Eugene M. Lerner

Discussion: The Determinants of Bank Interest Margins: Theory and Empirical Evidence

In this paper Ho and Saunders apply a model that has been used to analyze dealer spreads to banking.A potential contribution to a field can arise whenever a well-developed framework of analysis in one problem area is applied to another field. The risk of a mechanical application, however, is that the institutional structure of the two problem areas is so different that no real insights are gained. What are the facts here?

Risk, Ruin and Investment Analysis

In this article, we shall discuss several of the alternative definitions of risk that have been proposed from time to time. We shall show that one definition — risk is the probability of loss — leads to a formulation of the investment decision problem as a chance constrained problem. Three different strategies are then proposed by which an investor can reduce risk. It is our belief that professional investors utilize all three strategies and that risk, in many such cases, is not a substantial constraint on investor behavior.

Three Financial Problems Facing Bank Holding Companies: Comment

Bank holding companies must make decisions with respect to three ongoing financial problems: 1. how much debt to acquire; 2. where within the holding company (i.e., at the parent level or at the subsidiary level) to place the debt; 3. how the funds raised through debt should be allocated throughout the system. The way a one bank holding company decides these issues affects its probability of default and exposure to charges of conflicts of interest by various shareholders. All holding companies face these three financial problems. However, various sections of the Federal Reserve Act limit the loans a bank can make to its affiliates and the dividends that it can pay to its shareholders. As a consequence, a one bank holding company operates with different constraints and is probably less flexible with respect to funds transfers than are the holding companies in other industries. The first section of this paper reviews the factors that have contributed to the rapid growth of the one bank holding company, and the second evaluates some financial aspects of the acquisitions that holding companies have recently made. (This study was completed in July, 1971.) With this material as background, the third section then analyzes the three ongoing financial problems described above.

Measuring Corporate Profit Opportunities

The concept that corporate investment-growth decisions are constrained by a profit opportunities schedule is central to much of the literature on finance and the theory of the firm. These writings suggest that, for a single firm: (1) the profit opportunities schedule is a decreasing function of investment growth (the slope reflecting, inter alia, competitive conditions); (2) the schedule shifts to the right with changes in national income (except for a firm producing income-inferior goods), and (3) the schedules position (intercept) at a moment in time reflects a host of factors that are summarized by the term “management.â€