Joseph G. Haubrich

Bank Concentration and Competition: An Evolution in the Making

The consolidation of banks around the world in recent years is intensifying public policy debates on the influences of concentration and competition on the performance of banks. In light of these developments, this paper first reviews the existing literature on the impact of bank concentration and competition. Second, the paper summarizes the main findings of the papers in this special issue of the JMCB within the context of this active literature. Finally, the paper suggests some directions for future research.

The Yield Curve, Recessions, and the Credibility of the Monetary Regime: Long-Run Evidence, 1875-1997

This paper brings historical evidence to bear on the stylized fact that the yield curve predicts future growth. The spread between corporate bonds and commercial paper reliably predicts future growth over the period 1875-1997. This predictability varies over time, however, particularly across different monetary regimes. In accord with our proposed theory, regimes with low credibility (high persistence of inflation) tend to have better predictability.

Estimating Real and Nominal Term Structures Using Treasury Yields, Inflation, Inflation Forecasts, and Inflation Swap Rates

This paper develops and estimates an equilibrium model of the term structures of nominal and real interest rates. The term structures are driven by state variables that include the short term real interest rate, expected inflation, a factor that models the changing level to which inflation is expected to revert, as well as four volatility factors that follow GARCH processes. We derive analytical solutions for the prices of nominal bonds, inflation-indexed bonds that have an indexation lag, the term structure of expected inflation, and inflation swap rates. The model parameters are estimated using data on nominal Treasury yields, survey forecasts of inflation, and inflation swap rates. We find that allowing for GARCH effects is particularly important for real interest rate and expected inflation processes, but that long–horizon real and inflation risk premia are relatively stable. Comparing our model prices of inflation-indexed bonds to those of Treasury Inflation Protected Securities (TIPS) suggests that TIPS were underpriced prior to 2004 but subsequently were valued fairly. We find that unexpected increases in both short run and longer run inflation implied by our model have a negative impact on stock market returns.

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.

THE YIELD CURVE AS A PREDICTOR OF GROWTH: LONG-RUN EVIDENCE, 1875-1997

This paper brings historical evidence to bear on the stylized fact that the yield curve predicts future growth. The spread between corporate bonds and commercial paper reliably predicts future growth over the period 18751997. This predictability varies over time, however, and has been strongest in the postWorld War II period.

Consumption and Fractional Differencing: Old and New Anomalies

A calculation of the stochastic properties of consumption when income follows a fractional stochastic process, showing how this may explain excess-smoothness results noted in previous studies.

Some Lessons on the Rescue of Long-Term Capital Management

This Policy Discussion Paper reviews the restructuring and recapitalization of Long-Term Capital Management, looking at possible alternatives and paying particular attention to the Federal Reserve’s role.

Umbrella Supervision and the Role of the Central Bank

Deregulation and financial consolidation have led to the development of financial holding companies - allowing commercial banking, insurance, investment banking, and other financial activities to be conducted under the same corporate umbrella - and the Federal Reserve has been named supervisor of the consolidated enterprise. This Policy Discussion Paper will show that there likely are economies of scope between the Feds inherent central-banking responsibilities and those of an umbrella supervisor and that these duel roles benefit both the Fed and functional regulators.

Who Holds the Toxic Waste? An Investigation of CMO Holdings

“Toxic waste” refers to the riskiest derivative structures arising from collateralized mortgage obligations (CMOs). We use simulations to predict how this risk would manifest itself in various interest rate environments. We also look for evidence on the total dollar value of these securities, who holds them, and how much they hold. Very limited public information is available, but commercial banks are required to report on their holdings, and we investigate the extent to which the risk is concentrated in that sector.

Commitment as Investment Under Uncertainty

Irreversible investment and the techniques associated with pricing real options have led to significant advances many areas. We broaden this range of applications, showing how the techniques can apply to many policy problems in finance, macroeconomics, and trade policy. With small changes, standard techniques can handle a wide range of strategic problems related to policy. The decision to commit is like the decision to make an irreversible investment. Explicitly considering and correctly valuing the option to wait makes discretion relatively more attractive, implies that greater uncertainty increases the gain to discretion and results in policy that displays hysteresis.