Robert A. Eisenbeis

Financial Applications of Discriminant Analysis: A Clarification

In a recent article in this Journal Joy and Tollefson [10] (hereafter J&T) critically analyzed discriminant analysis and its application to bankruptcy analysis. The authors make several interesting points and provide a useful discussion of the application of this statistical technique in finance. There are, however, three aspects of their presentation which need further elaboration. These relate to their discussions of (1) the difference between the stability of the discriminant model and its predictive ability, (2) the alternative methods of making inferences about the relative discriminatory power of variables, and (3) the reference statistics to use in assessing classification efficiency. In commenting on these points we will make use of the data from the Altman [1] study as did J&T.

The Benefits of Geographical and Product Expansion in the Financial Service Industry

Residual analysis techniques are used to evaluate acquiring firm shareholder perceptions of the benefits of product expansion by nonbanking firms into the banking industry and of the relaxation of restrictions on interstate banking. The results are consistent with other merger studies that fail to find significant returns to shareholders of acquiring firms and suggest either that such benefits do not exist or they are distributed to the shareholders of the acquired firm.

The Role of Forbearance and its Costs in Handling Troubled and Failed Depository Institutions

The banking regulatory agencies have had, up to now, very wide discretion in the handling of troubled banks and thrifts. This could range from increased examination frequency to informal supervisory agreements to formal cease-and-desist actions to declarations of insolvency. The latter step would be followed by liquidation of the bank or sale to a buyer willing to recapitalize it. In some cases the FDIC has assisted in the recapitalization of the bank without a declaration of insolvency (open-bank assistance).

Financial services : perspectives and challenges

Nine papers commissioned by Harvard Business School faculty for a colloquium in May 1992 delve into a variety of issues and developments faced by managers of financial intermediaries in the rapidly changing banking industry. They include deregulation, the thrift crisis, international insurance, and

Geographic integration of bank deposit markets and restrictions on interstate banking: A cointegration approach

Abstract Several previous studies in the literature have examined the degree of market integration for different types of banking products. All of these previous studies have used conventional linear regression analysis to test their market integration hypothesis. This paper employs the method of cointegration analysis—which is a superior method for testing the extent of market integration relative to conventional linear regression analysis—to test the hypothesis that consumer deposit rates from distinct geographically-defined markets behave as if they are independent versus the alternative that they are determined on a regional or national basis. Our results, similar to some of the regression-based analysis in the literature, suggest that consumer deposit markets are integrated, and are not primarily local in nature. Therefore, rationalizations of interstate branching restrictions based on these restrictions abilities to localize banking markets are incorrect.

Commercial Banks and Real Estate Lending: The Texas Experience

This paper examines the performance of Texas commercial banks specializing in mortgage lending during the difficult times of the late 1980s and early 1990s to investigate how representative their experience as compared with that of banks concentrating in real estate lending across the country. The results show that Texas REBs performed very poorly during the 1980s and early 1990s, but this was because the Texas REBs were clearly different from the majority of the banks classified as REBs in the rest of the country. In contract to non-Texas real estate specializing banks, those in Texas banks put substantial assets into much riskier construction and development loans, and in loans on commercial property, such as office buildings, hotels and shopping centers. In a poor real estate market, these loans performed very poorly. The analysis indicates that the Texas experience is not a basis for rejecting the view that the commercial bank industry can safely replace the declining thrift industry as a major source of residential mortgage financing.

Playing for time: the Fed’s attempt to mange the crisis as a liquidity problem

Purpose - – The purpose of this paper is to examine the events leading up to the Great Recession, the US Federal Reserve’s response to what it perceived to be a short-term liquidity problem, and the programs it put in place to address liquidity needs from 2007 through the third quarter of 2008. Design/methodology/approach - – These programs were designed to channel liquidity to some of the largest institutions, most of which were primary dealers. We describe these programs, examine available evidence regarding their effectiveness and detail which institutions received the largest amounts under each program. Findings - – We argue that increasing financial fragility and potential insolvencies in several major institutions were evident prior to the crisis. While it is inherently difficult to disentangle issues of illiquidity from issues of insolvency, failure to recognize and address those insolvency problems delayed necessary adjustments, undermined confidence in the financial system and may have exacerbated the crisis. Research limitations/implications - – Disentangling issues of illiquidity from issues of insolvency is inherently difficult and so it is not possible to specify a definitive counterfactual scenario. Nonetheless, failure to recognize and address the insolvency problems in several major institutions until more than a year after the crisis had begun delayed the necessary adjustment and undermined confidence in the financial system. Originality/value - – This paper is among the first to analyze data showing the amounts of lending and the distribution of these loans across institutions under the Fed’s special liquidity facilities during the first 18 months of the financial crisis.

The World of Unintended Consequences: A Post-Mortem on Regulation Q and Prologue for the Future

The 2007–08 financial crisis has posed substantial challenges for bankers, economists and regulators: was it preventable, and how can such crises be avoided in future? This book addresses these questions. The Financial Crisis and the Regulation of Finance includes a comprehensive overview of the crisis and reviews the theory and practise of regulation in the UK and worldwide. The contributors – all international experts on financial markets and regulation – provide perspectives and analysis on macro-prudential regulation, the regulation of financial firms, and the role of shareholders and disclosure.

A Discussion of Technology and Productivity in the Firm

(2002) provides us with interesting insights into the effects of computers and capital investment on labor productivity and wage dispersion. Drawing heavily upon the theoretical framework of (1999) and more specifically of (1997), he seeks to explain and bring together four sets of stylistic facts. The first is that over the 1975–92 period, the dispersion of wages has increased. The second is that this increase in dispersion appears to hold for a subset of manufacturing firms as well as for the entire sample. Third, it appears that the dispersion of productivity across plants has increased over the period. Finally, there is evidence that wages and productivity are positively correlated.