September 1999, 5-10 | With Furlong
Comments on ‘Trends in Organizational Form and Their Relationship to Performance: The Case of Foreign Securities Subsidiaries of U.S. Banking Organizations’
Journal of Financial Services Research 16(2/3), September 1999, 219-221
Bank Risk, Capitalization, and Operating Efficiency
Journal of Financial Services Research 12 (2/3), October 1997, 117-131 | With Eisenbeis
Firm-Specific Information and the Correlation between Individual Stocks and Bonds
Journal of Financial Economics 40(1), January 1996, 63-80
An Analysis of Inefficiencies in Banking
Journal of Banking and Finance 19(3-4), June 1995, 733-734 | With Eisenbeis
Re-examination of Interest Rate Sensitivity of Commercial Bank Stock Returns Using a Random Coefficient Model
Journal of Financial Services Research 5(1), March 1991, 61-76