R. Alton Gilbert

Effects of Deregulation on the Productivity of Korean Banks

Abstract The Korean economy began a period of rapid economic growth in the early 1960s. Meanwhile, the Korean government nationalized the banking industry and began a policy of allocating resources in the economy through its control over the financial system. By the 1980s, the government decided that greater development of the financial system under private control was essential for continued economic growth. Banks were subsequently privatized, and some of the regulations on the financial system were lifted. We used Malmquist indexes of productivity change to investigate the effects of privatization and deregulation on the productivity of Korean banks over the period of privatization and deregulation. These indexes were also decomposed into changes in technology and efficiency. We found that Korean banks responded to privatization and deregulation by substantially altering their mix of inputs and outputs, yielding large changes in productivity.

The Effects of Affiliation with Large Bank Holding Companies on Commercial Bank Lending to Agriculture

This article examines whether the agricultural loan ratios of rural subsidiaries of large bank holding companies differ from the ratios of other banks in the same rural counties. In each of the years 1975, 1980, and 1985, the ratio of agricultural loans to total assets is significantly lower for the subsidiaries of large bank holding companies. These results are interpreted as evidence that the subsidiaries of large bank holding companies have greater opportunities to diversify risk by lending to businesses in a variety of industries.

Local economic effects of bank failures

This study tests the hypothesis that bank failures have adverse effects on economic activity in the communities where the failed banks are located. The literature on the economic effects of credit constraints provides the theoretical foundation for adverse economic effects of bank failures. The data are for rural counties in Kansas, Nebraska, and Oklahoma. The measures of local economic activity are the value of sales and employment. The empirical results indicate that bank failures depress local sales, and, for some of the states, the closing of failed banks depresses local employment.

Measuring Commercial Bank Profitability: Proceed with Caution

The Federal tax code creates challenges for comparing the profit rates of different banks on a consistent basis. The earnings of banks that elect to operate under Subchapter S of the Federal tax code are not subject to the Federal corporate income tax, but S-bank shareholders are taxed on their pro rata share of the entire earnings of the bank. The number of banks electing Subchapter S tax treatment has increased rapidly, especially among small banks. Using estimates of the Federal corporate income tax that S-banks would pay if they were subject to the tax, this article shows that differences in the tax treatment of S-banks and other banks has a large impact on measures of U.S. banking system profitability. Further, the article shows that adjustment of S-bank earnings by estimates of Federal income taxes to make them comparable with the earnings of other banks can markedly affect conclusions of studies that use net income as a measure of performance. Finally, the article shows that S-banks tend to out-earn their peers even if S-bank earnings are reduced by estimated Federal taxes, and that S-banks also tend to have higher earnings rates than their peers in the year before they elect S-bank status.

Do depositors care about enforcement actions

Since 1990, federal bank supervisors have publicly announced formal enforcement actions. This change in regime provides a natural laboratory to test two propositions: (1) claims by economists that putting confidential supervisory information in the public domain will enhance market discipline and (2) claims by bank supervisors that releasing such data will spark runs. To evaluate these propositions, we measure depositor reaction to 87 Federal Reserve announcements of enforcement actions. We compare deposit growth rates and yield spreads before and after the announcements at the sample banks and a control group of peer banks. The data show no evidence of unusual deposit withdrawals or spread increases at the sample banks following the announcements of formal actions. These results suggest that public announcements of enforcement actions did not spark bank runs or enhance depositor discipline. Apparently, depositors did not care a great deal about our sample actions.

Crop Yields: Random, Cyclical, or Bunchy?

This paper investigates whether changes in weather have random effects on crop yields. The data are yield series of several crops for the United States, individual major producing states, and major producing areas. Statistical tests show little evidence of nonrandomness in these series. There is almost no evidence of cycles or bunchiness prior to 1932, none for national average yields or the weighted average for major producing areas. Since 1932 there is some evidence of autocorrelation; however, this appears to reflect the uneven application rate of high yielding inputs, such as fertilizer and hybrid seed.

The Effects of Management Decisions on Agricultural Bank Failures

The assertion that local economic conditions have been responsible for the failures of large numbers of agricultural banks is investigated by pairing solvent and failed banks within rural counties and examining whether balance sheet items alone explain differences in the probability of failure for the two groups of banks. Estimation of a probit model indicates that higher ratios of loans to assets and agricultural to total loans were associated with higher probabilities of failure; banks with higher capital ratios and those affiliated with multibank holding companies had lower probabilities of failure.

Can Feedback from the Jumbo-CD Market Improve Bank Surveillance?

We examine the value of jumbo certificate-of-deposit (CD) signals in bank surveillance. To do so, we first construct proxies for default premiums and deposit runoffs and then rank banks based on these risk proxies. Next, we rank banks based on the output of a logit model typical of the econometric models used in off-site surveillance. Finally, we compare jumbo-CD rankings and surveillance-model rankings as tools for predicting financial distress. Our comparisons include eight out-of-sample test windows during the 1990s. We find that rankings obtained from jumbo-CD data would not have improved on rankings obtained from conventional surveillance tools. More importantly, we find that jumbo-CD rankings would not have improved materially over random rankings of the sample banks. These findings validate current surveillance practices and, when viewed with other recent empirical tests, raise questions about the value of market signals in bank surveillance.

Federal Reserve Lending to Banks That Failed: Implications for the Bank Insurance Fund

Debate that led to passage of the Federal Deposit Insurance Corporation Improvement Act (FDICIA) in 1991 focused on changes in public policy to reduce losses of the deposit insurance funds. One aspect of public policy subject to such scrutiny was lending by the Federal Reserve to troubled banks. Analysis prepared by Congressional staff indicated that over 300 of the banks that failed in 1985–91 were borrowing from the Fed when they failed, and that 90 percent of the banks that borrowed for extended periods of time eventually failed.1 Other evidence caused the authors of that Congressional staff study to conclude that Fed credit extended the life of borrowers that ultimately failed. Critics of Fed lending practices concluded on the basis of this evidence that lending to troubled banks increased losses to the Bank Insurance Fund (BIF).2 This concern led to constraints on Federal Reserve lending to troubled banks in FDICIA (see the next section below).

The Effects of Federal Credit Programs on Farm Output

Institutions with the direct or implied support of the federal government have supplied on average in the 1980s 45% of total credit received by the agricultural sector of the U.S. economy. The Farm Credit System (FCS), a borrower-owned cooperative whose bonds carry an implied federal guarantee, held about 27% of total outstanding farm debt in 1987. The Farmers Home Administration (FmHA), a federal agency that makes loans to farmers who are attempting to cope with emergency situations, held an additional 17%.