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Federal Reserve Bank of St. Louis working papers are preliminary materials circulated to stimulate discussion and critial comment.

Banking

Strategic Online-Banking Adoption

In this paper we study the determinants of banks' decision to adopt a transactional web-site for their customers.

Foreign Entry and Bank Competition

Foreign entry and bank competition are modeled as the interaction between asymmetrically informed principals: the entrant uses collateral as a screening device to contest the incumbent's informational advantage. Both better information ex ante and stronger legal protection ex post are shown to facilitate the entry of low-cost outside competitors into credit markets.

The Termination of Subprime Hybrid and Fixed Rate Mortgages

Adjustable rate and hybrid loans have been a large and important component of subprime lending in the mortgage market. While maintaining the familiar 30-year term the typical adjustable rate loan in subprime is designed as a hybrid of fixed and adjustable characteristics.

Robust Non-parametric Quantile Estimation of Efficiency and Productivity Change in U.S. Commercial Banking, 1985–2004

This paper describes a non-parametric, unconditional, hyperbolic quantile estimator that unlike traditional non-parametric frontier estimators is both robust to data outliers and has a root-n convergence rate.

Why Do Analysts Continue to Provide Favorable Coverage for Seasoned Stocks?

Research has documented that the first report an investment bank affiliated analyst issues on a newly listed stock tends to be favorable. Our analysis of 16,824 relationships between analyst teams and established listed companies during 1995-2003 indicates that analyst coverage decisions of seasoned stocks are influenced by their affiliations with investment banks and mutual funds.

Central Bank Intervention with Limited Arbitrage

Shleifer and Vishny (1997) pointed out some of the practical and theoretical problems associated with assuming that rational risk-arbitrage would quickly drive asset prices back to long-run equilibrium.

The Duration of Foreclosures in the Subprime Mortgage Market: A Competing Risks Model with Mixing

This paper examines what happens to mortgages in the subprime mortgage market once foreclosure proceeding are initiated. A multinominial logit model that allows for the interdependence of the possible outcomes or risks (cure, partial cure, paid off, and real estate owned) through the correlation of associated unobserved heterogeneities is estimated.

Loan Servicer Heterogeneity and The Termination of Subprime Mortgages

After a mortgage is originated the borrower promises to make scheduled payments to repay the loan. These payments are sent to the loan servicer, who may be the original lender or some other firm. This firm collects the promised payments and distributes the cash flow (payments) to the appropriate investor/lender.

Subprime Refinancing: Equity Extraction and Mortgage Termination

This paper examines the choice of borrowers to extract wealth from housing in the high-cost (subprime) segment of the mortgage market while refinancing and assesses the prepayment and default performance of these cash-out refinance loans relative to the rate refinance loans.

Predatory Lending Laws and the Cost of Credit

Various states and other local jurisdictions have enacted laws intending to reduce predatory and abusive lending in the subprime mortgage market. These laws have created substantial geographic variation in the regulation of mortgage credit. This paper examines whether these laws are associated with a higher or lower cost of credit.

The Impact of Local Predatory Lending Laws on the Flow of Subprime Credit

Local authorities in North Carolina, and subsequently in at least 23 other states, have enacted laws intending to reduce predatory and abusive lending. While there is substantial variation in the laws, they typically extend the coverage of the Federal Home Ownership and Equity Protection Act (HOEPA) by including home purchase and open end mortgage credit, by lowering annual percentage rate (APR) and fees and points triggers, and by prohibiting or restricting the use of balloon payments and prepayment penalties.

The Impact of Local Predatory Lending Laws

Local authorities in North Carolina, and subsequently in at least 23 other states, have enacted laws intending to reduce predatory and abusive lending. While there is substantial variation in the laws, they typically extend the coverage of the Federal Home Ownership and Equity Protection Act (HOEPA) by including home purchase and open-end mortgage credit, by lowering annual percentage rate (APR) and fees and points triggers, and by prohibiting or restricting the use of balloon payments and prepayment penalties.

A Dynamic Look at Subprime Loan Performance

This paper examines the implications of delinquency on the performance of subprime mortgages. Specifically, we examine whether delinquency has any predictive power of the future performance of a mortgage.

Non-parametric, Unconditional Quantile Estimation for Efficiency Analysis with an Application to Federal Reserve Check Processing Operations

This paper examines the technical efficiency of U.S. Federal Reserve check processing offices over 1980–2003.

A Specialized Inventory Problem in Banks: Optimizing Retail Sweeps

Deposits held at Federal Reserve Banks are an essential input to the business activity of most depository institutions in the United States. Managing these deposits is an important and complex inventory problem, for two reasons.

The Delinquency of Subprime Mortgages

This paper focuses on understanding the determinants of the performance of subprime mortgages. A growing body of literature recognizes the substantial lag between the time that a borrower stops making payments on a mortgage and the termination of the loan.

When For-Profits and Not-For-Profits Compete: Theory and Empirical Evidence from Retail Banking

We model competition in local deposit markets between for-profit and not-for-profit financial institutions. For-profit retail banks may offer a superior bundle of financial services, but not-for-profit (occupational) credit unions enjoy sponsor subsidies that allow them to capture a share of the local market.

A Spatial Analysis of State Banking Regulation

We use a spatial model to investigate a state's choice of branch banking and interstate banking regimes as a function of the regime choices made by other states and other variables suggested in the literature. We extend the basic spatial econometric model by allowing spatial dependence to vary by geographic region.

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.

Year-End Seasonality in One-Month LIBOR Derivatives

We examine the markets for one-month LIBOR futures contracts and options on those futures for a year-end price effect consistent with the previously identified year-end rate increase in one-month LIBOR. The cash market rate increase appears in forward rates and derivative prices, which allows the derivatives to properly hedge year-end interest rate risk.

Robust Nonparametric Estimation of Efficiency and Technical Change in U.S. Commercial Banking

This paper examines the performance of the U.S. commercial banking industry over 1984–2002. Rather than measuring performance relative to the unknown (and difficult-to-estimate) boundary of the production set, performance for a given bank is measured relative to expected maximum output among m banks using no more of each input than the given bank.

Input Inefficiency In Commercial Banks: A Normalized Quadratic Input Distance Approach

A normalized quadratic input distance function is proposed with which to estimate technical efficiency on commercial banks regulated by the Federal Reserve System. The study period covers 1990 to 2000 using individual bank information from the Call and Banking Holding Company Database.

The Federal Reserve Responds to Crises: September 11th Was Not the First

A primary purpose of the Federal Reserve Act of 1913 was to prevent banking panics by establishing the Federal Reserve System to function as a lender of last resort. Other types of financial crisis require similar response, however, and the Federal Reserve has repeatedly used its capacity to generate liquidity to insulate the economy from crises in financial markets.

Entrepreneurship and the Deregulation of Banking

This paper presents evidence that banking deregulation led to decreases in entrepreneurship in some U.S. regions, and to increases in others. This is contrary to recent research that found an unambiguous positive relationship.

New Evidence on the Fed's Productivity in Providing Payments Services

As the dominant provider of payments services, the efficiency with which the Federal Reserve provides such services in an important public policy issue. This paper examines the productivity of Federal Reserve check-processing offices during 1980-1999 using non-parametric estimation methods and newly developed methods for non-parametric inference and hypothesis testing.

Intermediaries and Payments Instruments

We Study an economy in which intermediaries have incentives to issue circulating liabilities as part of an equilibrium. We show that, with arbitrarily small transactions costs, only the liabilities of intermediaries will circulate, and not those of other private sector agents.

The Importance of Scale Economies and Geographic Diversification in Community Bank Mergers

Mergers of community banks across economic market areas potentially reduce both idiosyncratic and local market risk. A merger may reduce idiosyncratic risk because the larger post-merger bank has a larger customer base. Negative credit and liquidity shocks from individual customers would have smaller effects on the portfolio of the merged entity than on the individual community banks involved in the merger.

Consolidation in US Banking: Which Banks Engage in Mergers?

The number of U.S. commercial banks has declined by some 40 percent since 1984, primarily through mergers of solvent institutions. The relaxation of legal impediments to branching has enabled this consolidation, but specific characteristics of banks that engage in mergers reflect the regulatory process and market structure, as well as the bank's own condition.

The Role of a CAMEL Downgrade Model in Bank Surveillance

This article examines the potential contribution to bank supervision of a model designed to predict which banks will have their supervisory ratings downgraded in future periods. Bank supervisors rely on various tools of off-site surveillance to track the condition of banks under their jurisdiction between on-site examinations, including econometric models.

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.


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