Commercial Bank Deposits Research Articles

Demand estimation and consumer welfare in the banking industry

This paper estimates a structural demand model for commercial bank deposit services in order to measure the effects on consumers given dramatic changes in bank services throughout US branching deregulation in the 1990s. Following the discrete choice literature, consumer decisions are based on prices and bank characteristics. Consumers are found to respond to deposit rates, and to a lesser extent, to account fees, in choosing a depository institution. Moreover, consumers respond favorably to the branch staffing and geographic density, as well as to the bank’s age, size, and geographic diversification. Consumers in most markets experience a slight increase in welfare throughout the period.

Banknotes and Economic Growth

Modern paper currency contributes little to productive investment. This shortcoming is not inherent to paper money. It stems from the fact that such money is monopolistically supplied by public monetary authorities that are poor intermediaries. Commercial banknotes, in contrast, are just as capable as commercial bank deposits are of supporting efficient intermediation and, through it, more rapid economic growth. We demonstrate this advantage of commercial banknotes in a modified endogenous growth model, and use the model to simulate, for a sample of developing countries, steady-state growth rate gains from various degrees of banknote deregulation. The simulated gains are large compared to those from conventional forms of financial liberalization.

Evidence on the bank-lending channel in Ukraine

The paper examines evidence for a bank-lending channel in Ukraine. We use a panel of bank balance sheet data to estimate the response of bank lending to changes in monetary policy between 1998 and 2003. In particular, we segregate banks according to their asset size, capitalization and liquidity standing to test whether lending responses differ depending on the strength of a bank. The main result is that undercapitalized banks are more affected by a monetary policy change than is an average bank, which is consistent with the bank lending channel hypothesis, suggesting that monetary policy can affect deposits of commercial banks forcing them to change lending, which influences the amount of investment in the economy.

Stability of the Demand for Real Narrow Money in Indonesia: Evidence from the Pre and Post Asian Crisis Era

The stability of the demand for real M1 in Indonesia is empirically examined using quarterly data between 1981 and 2002. A cointegrated VAR methodology that isolates the period of structural breaks in the data generating process of the variables, caused by the Asian crisis, is used. The results show that the nominal M1 demand function is long run homogenous in the price level and the price level itself is endogenous in the equation for nominal M1. Therefore, a reparameterization towards the real M1 demand function is necessary. In the pre and post Asian crisis era, the demand function for real M1 in Indonesia is empirically stable and consists of a small number of variables. In the long run, the real private household consumption spending forms the permanent part of the demand for real M1 balances. Meanwhile, in the short run, the opportunity cost of holding real M1 balances, measured by the 1-month nominal interest rate of time deposits in commercial banks, and agents' seasonal preference for real money balances, are key determinants of the demand for real M1 balances. In addition, there is evidence of a co-breaking relationship between the real M1 balances and the real private household consumption spending in Indonesia during the Asian crisis.

ANALISIS DAMPAK KEBIJAKAN MONETER TERHADAP VARIABEL MAKROEKONOMI DI INDONESIA TAHUN 1983.1 - 2003.2

The objectives of this study are to analyze the effect of monetary policy on Indonesian economy and which monetary instruments can explain the variability of macroeconomic variables better.We apply Vector Error Correction Model on quarterly Indonesian economic data during period of 1983.1 - 2003.2. We observe monetary policy variables namely base money, SBI interest rate, one month commercial bank deposit interest rate, and macroeconomic variables namely consumer price index, gross domestic product, and exchange rate (rupiah/dollar). The model approach provide us two quantitative measurements, (i) impulse response function that can trace the response of one endogenous variable caused by shock/ innovation of other variables in the model; (ii) variance decomposition to show the relative contribution of certain endogenous variable variability.The result of impulse response function shows that economic growth did not response the shock of base money while on the other hand the base money has significant effect on inflation. This leaves a price puzzle and liquidity puzzle. The use of SBI as policy variable gives better result than base money as price puzzle and liquidity puzzle vanish. The result of variance decomposition shows that base money contributes only 5% on inflation but it did not give any contribution on economic growth fluctuation. While SBI has better capability in explaining the economic growth fluctuation until 14%. The interesting result is policy variables (base money and SBI) have best contribution in explain the fluctuation on exchange rate. These findings assert that policy shock is well responded by exchange rate rather than other economic variables.Keywords: monetary policy, impulse response function, variance decomposition.JEL : C32, E52, F31, F43

Political Determinants of Commercial Bank Behavior in Latin America: The Case of Bolivia

Research on the determinants of commercial bank behavior has generally focused on financial and economic variables, ignoring political factors. Extending an earlier study by Brock and Suarez (2000) [Journal of Development Economics], we provide empirical evidence from Bolivia's recent experience that political events are important determinants of bank behavior. We find that news about the zero coca policy initiated in 1998, cancer news regarding the former president Banzer in 2001, and the recent 2002 political election, which was tied to the coca war, are all associated with changes in commercial bank spreads and deposits, affecting bank profits and growth. Our results are consistent with cross section studies that find that political instability contributes the bid-ask spread in both industrial and developing countries' asset markets.

Demand Estimation and Consumer Welfare in the Banking Industry

This paper estimates a structural demand model for commercial bank deposit services. Following the discrete choice literature, consumer decisions are based on prices and bank characteristics. The results, based on the U.S. for 1993-1999, indicate that, with respect to prices, consumers respond to deposit rates, and to a lesser extent, to account fees, in choosing a depository institution. Moreover, consumers respond favorably to the branch staffing and geographic density, as well as to the bank's age, size, and geographic diversification. In light of the banks' responses to regulatory changes throughout the period, most markets experience a slight increase in welfare.

Interest rates and information geometry

Interest rates and information geometry

Persistence of regulatory innovation: MMMFs and financial intermediaries

Regulation-induced innovation may persist in the deregulated environment if the fixed costs of innovation are too high to be incurred without the incentives created by binding regulation. The example of money market mutual funds (MMMFs) illustrates the dynamics leading to lasting change. The effects of MMMFs' entry on thrift and commercial bank deposit shares are examined. MMMFs are found to substitute for thrift but not commercial bank deposits. MMMFs reduced thrift deposit share; deregulation did not restore lost share; and substitutability persisted into the post-regulation environment. With increases in GNP, MMMFs now acquire share that would conceivably have gone to banking institutions.

The Reform of Federal Deposit Insurance

In early 1989, the system of deposit insurance in the United States was in crisis. The Federal Savings and Loan Insurance Corporation (FSLIC), the U.S. government agency that provided deposit insurance for savings and loan (thrift) institutions, had sustained massive losses from the insolvencies of hundreds of thrifts. Tens of billions of dollars of general Treasury revenues will be necessary to make good the losses in the insurance fund, which had previously been financed solely through premiums assessed on thrifts' deposits. The Federal Deposit Insurance Corporation (FDIC), which provides similar insurance for deposits in commercial banks, has sustained much smaller losses but is considered to be in poor enough financial condition that its premium assessments will increase substantially. This article will review the current system of deposit insurance and advocate a set of necessary reforms.

Symposium on Federal Deposit Insurance for S&L Institutions

Federal deposit insurance was introduced to eliminate the bank runs of the Great Depression: the FDIC (Federal Deposit Insurance Corporation) was created in 1933 to insure commercial bank deposits, and the FSLIC (Federal Savings and Loan Insurance Corporation) was created in 1934 to insure savings and loan association (S&L) deposits. Following a decade of neglect, the Bush administration and Congress moved early in 1989 to resolve the most serious problems yet to confront federal insurance of U.S. bank deposits. How did S&L losses expand so rapidly and unexpectedly? How should FSLIC be redesigned to avoid a reoccurance? Who is going to pay for the existing FSLIC losses? What are the future prospects for the S&L industry?

Litan's What Should Banks Do?: A Review Essay

a What Should Banks Do? a recent book by Robert E. Litan (1987), poses in its title a policy question that has been with us since banks were first chartered in the United States in the early nineteenth century. The American polity has always considered depository institutions-especially commercial banks-to be special. They have been seen as bastions of great economic and political power; they provide a common and important input (credit) for many enterprises and many household production units; they are at the center of the payments mechanism; and their deposits are an important means of wealth storage. Depository institutions have been-and continue to be-among the most heavily regulated entities in the U.S. economy. As the 1 980s come to a close, the title question of Litan's book is especially pertinent. At the beginning of the decade depository institutions-especially savings and loan associations and savings banks (collectively, thrifts) -experienced substantial deregulation. That experience alone would be expected to create turmoil and new winners and losers in a more competitive environment.' The rapidly improving technologies of information processing (computerization) and telecommunications-both of which are important inputs into banking services-have made it easier for financial institutions to enter new markets and to offer new services. This, in turn, has brought more financial institutions, depository and nondepository, into competition with each other. The same technologies have meant more international competition for U.S. financial institutions in both domestic and overseas markets. And the turmoil, compounded by inadequate policies (discussed below), severe sectorial recessions in agricultural and energy-related areas (especially in the Southwest), and a large overhang of reduced-value Third World country debt, has already created a severe strain on the federal insurance fund that guarantees deposits in most thrifts (the Federal Savings and Loan Insurance Corporation or FSLIC) and is likely to do so for the similar fund that insures deposits in commercial banks and some savings banks (the Federal Deposit Insurance Corporation or FDIC). At this time of writing in 1988, the Congress is seriously considering legislation that would substantially modify or eliminate the limitations on commercial banks' securities operations contained in the Glass-Steagall Act of 1933-another time of great turmoil in

Determinants of Commercial Bank Deposits in India

Determinants of Commercial Bank Deposits in India

Interrelations between the United States and the United Kingdom, 1873–1975

This article is an excerpt from a monograph, Monetary Trends in the United States and the United Kingdom: Their Relation to Income, Prices, and Interest Rates, 1867–1975, that the University of Chicago Press has scheduled for publication in July 1982. Earlier in the monograph, we estimate a single demand curve for money for the United States and the United Kingdom, and also show that velocity in the two countries had parallel movements and that the rates of change of velocity were nearly identical in the two countries for most of the century we cover. Similar behavior of velocity in the two countries requires in addition to a largely common demand curve similar behavior of the variables affecting the demand for money. Chapter 7 from which this excerpt is taken begins by examining the interrelations between velocity in the two countries. The excerpt though self-contained is clearly incomplete. Note that the basic data are geometric averages of annual data for cycle phases (expansions or contractions) which average 2.0 years in length for the United States, 2.8 years for the United Kingdom. Rates of change ( g with a subscript for the variable) for a phase are the slopes of straight lines fitted to the logarithms of three successive phase averages (the phase in question, the prior phase, and the following phase). Money refers to currency plus adjusted demand and time deposits of commercial banks held by the public. Income refers to net national product. Nominal money ( M) or income ( Y) is income in dollars or pounds at current prices. Prices ( P) refer to the implicit price index obtained by dividing national product in current prices by national product in constant 1929 prices. Velocity ( V) is the ratio of nominal income to nominal money. Short-term interest rates refer to the US commercial paper rate and the UK rate on 3-month bank bills. Demand shift and postwar readjustment effects refer to the values of dummy variables in the demand curves for each country. These effects allow for an upward shift in the demand for money during selected phases of economic uncertainty and for readjustments in the demand for money following World Wars I and II.

Deposit rate ceiling deregulation and mortgage innovation

In many countries household financing of housing purchases has assumed a special role and as a consequence constraints have been imposed on financial institutions and on financing contracts. In addition, of course, direct subsidization of housing is pervasive. In a macroeconomic environment with inflation and variable interest rates, the constraints sometimes lead to problems for lenders and borrowers. In the U.S. these problems have resulted in pressures to change the nature of the lending institution, the financial intermediation structure and/or the mortgage contract. This paper considers the use of new, innovative, mortgage contract designs as a method of portfolio diversification when thrift institutions face deposit-rate ceiling deregulation. Since thrift institutions have been more constrained than commercial banks, changing the constraints on the former may lead to behavioral changes by the latter. Alternative scenarios about commercial bank deposit rate behavior are examined. It is found that contracts exist that minimize savings reallocation toward commercial banks, thus protecting, in a sense, the specialized mortgage lending institutions (thrift institutions). These contracts also have nice properties for mortgagors during inflationary periods. However, it is also found that certain new mortgage contracts may protect thrift institutions without maintaining the historical flow of capital into the housing sector.

Optimal Reserve Requirement Ratios Against Bank Deposits for Short-Run Monetary Control: Note

Commercial bank deposits are most commonly classified as either demand deposits or time deposits. Moreover, reserves are legally required to be held against both tpes of deposits, wiF lower requirements usually being applied to the latter. Although this differentiation of reserve requirements was originally based on the general banking principle of matching the liquidity of assets and liabilities, it also has been mentioned as an instrument of monetary stability and control. For example, Poole and Liebennan [8] have argued that required reserve ratios against bank deposits, if set appropriately, could improve the central bank's control of monetary aggregates. They suggest that if the central bank attempts to control the level of narrowly defined money, which includes bank demand deposits and currencyMl, the optimal reserve requirementratio against time deposits should be zero; whereas, if the central bank's intermediate objective is M1 plus time deposits M2, then the reserve requirement ratio against time deposits should be identical to the ratio against demand deposits. 1

Have Multibank Holding Companies Affected Commercial Bank Performance?

Since the late 1960s there has been a rapid expansion of multibank holding companies which has had far-reaching impacts on the structure of banking in the nation. These multibank holding companies (MBHCs) were established as alternatives to branching systems in a number of states where branch banking was prohibited or severely limited. The holding company device for controlling and managing banks is not new—having been used since about the turn of the century—but its importance has increased dramatically in the last decade. MBHCs’ control of commercial bank deposits increased from 8 percent at the end of 1965, to 16 percent at the end of 1970, and to 34 percent at yearend 1976.

Money and Money Substitutes: A Time Series Analysis of Household Portfolios

An important open question persists in monetary theory: To what extent are interest-bearing liquid assets effective substitutes for money (currency outside banks and demand deposits adjusted) in the aggregate portfolio of the household sector? Clearly, such assets may not be substituted directly for money as a medium of exchange. Yet they may be poor or excellent portfolio substitutes, depending on the facility with which the household sector adjusts asset holdings to changes in interest rates. The question is of scientific interest for two distinct, but related, reasons. The first is the well-known assertion that if such adjustments are highly sensitive, procyclical changes in the income velocity of money may occur and may thus attenuate the intended effects of a specific monetary (stock) policy initiated by the central bank (Gurley [14, esp. pp. 9-25], Gurley and Shaw [15]). According to this view, the rapid growth of nonbank financial intermediaries and of bond markets throughout the past three decades may have weakened the effectiveness of monetary policy.1 A second reason has to do with the most appropriate deElnition of money. Friedman and Meiselman [ 1 1 ] and Friedman and Schwartz [12], for example, reason that the U.S. money supply should preferably include not only publicly held currency and demand deposits, but also time deposits in commercial banks. Kane

Capital Management by Holding Company Banks

The bank holding company movement has had a dramatic impact on the U.S. banking industry. Since 1966 approximately 1,100 bank holding companies have been formed; they now account for 64.7 percent of the commercial bank deposits in the country.' There is ample incentive for bank management to form a holding company, since such a formation allows the firm to expand its activities into areas that are restricted to commercial banks. In addition, bank holding companies have considerably greater flexibility in managing their debt/equity position than do individual independent banks. This flexibility of management of bank holding companies with respect to both their assets and liabilities may have led to a more aggressive management of their banking subsidiaries with regards to their capital and risk positions. This paper examines the capital positions of the largest banks in the United States. The hypothesis to be tested is that banks affiliated with

The Performance of Bank Holding Company Acquisitions: A Multivariate Analysis

The substantial growth in acquisitions of commercial banks by registered bank holding companies has had a marked effect on the structure of commercial banking. In 1971 alone, following the 1970 amendment to the Bank Holding Company Act of 1956, deposits at affiliated commercial banks rose from less than one-fifth to more than one-half of all commercial bank deposits in the United States. The concern that the change in market structure brought about by the increasing influence of holding companies would permanently worsen the performance of the commercial banking system has resulted in a series of empirical studies attempting to measure the effects of acquisition on bank performance.' While the procedures employed varied slightly, these studies all used the same basic methodology and, not surprisingly, obtained quite consistent results: they have all basically concluded that holding company acquisitions have little effect on performance. Several aspects of the methodology employed in these studies have recently been criticized by Johnson and Meinster.2 Two such aspects were the use of univariate rather than multivariate analysis and the failure to correctly account for the postacquisition interval. This study has two goals. First, data similar to those used in earlier studies will be subjected to multivariate analysis to determine whether the use of multivariate analysis will confirm the outcome of earlier studies. We hypothesize that some performance measures used in the earlier studies are highly correlated with each other and that some measures might act differently in combination than they would if tested separately. Therefore,