Ken B. Cyree

Determinants of Bank Growth Choice

Abstract We study the determinants of bank growth in a two-stage logistic regression model. We first compare banks that branch, Bank Acquire, or Product Expand with banks that do not grow externally. Banks that are federally chartered, in states with higher income growth, and with higher labor prices are less likely to grow externally. Larger banks are more likely to grow externally. In the second stage, we study determinants of growth activity for banks that expand products, branch, or acquire other banks. Depending on the time period, bank structure, regulatory environment, performance, and balance sheet characteristics determine bank growth choices.

An Intraday Examination of the Federal Funds Market: Implications for the Theories of the Reverse-J Pattern

The intraday literature suggests that returns, variances, and volume form an intraday reverse-J pattern. Two competing theories explain the observed patterns: private information about future security prices and trading stoppages. The Federal funds market allows a unique opportunity to study the causes of intraday patterns because private information common to most markets does not play a role in setting prices. We find reverse-J variance patterns while accounting for generalized autoregressive conditional heteroskedasticity (GARCH) model effects. Our results support trading stops as an explanation for the reverse-J pattern and suggest that private information is not a necessary condition for the observed pattern. Copyright 2001 by University of Chicago Press.

The erosion of the Glass-Steagall Act:: Winners and losers in the banking industry

Abstract This paper studies stock price reaction to increased investment banking powers for commercial banks using Seemingly Unrelated Regressions. Market participants react favorably to the announcement of increased Section 20 powers to the Glass-Steagall Act both with and without a risk-shift variable. When the sample is split, abnormal returns are significantly higher for Money Center Banks, banks with prior Section 20 subsidiaries, and Large Regional commercial banks as compared to Small Regional banks. Cross sectional analysis suggests that banks with prior Section 20 subsidiaries have higher abnormal returns and Small Regional banks have lower abnormal returns than the average bank in the sample. Keywords: Glass-Steagall Act; Section 20 subsidiaries

Bank Lending to Native American Applicants: An Investigation of Mortgage Flows and Government Guarantee Programs on Native American Lands

We investigate the efficacy of government guarantee programs for mortgage loans made on tribal lands by comparing lending outcomes for White applicants and Native Americans (NAs) living on- and off reservation lands. Simultaneous equations models with the loan-to-income ratio endogenous indicate both on- and off-reservation NA applicants experience higher conditional denial rates compared with otherwise similar White applicants. NAs living on-reservation are equally as likely to be approved for mortgage loans as off-reservation NAs. On-reservation applicants self-select lower loan-to-income ratios, and are held to a higher standard for this credit variable, likely because lower housing values and other economic variables challenge on-reservation applicants. Our findings suggest lack of financial resources, lack of applicant education about and experience with the mortgage process, low creditworthiness, and lender reluctance to confront burdensome bureaucracy limit on-reservation guarantee program success.

Avoiding Double Taxation: The Case of Commercial Banks

Recently, there has been a marked increase in the number of banks choosing to operate as Subchapter-S Corporations. The apparent motivation is tax savings as Subchapter-S firms do not pay federal income taxes on income at the firm level, but transfer income to stockholders where it is taxed as individual income at personal tax rates. Given the apparent advantages of Sub-S status, there must be mitigating reasons for not choosing this organizational form. We empirically investigate factors affecting the choice of Subchapter-S status and key performance differences between Sub-S banks and those taxed as C-corporations. Empirical findings indicate that Sub-S banks are significantly smaller, pay higher dividends, have lower taxable income before Sub-S formation, higher profitability, lower capital and loan loss reserves, rely more on core deposits, and have higher agricultural but lower commercial and total loans. Sub-S banks are more likely to be rural and less likely to be de novo, or have publicly-traded stock.

The Relation between Market Discipline of Banks and Bond Market Transparency: Evidence from the Risk Sensitivity of Subordinated Notes and Debenture Yield Spreads

We investigate the effects of increased bond market transparency on the risk sensitivity of yield spreads for bank-issued subordinated notes and debentures after bond markets became more transparent in 2002. Models of yield spread levels and yield spread changes show improvement in normal economic times after markets became more transparent. Risk-sensitivity of yield spreads increases strongly prior to crises. We show that firm-specific default risk variables are significant determinants of yield spread changes around earnings announcements and we observe a stronger effect for lower rated bonds. Our results imply that market discipline poorly complements regulatory discipline during good economic times. In general, increased transparency improves risk sensitivity in all cases.

The Determinants of Yield Spreads and the Market Discipline of Banks

Determinants of yield spreads vary with market conditions and available information, which has implications for debt pricing models. After the bailout of Long Term Capital Management (LTCM) in September 1998, important firm-specific default risk measures, such as leverage, are not significant factors in determining yield spread levels of bank-issued subordinated notes and debentures (SND) because these measures do not reflect the true risk of the firm. Bond markets impound a higher cost for higher risk-taking, particularly for off-balance sheet risks, based on return-on-assets, after the LTCM bailout, Yield spreads have become less sensitive to firm-specific risks, even prior to the LTCM bailout, after the issuance of trust-preferred securities (TPS) by banks because TPS are junior claims to SND and provide an additional buffer to SND from default risk. Yield spreads on SND prior to TPS issuance by banks and the LTCM bailout are sensitive to conventional firm-specific risk measures. Yield spreads on TPS at the time of offer provide market signals about on-balance sheet risks.