Myron L. Kwast

Using Subordinated Debt to Monitor Bank Holding Companies: Is it Feasible?

Although accurate bond prices are difficult to come by, many have advocated that bank supervisors use subordinated debt spreads in the surveillance of large banking organizations. Our findings indicate that subordinated debt spreads are most consistent across data sources for the most liquid bonds (i.e., those of relatively large issuance size, relatively young age, issued by relatively large firms) traded in a relatively robust overall bond market. We also find a high degree of concordance in rankings of firms by their minimum spreads across bonds with especially strong agreement about which large firms are in the tails of the spread distribution at each point in time. Our time-series results further support and provide additional guidance for the use of subordinated debt spreads in supervisory monitoring, support the need for careful judgment when interpreting such spreads, highlight difficulties with currently available data sources, and motivate the need for further research.

The impact of underwriting and dealing on bank returns and risks

Abstract This study uses portfolio theory to investigate empirically the potential for diversification gains from expanded bank securities powers. Diversification potential is examined using microeconomic data on returns to existing bank securities and non-securities activities over 1976 through 1985. Both the mean and standard deviation of returns to securities activities are found to be greater than those of non-securities activities. Some potential for diversification gains is found, although this appears to be quite limited. Experiments designed to estimate the effect of using industry and time aggregated data are performed.

Pricing, operating efficiency, and profitability among large commercial banks

Abstract This study uses statistical cost accounting techniques to examine the relationship between bank profitability and two dimensions of operating performance — pricing and operating efficiency. The traditional statistical cost accounting model, which relates a firms income to its asset and liability mix, is expanded to account for differences in market structure, regional demand and supply conditions, and macroeconomics factors. The study focuses on large (above

Are real estate specializing depositories viable? Evidence from commercial banks

500 million in domestic deposits) banks, comparing a sample of relatively profitable banks against a matched group of much less profitable banks over the period 1970–1977. After allowing for regional supply and demand factors, the high and low-profit banks are estimated to earn equal market rates of return on individual assets and liabilities. There is virtually no evidence that differential prices are an important discriminator between the two bank groups. Some evidence is found that the high-earnings banks experience lower operating costs on some liabilities, but the opposite is true with respect to selected asset items. After taxes are taken into account, however, any such cost differentials virtually disappear. Overall, there is no compelling evidence that high-profit banks are characterized by greater operating efficiency than their low-earnings counterparts. This finding is consistent with the view that over time, and especially among relatively large banks, information flows and competitive pressures act to reduce operating efficiency differences that may appear in the short run.

New banking powers: A portfolio analysis of bank investment in real estate☆

This study investigates whether depository institutions that concentrate on real estate lending are economically viable by examining the behavior of a sample of commercial banks that chose over the last decade to specialize in real estate lending. The results show that over the 1978–1988 period, the average real estate specializing bank earnings performance was on par with regular commercial banks, and those that were in the business for a longer period of time had higher returns with less risk than substantially more diversified commercial banks. Real estate banks has relatively lower loan losses and relatively higher proportions of lower risk, one- to four-family mortgage loans than regular commercial banks. Finally, it appears that real estate banks exhibited substantial flexibility in their ability to adjust their real estate loan holdings.

Market discipline in banking reconsidered: the roles of deposit insurance reform, funding manager decisions and bond market liquidity

Abstract A new banking power currently under consideration is bank direct equity investment in real estate. A portfolio analysis of the possible effect of this new power is presented using two sets of data on returns to direct real estate investment. While it is estimated that there can be benefits from bank diversification into this area, the results suggest that risk may be increased, rather than reduced, if real estate investment exceeds certain relatively low levels of concentration.

Bank mergers: What should policymakers do?

This paper demonstrates that the risk sensitivity of a banking organizations subordinated debt yield spreads may understate the potential for market discipline in some periods and overstate in others because such spreads contain liquidity premiums that are driven, in part, by the risk-sensitivity of funding manager decisions. Once such decisions are accounted for, new evidence is provided that indicates that subordinated debt spreads were sensitive to organization-specific risks in the mid-1980s, and that the risk- sensitivity of such spreads was about the same in the pre- and post-FDICIA periods. These results resolve some anomalies in the existing literature. In addition, it is argued that mandating the regular issuance of subordinated debt would, by reducing the endogeneity of liquidity premiums, improve the information content of both primary and secondary market debt spreads, thereby augmenting both direct and indirect market discipline.

The Subsidy Provided by the Federal Safety Net: Theory and Evidence

Abstract These remarks discuss why the “cluster” of financial services and local banking markets are still relevant for antitrust analysis in banking. A key portion of the Federal Reserve’s Order approving the NationsBank–Barnett merger is interpreted, and the extent to which antitrust is a practical constraint on the development of a nationwide banking structure is commented upon.

Households' Deposit Insurance Coverage: Evidence and Analysis of Potential Reforms

Views about the value to depository institutions of the federal safety net differ widely. Resolution of the issue is important because defining the appropriate relationship between the federal safety net and financial institutions is central to the design of efficient financial modernization strategies. A heuristic model is presented of how the safety net subsidy affects the size of the banking system and the behavior of banks. The model suggests that banks should have lower capital ratios than similar nonbank financial firms. Evidence is presented that supports this prediction and that banks have organized themselves in ways that take advantage of safety net benefits.

Market Discipline in Banking Reconsidered: The Roles of Funding Manager Decisions and Deposit Insurance Reform

It is often suggested that reducing deposit insurance would reduce problems of moral hazard in the banking industry. However, little is known about likely effects of proposed reforms on household depositors. This study uses data from the Survey of Consumer Finances to examine the characteristics of household depositors, particularly those with uninsured funds. The authors find that large depositors tend to have substantial shares of their assets in insured depositories, yet often fail to keep their holdings within insurance limits. Various explanations for these factors are considered. The authors also simulate the effects of proposed reforms on the pool of uninsured depositors. Copyright 1996 by Ohio State University Press.