Andrew P. Meyer

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 on rankings obtained from conventional surveillance tools. More importantly, we find that jumbo-CD rankings would not have improved materially over random rankings of the sample banks. These findings validate current surveillance practices and, when viewed with other recent empirical tests, raise questions about the value of market signals in bank surveillance.

Did FDICIA Enhance Market Discipline? A Look at Evidence from the Jumbo-CD Market

The Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA) forced uninsured creditors such as jumbo-CD holders to bear more of the losses from bank failures. Because no other federal laws affecting loss exposure took effect in the surrounding years, the Act offers a natural experiment for assessing the supervisory returns from greater reliance on debt markets to police bank risk. Accordingly, we examine the sensitivity of jumbo-CD yields and run-offs to risk before and after FDICIA as well as the implied impact of any risk penalties on bank profitability. The evidence indicates that yields and run-offs were risk sensitive in both periods, but that this sensitivity was always economically small and, more importantly, was not significantly higher after the Act. These findings suggest that raising the deposit-insurance ceiling would not - at least in the current institutional and economic environment - exacerbate moral hazard. More importantly, they also suggest that operationalizing debt-market discipline as pillar of bank supervision could prove more difficult than previously thought.

Tailoring in the Application of Regulatory Accounting Guidelines: Evidence from Community Banks

We examine the latitude that regulators provide to banks in how they manage loan loss allowances. Empirical tests on subsamples of 64,807 annual observations of banks, 2006 to 2015, show that correlations of provisions for loan losses and subsequent charge-offs, which are expected under regulatory guidelines, are weaker for smaller banks and that, further, the weaker correlations of smaller banks do not necessarily constrain them from achieving a given regulatory-assessed managerial performance rating. We consider this to be evidence of a “tailoring” in accounting oversight that is relevant to the enforcement of former, current and future standards established by the Financial Accounting Standards Board.