Timothy J. Yeager

Valuation and systemic risk consequences of bank opacity

We examine the effects of opacity on bank valuation and synchronicity in bank equity returns over the years 2000–2006 prior to the 2007 financial crisis. As expected, investments in opaque assets are more profitable than investments in transparent assets, and taking profitability into account, have larger valuation discounts relative to transparent assets. The valuation discounts on opaque asset investments decline over the 2000–2006 period only to be followed by a sharp reversal in 2007. The decline is coincident with a rise in bank equity share prices, decrease in transparent asset holdings by banks, and greater return synchronicity – evidence consistent with a feedback effect. 2012 Elsevier B.V. All rights reserved.

Should the FDIC Worry About the FHLB? The Impact of Federal Home Loan Bank Advances on the Bank Insurance Fund

Does growing commercial-bank reliance on Federal Home Loan Bank (FHLBank) advances increase expected losses to the Bank Insurance Fund (BIF)? Our approach to this question begins by modeling the link between advances and expected losses. We then quantify the effect of advances on default probability with a CAMELS-downgrade model. Finally, we assess the impact on loss-given-default by estimating resolution costs in two scenarios: the liquidation of all banks with failure probabilities above two percent and the liquidation of all banks with advance-to-asset ratios above 15 percent. The evidence points to non-trivial increases in expected losses. The policy implication is that the FDIC should price FHLBank-related exposures.

Economies of Integration in Banking: An Application of the Survivor Principle

Despite the growing concentration of U.S. banking assets in mega-banks, most academic research finds that scale and scope economies are small. I apply the survivor principle to the banking industry between 1984 and 2002 and find that the so-called economies of integration are significant. These results hold after accounting for off-balance- sheet activities and after replicating the results at the holding company level. Regression analysis reveals that deregulation of branching restrictions, especially at the state level, played a significant role in allowing banks to exploit these economies. The results also suggest that, although the absolute number of community banks will decrease over time, community banks of all sizes will remain viable in the future. A likely explanation for the paradox of significant economies of integration and small estimated cost economies is that the size benefits to a bank come from sources other than cost efficiencies.

Financial Crisis and the Supply of Corporate Credit

Analyzing syndicated loan and public debt originations by publicly traded U.S. firms between 2004 and 2011, we document a sharp migration from bank borrowing to either no borrowing or public debt issuance in the crisis years. We find evidence for a bank-lending channel; the migration from bank borrowing was more prominent and subsequent investment was lower for firms that had relationships with the more severely distressed lead banks during the crisis. The ability of many publicly traded firms to promptly disintermediate and issue their own debt provided critical but imperfect debt substitutability. Sticky interest rates and a surge in loan commitment drawdowns suggest that bank credit rationing was prevalent during the crisis as banks hoarded liquidity to reduce their risk of insolvency. Many firms originated public debt at interest rates far higher than syndicated loan rates.