Search results

The purpose of this paper is to examine the events leading up to the Great Recession, the US Federal Reserve’s response to what it perceived to be a short-term liquidity problem, and the programs it put in place to address liquidity needs from 2007 through the third quarter of 2008.

These programs were designed to channel liquidity to some of the largest institutions, most of which were primary dealers. We describe these programs, examine available evidence regarding their effectiveness and detail which institutions received the largest amounts under each program.

We argue that increasing financial fragility and potential insolvencies in several major institutions were evident prior to the crisis. While it is inherently difficult to disentangle issues of illiquidity from issues of insolvency, failure to recognize and address those insolvency problems delayed necessary adjustments, undermined confidence in the financial system and may have exacerbated the crisis.

Disentangling issues of illiquidity from issues of insolvency is inherently difficult and so it is not possible to specify a definitive counterfactual scenario. Nonetheless, failure to recognize and address the insolvency problems in several major institutions until more than a year after the crisis had begun delayed the necessary adjustment and undermined confidence in the financial system.

This paper is among the first to analyze data showing the amounts of lending and the distribution of these loans across institutions under the Fed’s special liquidity facilities during the first 18 months of the financial crisis.

Bond rating studies have received and continue to receive considerable attention in the literature on government finance. This study focuses on two major issues of municipal bond ratings that occupy the center-stage of these discussions: What charac-teristics does a rating institution analyze when assigning rating to a government? How significant are these characteristics in predicting the ratings given by these institutions? Using a combination of economic, financial, and demographic factors, the study reexamines these questions on a select group of cities.

This paper studies the profit efficiency of a sample of large U.S. commercial banks and explores how this performance varies with selected measures of bank risk reflecting aspects of credit risk, liquidity risk, and insolvency risk. We use a standard profit function and the stochastic frontier approach, and compare two standard functional forms – Cobb‐Douglas and translog – to assess the tradeoff between precision and parsimony. We find that profit efficiency is sensitive to credit risk and insolvency risk but not to liquidity risk or to the mix of loan products.

The objectives of this study are to offer cash based funds flow components as an alternative to financial ratios for classifying the financial performance of companies; to test empirically the ability of funds flow components to distinguish between failed and nonfailed companies with special emphasis on working capital components; to analyse the empirical results and make recommendations for future study.

Prospects for banking regulation are a central issue in planning by firms that provide financial services or are considering offering such services. Because there has been deregulation in the past, further deregulation is often assumed for the future. Indeed, sometimes de‐regulation seems to be taken for granted.

This study provides evidence regarding the performance of bank holding companies (BHC) following a series of deregulatory measures by the United States Congress. To compare performance of commercial banks before and after expanding their operations to nonbank functions, a set of hypotheses addressing BHC risk and return characteristics are proposed. Empirical results are mixed. Total risk dropped after expansion. Market risk, on the other hand, rose substantially in post‐expansion time. When returns are adjusted for risk, a marginal improvement in performance is achieved.

Core‐deposit franchises usually fetch substantial premiums when placed on the market. Those premiums are consistent with the “core‐deposit hypothesis:” because of limitations on competition (rationing of charters), deposits provide below‐market funds to financial intermediaries (Spellman, 1982, Chapter 3). However, two other hypotheses can explain core‐deposit premiums. The first holds that generally accepted accounting principles (GAAP) misallocate the costs of developing a core‐deposit base, by charging such costs against current income rather than capitalizing them as an asset; core‐deposit premiums merely represent a normal return to the costs of developing a core‐deposit base. The second holds that core‐deposit premiums arise from banks' good reputation (“goodwill”). A test which can discriminate between the three hypotheses is needed.

This paper aims to identify the variables responsible for classifying the investors into risk takers (RT) and risk avoiders (RA) across their economic perspectives.

The research offers a novel and unobtrusive measure of classifying investors into RT and RA based on a set of financial risk tolerance (FRT) questions. The authors have investigated the causes of discrimination across economic perspectives over a sample of 552 investors exposed to market risk.

The authors identify that out of the total of 11 risk assessment variables, only three are responsible for classifying investors into RA and RT. The variables are risk return trade-off, comfort level dealing with risk, and understanding short-term volatility. Financial literacy is considered as an emerging cause of discrimination. Further, the authors highlight the most striking finding to be the discriminating factors across wealth and source of income of the investors.

Existing research on FRT can be loosely segregated into three groups: the relationship between an individual's financial and non-FRT, estimation of FRT score (FRTS), and perceived self-assessed FRTS. The current research roughly falls into the third category of study where the authors have not only studied the self-assessed risk tolerance but also evaluated the predictors. Most of the studies have focussed on estimating self-assessed FRT with the help of one direct question to the respondent. However, the uniqueness of this study is that the researchers have used an instrument comprising a series of direct and indirect questions that can easily estimate the self-assessed risk perception and also discriminate the role of the economic factors that have any impact on self-assessed FRTS.

The effects of bank lending specialization are unclear. To explore this issue, we contrast the performance effects of general lending specialization and agricultural specialization. The latter is important given small or community banks account for a significant share of all agricultural lending, while the number of such banks continues to shrink.

This article develops a novel measure of general lending specialization for the percentage of loans that could be shifted across seven categories to mimic market allocations. Using US government data, we analyze small-, medium- and large-sized banks for four performance indicators in random effects regressions for 2011–2019, with four sets of subsidiary analyses.

Results suggest specialized lending reduces risk for small, community banks, and that large-sized banks face a risk-reward trade-off such that general specialization improves returns, but increases risk. Agricultural lending is associated with improved returns and lower risk for small-sized banks, particularly in rural locations, but with poorer performance for large-sized banks. Analyses of bank performance around the global financial crisis and COVID-19 pandemics suggest these were black swan events. Overall results suggest that both general lending specialization and agricultural specialization warrant separate analytical treatment and that small, community banks continue to play a crucial role in the US economy.

This is the first article to contrast general and agricultural lending, and across small-, medium- and large-sized banks, finding distinct effects. Future studies of other types of lending specialization are warranted.

Outlines the UK law on insovency and asks whether the financial ratios banks use to assess credit worthiness can discriminate between the companies placed in administrative receivership (AR) by their lending banks which can or cannot be rescued. Applies both linear discriminant analysis and logistic regression to samples of UK companies placed into AR in 1998, explains the methodology and shows broadly similar results from the two methods; and a predictive accuracy of 85‐90 per cent for the rescued companies and 55‐60 per cent for the failures. Analyses the key ratios for survival in more detail, looking at debtor turnover, the gearing ratio and the current ratio. Recogises the limitations of the study but sees it as a promising approach to predicting survivability.