James B. Thomson

Modeling the bank regulator's closure option: A two-step logit regression approach

This article models the regulators decision to close a bank as a call option. A two-equation model of bank failure that treats bank closings as an event timed by bank regulators is constructed and estimated for bank failures occurring from 1984 through 1989. The results of the regression experiment are consistent with the underlying theoretical model, as the majority of the regressors in the closure equation are significant with the correct sign.

Small Firm Finance, Credit Rationing, and the Impact of SBA-Guaranteed Lending on Local Economic Growth

Increasingly, policymakers look to the small business sector as a potential engine of economic growth. Policies to promote small businesses include tax relief, direct subsidies, and indirect subsidies through government lending programs. Encouraging lending to small business is the primary policy objective of the Small Business Administration (SBA) loan‐guarantee program. Using a panel data set of SBA‐guaranteed loans, we assess whether or not SBA‐guaranteed lending has an observable impact on local economic performance. We find a positive and significant (although economically small) relationship between the relative levels of SBA‐guaranteed lending in a local market and the future per capita income growth in that market.

Systemic Banking Crises

Systemic banking crises can have devastating effects on the economies of developing or industrialized countries. This Policy Discussion Paper reviews the factors that weaken banking systems and make them more susceptible to crises.

The use of market information in pricing deposit insurance

An argument that information about the value of the deposit-insurance guarantee is available from market-generated data.

On Systemically Important Financial Institutions and Progressive Systemic Mitigation

One of the most important issues in the regulatory reform debate is that of systemically important financial institutions. This paper proposes a framework for identifying and supervising such institutions; the framework is designed to remove the advantages they derive from becoming systemically important and to give them more time-consistent incentives. It defines criteria for classifying firms as systemically important: size (the classic doctrine of too big to let fail) and the four C’s of systemic importance (contagion, concentration, correlation, and conditions); it also discusses the concept of progressive systemic mitigation.

On SBA-Guaranteed Lending and Economic Growth

Increasingly, policymakers are looking to the small business sector as a potential engine of economic growth. Policies to promote small businesses include tax relief, direct subsidies, and indirect subsidies through government lending programs. Encouraging lending to small business is the primary policy objective of the Small Business Administration (SBA) loan-guarantee program. Using a panel data set of SBA-guaranteed loans we assess whether SBA-guaranteed lending has an observable impact on local and regional economic performance.

On flexibility, capital structure and investment decisions for the insured bank

Most models of deposit insurance assume that the volatility of a banks assets is exogenously provided. Although this framework allows the impact of volatility on bankruptcy costs and deposit insurance subsidies to be explored, it is static and does not incorporate the fact that equityholders can respond to market events by adjusting previous investment and leverage decisions. This paper presents a dynamic model of a bank that allows for such behavior. The flexibility of being able to respond dynamically to market information has value to equityholders. The impact and value of this flexibility option are explored under a regime in which flat-rate deposit insurance is provided.

On Credit-Spread Slopes and Predicting Bank Risk

We examine whether bank credit-spread curves, engendered by subordinated debt, would help predict bank risk. We extract credit-spread curves for each bank each quarter and analyze the predictive properties of creditspread slopes. We find that credit-spread slopes are significant predictors of future credit spreads. We also find that credit-spread slopes provide significant additional information on future bank risk variables, over and above other bank-specific and market-wide information.

Federal Home Loan Bank Lending to Community Banks: Are Targeted Subsidies Necessary?

The Gramm-Leach-Bliley Act of 1999 extended the lending authority of Federal Home Loan Banks to include advances secured by small-enterprise loans of community financial institutions. The authors examine three possible reasons for the extension of this selective credit subsidy to community banks and thrifts, including the need to subsidize community depository institutions, stabilize the Federal Home Loan Banks, and address a market failure for small enterprise loans in rural banking markets. They use two empirical models to investigate whether funding constraints affect small-business lending decisions by rural community banks. The results reject the hypothesis that access to increased funds will increase the amount of small-business loans made by community banks.

Loan Sales, Implicit Contracts, and Bank Structure

We document some recent changes in the market for loan sales. We then test the main implications of several prevailing theories, using a Tobit model to relate loan sales and purchases to bank size, capital, risk, and funding mode. The results, though not definitive, broadly confirm the Pennacchi funding cost model of sales. Other data cast doubt on the importance of mergers and acquisitions for this market and on the comparability of different data sources.