Emilio R. Zarruk

Optimal Bank Interest Margin under Capital Regulation and Deposit Insurance

This paper examines the relationships among capital regulation, deposit insurance, and the optimal bank interest margin. In a model where loan losses are the source of uncertainty, changes in capital regulation or deposit insurance premiums have direct effects on the banks interest margin. An increase in bank capital requirement or in deposit insurance premiums results in a reduced interest margin under nonincreasing risk aversion. Comparative static analysis also explores the relation between asset quality and interest margin. It is shown that a mean-preserving spread of the distribution of loan losses results in a reduced margin.

Bank spread with uncertain deposit level and risk aversion

Abstract This paper derives a model of the banking firm under uncertainty and risk aversion. The selection of the banks optimal spread between loan and deposit rates is emphasized. The models results provide some implications for bank asset quality, capital regulation and deposit insurance. For example, it is shown that increases in the level of equity capital tend to increase the banks spread under DARA. This implies an improvement in bank asset quality. On the other hand, as the deposit supply function becomes more volatile, the banks spread narrows, which implies a decline in the quality of the banks assets.

Reaction of bank share prices to the Third-World debt reduction plan

Abstract Financial institutions have been subjected to several forms of regulatory intervention in recent years. Intervention may cause a wealth transfer to depository institutions and may therefore perceive these institutions to be undervalued. This effect can be verified by a positive abnormal share price response of the depository institutions. When the intervention is in response to a problem, the potential wealth transfer is a function of the magnitude of the problem, the magnitude of the remedy, and the financial source of the remedy (the source of the wealth transfer). One of the most prominent forms of intervention in the 1980s was the Debt Reduction Plan. Our study measures the effects of the Debt Reduction Plan on commercial bank share prices. We found that announcements pertaining to the Plan elicited a favorable share price response. Furthermore, the degree of response was positively associated with the banks degree of exposure to debt of less developed countries.

Market reaction to the thrift bailout

Abstract This paper examines the share price reaction of depository institutions to the Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA) passed August 1989. We find a favorable share price response for thrifts, which could be attributed to enhanced depositor confidence, reduced risk premiums on deposits, reduced agency costs, or reduced loan losses, among other reasons. However, the effects of FIRREA on commercial banks were negligible. An intra-industry analysis revealed that the variation in share price responses could not be explained by cross-sectional differences in thrift capital levels.

Market reaction to uniform capital adequacy guidelines in the banking industry

In this paper the authors assess the stock market reaction to information on uniform capital requirements that was disseminated on four different dates: September 29, 1987; December 7, 1987; December 10, 1987; and July 11, 1988. The share prices of U.S. money center banks were adversely affected by the December 7, 1987, announcement regarding proposals to make regulatory standards more uniform. The share prices of U.S. superregional banks were not affected by this announcement. The difference in degree of response is attributed to disparate capital positions between the two groups of banks. In order to meet the new guidelines, U.S. money center banks may need to implement policies (such as issuing new stock) that are viewed unfavorably by the market.

Impact of the thrift bailout on bank risk

Bank risk premiums are examined in the light of the bailout bill. Intertemporal shifts are assessed in risk perception and it is found that the reduction in risk premium was extended for a long period. This implies a prolonged reduction in the risk perception of commercial banks, but may have been affected by other factors.

Impact of the debt reduction plan on the value of LDC debt

Abstract This paper assesses the reaction of LDC debt prices to the Brady Plan, which was intended to facilitate bargaining between the international lenders and the LDCs. Overall, there is evidence of a favorable LDC debt price response. The results suggest that the market may have anticipated an accord between lending banks and Mexico, as well as an accord between these banks and Venezuela. The debt price effects varied among LDCs, implying that the provisions of the plan carried separate ramifications for each LDC. The Plan may not only benefit LDCs, but the lending banks as well.