Stuart I. Greenbaum

Equilibrium loan pricing under the bank-client relationship

Abstract We determine the loan interest rate policy of a lender who is better informed about a client than other potential lenders. The informational advantage possessed by the informed lender derives from the durability of information acquired as a result of an extant relationship. Given heterogeneous potential loan rate offers to the client by competitive lenders and client search costs, the incumbent lenders policy of loan interest rate offers is examined. We show that the optimal loan rate will exceed the incumbent lenders cost of funds and will exceed the average offer of competing lenders. The potential lenders will offer loan rates that are exceeded by their cost of funds, implying immediate losses in order to attract the client and to thereby earn expected profits in the future. Finally, we show that the expected remaining duration of a lender-client relationship is decreasing in the existing length of the relationship. Thus, clients that have been with a particular lender longer will be more likely to leave and establish a relationship with another lender.

Bank funding modes: Securitization versus deposits

We examine a banks choice of whether to fund the loans it originates by emitting deposits or to sell the loans to investors. With common knowledge of loan quality and laissez faire banking, we find that the choice is irrelevant. With asymmetric information but without government intervention, we find that better quality assets will be sold (securitized) and poorer quality assets will be funded with deposits. Public regulation can influence the banks choice; subsidies can cause a bank to favor deposit funding, but mutual funds and third-party insurers may mitigate the effects of governmental subsidies.

Savings and loan ownership structure and expense-preference☆

Abstract This paper studies the influence of ownership structure on managerial expense-preference behavior. The hypothesis is that the greater the diffusion of ownership, the weaker is the monitoring by owners and the greater is the degree of expense-preference behavior. Whereas expense-preference behavior affects inputs, particularly on-the-job consumption of managers, well-functioning managerial labor markets should resolve the problem by equating the total compensation of managers across firms of different ownership structures. A more serious problem, however, is the potential impact of expense-preference behavior on output. Evidence from the savings and loan industry is adduced indicating that the more diffuse ownership structures associated with mutuality exhibit greater agency costs through the expansion of inputs and outputs beyond profit maximizing levels.

Innovations in Interest Rates, Duration Transformation, and Bank Stock Returns

This paper studies the cross-sectional variation in the sensitivity of bank stock returns to interest-rate innovations. An econometric framework is developed to estimate the mismatch between asset and liability durations. The innovation sensitivity is then related to duration transformation. The results indicate that banks are exposed to interest-rate risk and that the innovation sensitivity is positively related to duration transformation. Copyright 1992 by Ohio State University Press.

The Loan Commitment as an Optimal Financing Contract

This paper provides an imperfect information explanation for the existence of bank loan commitments when both the bank and the potential borrower are risk neutral. The borrower is assumed to have access to a two-stage investment project wherein the investment required in the second stage is not known at the outset. The unknown investment requirement is revealed to the borrower, but not to the bank, at the beginning of the second stage. If the investor borrows at the beginning of the first stage, the realization at the beginning of the second stage might prompt a default in a situation where the project yields positive net present value. The reason is that the borrower does not regard the first-stage investment as a sunk cost. We show that a two-stage contract resembling a loan commitment can solve this under-investment problem.

Twin information revolutions and the future of financial intermediation

Two information-related trends have dramatically altered our perceptions of financial intermediation in recent years. These trends are: (1) an ongoing paradigm shift in financial-economic theory and regulation that focuses on the role of financial intermediaries in overcoming informational problems in financial contracting and transactions as their primary source of value creation, and (2) a protracted series of technology shocks with order-of-magnitude effects on the costs of transmitting and processing information.

Secular Change in the Financial Services Industry

THE PR13SENT PAPER oSers an interpretation of the process of secular change in the financial services industry. The primary activity of the industry is taken to be financial intermediation, a process by which the menu of claims available to wealth owners is transformed and/or augmented. Since the set of all firms engaged in financial intermediation is so widely inclusive and disparate, it is useful to distinguish between those firms engaged in intermediation as a primary activity and those performing such services as an adjunct to other business. The former group we refer to as members of the financial services industry, recognizing that the criterion for inclusion in the industry lacks

Bank reserve requirements and monetary aggregates

The paper criticizes the traditional belief in the usefulness of reserve requirements for the control of monetary aggregates. It is shown that the efficacy of this policy tool is maintained only if the incentive it provides for financial innovations is ignored. If the relevant monetary aggregate is broader than that which is reserve-constrained, we show that reserve requirements may be counter-productive. An alternative policy involving the payment of interest on voluntarily held reserves is proposed and analyzed. It is shown that this approach has the stabilization effects attributed to reserve requirements, but without any of the latters adverse incentives.

Twenty-Five Years of Banking Research

0 More than a century ago, Thorstein Veblen was asked about his insights into American institutions. He commented that his acuity was attributable to the distance he had achieved from his object of study. My perspective is one of just enough involvement to be confused by the mass of detail. My involvement began 35 years ago, before the twin revolutions of information, the reinterpretation of financial intermediation in terms.of information economics and the enormous decline in information costs in the

Loan Commitments and the Management of Uncertain Credit Demand

We provide an explanation for loan commitments unrelated to borrower creditworthiness. In our model, banks can use loan commitments to reduce uncertainty regarding their own future funding needs. Given a cost advantage to banks that can acquire such information, there exists an equilibrium demand for commitments by riskneutral firms. The purchase of the loan commitment and the choice of contract terms reveals the buyers private information regarding future credit needs. In order to ensure the sorting of the a priori indistinguishable applicants according to their private information, we show that a usage fee applied to the commitment holders unused credit line is necessary.