Obligations Of Banks Research Articles

Information Needs and Efficiency in Banking Services - A 'Demand-Side' Approach

The financial system has always been subject to complex public scrutiny for a number of reasons, aimed at ensuring, for example, the efficient mobilization of savings, the effective management of banking crises and their possible domino effects, while enhancing competition and safeguarding consumers, in the general interest. Ensuring transparency in commercial transactions is part and parcel of this process of scrutiny and is one of the primary obligations of banks, and lenders in general, which are required to inform their customers clearly and transparently, with respect to the characteristics, terms and conditions of their products and services. The changes taking place in the financial system are encouraging the reform of the transparency regulations. Among the most incisive transformations is the spread of complex financial instruments and the broadening of the range of available alternatives. The reform projects that have secured the greatest consensus to date call for the introduction of firmer requirements for the full disclosure, in intelligible terms, of the characteristics and conditions of the services offered, with respect to the amount and structure of the data that should be made available to consumers to enable them to make informed decisions, without leaving them with the impression that they need further information. The aim of this paper is to provide a clear picture of the amount and characteristics of the information that should be made available to consumers when taking out a loan or mortgage. To achieve this aim certain issues must first be addressed, such as investigating the characteristics of the loan process and organizing the information collection activities.

Blurring the Line between Primary and Secondary Obligations of Banks: Demand Guarantees in the Financing of International and Domestic Transactions

Blurring the Line between Primary and Secondary Obligations of Banks: Demand Guarantees in the Financing of International and Domestic Transactions

The Dynamics of Deposit Insurance and the Consumption Trap

We investigate a banking system subject to repeated macroeconomic shocks and show that without deposit rate control, the banking system collapses with certainty. Any initial level of reserves will delay the collapse but not avoid it. Even without a banking collapse, the economy still converges to a consumption trap with positive probability. Savings are maximal in the consumption trap, but are used entirely to pay back obligations of banks. No long-term investments can be financed and GDP is minimal. We discuss stronger intervention rules that avoid both a collapse and the consumption trap, confirming that capital requirements are an early indicator signaling when intervention may become necessary. Our analysis provides an explanation why economies which experience a banking crisis may endure long-lasting economic downturns.

The Swedish banking crisis: roots and consequences

The article analyses the Swedish banking crisis in the early 1990s. Newly deregulated credit markets after 1985 stimulated a competitive process between financial institutions where expansion was given priority. Combined with an expansive macro policy, this contributed to an asset price boom. The subsequent crisis resulted from a highly leveraged private sector being simultaneously hit by three major exogenous events: a shift in monetary policy with an increase in pre-tax interest rates, a tax reform that increased after tax interest rates, and the ERM crisis. Combined with some overinvestment in commercial property, high real interest rates contributed to breaking the boom in real estate prices and triggering a downward price spiral resulting in bankruptcies and massive credit losses. The government rescued the banking system by issuing a general guarantee of bank obligations. The total direct cost to the taxpayer of the salvage has been estimated at around 2 per cent of GDP.

When Missions Matter: Professional Priorities and the “Stepchild” of Supervisory Programs

If there is a clear bottom line to the literature on political control of the bureaucracy, it is that control is never complete. Principals can be multiple, priorities diverse, preferences for policy incomplete and not articulated, and intentional choice lost in the muddle. Yet as long as bureaucratic studies remain focused upon outside political actors, or at best, the political appointee at the helm of an agency, we will not make many advances in our understanding of important organizational dynamics that act as an independent force upon the phenomenon of bureaucratic behavior. This article suggests a politically cognizant return to the bureaucracy by examining the distinct management efforts of the Fed, the Office of the Comptroller of the Currency, and the FDIC to supervise the consumer and civil rights obligations of banks, known collectively as “compliance” obligations. The same mandates, issued and overseen by the same political principals, and implemented within common professional cultures, have been managed in ways that vary in the context of each agency's organizational mission. It is argued that organizational mission provides an empirical link between the priorities and mandates imposed from a system of “overhead democracy,” and the influential priorities of a common professional group (bank examiners) in each of the agencies.

Comparing Costs of Note Issuance Facilities and Eurocredits

Since early 1984, note issuance facilities (NIFs) have in considerable degree replaced syndicated Eurocurrency bank credits in international credit markets, especially for borrowers in industrial countries, because borrowers have found it cheaper to bypass bank syndications and obtain funds more directly by issuing Euronotes. Factors behind this include an increasing awareness of borrowing possibilities, more freedom for Japanese investors to buy foreign securities, a drop in the relative popularity of bank obligations with investors, and banks' desire to slow asset growth to improve capital ratios.Measurement of the cost savings to borrowers on NIFs as compared with Eurocredits is difficult because of limited comparison possibilities. Most NIFs arranged so far have not been drawn on through issuance of notes, and few of the actual issuers have arranged LIBOR-priced Eurocredits recently. In the 12 cases, as of mid-1985, where meaningful comparisons could be made, it appears that the cost savings to the borrowers ranged from about 10 to around 50 basis points. All of the savings were in the interest spread, where the NIFs appear to have been about 15 to 55 basis points cheaper. Fee costs were slightly higher on NIFs than on Eurocredits; although front-end fees are lower, the total fee costs for NIFs are higher because of the annual facility fee paid to banks that underwrite the NIF.

The Obligations of Banks in the Public Securities Markets

The Obligations of Banks in the Public Securities Markets

Potential Insolvency, Market Efficiency, and Bank Regulation of Large Commercial Banks

Bank regulators tend to disagree with the idea that markets can play a role in bank regulation. The markets for bank securities are viewed by regulators as inefficient and lacking the necessary information to demand sufficient risk premiums on bank obligations to affect bank management decisions. On the other hand, bankers who have an active market for their securities tend to place faith in market assessments to determine the cost of management policies; therefore, they tend to think that the market plays an important role in “regulating” bank management decisions. The regulators are perhaps correct about the markets for small and medium–sized banks, but for those banks which have an active market for their securities, do investors adjust rates of return for the presence of increased potential of bankruptcy? If so, when does the adjustment take place?

MARKET TESTS OF CAPITAL ADEQUACY OF LARGE COMMERCIAL BANKS

FOR AS LONG as the public record has exposed bank supervisory policy, bank supervisors have wanted more capital for commercial banks. Sixty years ago, in the first-known explicit statement on capital policy, the Comptroller of the Currency, John Skelton Williams, stated a long well-known but now forgotten standard for bank capital: one dollar of capital to ten dollars of deposits.' The standards suggested by the supervisors have seldom been met in practice. Declines in bank capital adequacy ratios usually occurred during periods of more than average economic and banking growth [20]. Faced with an accomplished decline in capital, the supervisors then usually retreated from their former position and took up new ones, only to be left behind again in the next great period of banking growth. The bank structure has recently passed through such a period and the decline of bank capital has been lamented by Chairman Burns [4]. One explanation of the disparity between supervisory standards and the defacto levels of bank capital may have been that the supervisors were out of touch with the standards of safety required by the money and capital markets. Investors in the capital markets are constantly assessing the risk-return relationship of bank obligations which are subordinate to deposits issued by the larger banks. Bank managers, responding to these signals from the market, attempt to implement optimizing capital policies which will minimize the total cost of funds. The question to which this study is directed is the sensitivity of the capital market to differential bank capital standards established by managerial and regulatory policy. Does the capital market require differential risk premiums on unsecured obligations issued by large banks which have different capital positions? If there is no relationship between the risk premiums required by the market and the capital position of the issuing banks, capital must be adequate or perhaps abundant for the perceived risk in these investments. Yet, if the market demands significant risk premiums which are a function of the banks' capital position, these banks are approaching a level where the market is questioning the adequacy of their capital. Perhaps the market for unsecured obligations of large banks can provide an early warning system to alert bank investors and regulators about the capital adequacy levels of these banks. This study reports on three tests: one test on the capital notes sold in competitive capital markets by large banks and two tests on the equity shares of large banks

Williams Claim.

State responsibility — Kinds of — Interference with property — Nationalization of banks — Subsequent annulment of prior obligations of banks — Whether a confiscation of interests of obligees.

Has Bank Supervision Been in Conflict With Monetary Policy

IN a recent article in this REVIEW 2 Mr. Robert V. Rosa refers to discussions of relation of bank supervision to by E. A. Goldenweiser, G. L. Bach, and a Subcommittee of Joint Committee on Economic Report. supervision is one of intangibles of control that has attracted considerable attention. . . Although none of writers would appear to believe that supervision can practicably serve as an active arm of and credit policy, Bach does rightly stress great importance of preventing bank supervision from going counter to in periods. 3 Bank supervisory has probably accentuated deflationary tendencies at times; and at other times relaxation of supervisory standards has tended to remove restraints on bank credit expansion. However, assumption of Bach, which seems to be prevalent, that in critical periods influence of bank supervision was directly counter to policy needs mnore scrutiny than has been given to it. This article is an examination of this assurmption period of late I920'S and I930's.' XVhether bank supervisory has been in conflict with depends in part on meaning attached to term monetary poticy. If is defined as government and central bank actions designed to influence rates of interest, or certain specific rates such as Federal Reserve discount rates, it can of course be said that supervisory during at least a portion of I929-33 period was in conflict with monetary policy. However, such a narrow interpretation of misses heart of problem of relation of to business activity and degree of full employment. Manipulation of or pressure on interest rates is not only method, and past decades has not been principal method, of influencing quantity of money or circulating medium, of which by far greater part now consists of obligations of banks in form of deposits. Under fractional reserve system as it developed in United States in nineteenth century, banks tended to expand their earning assets and deposits to limit permitted by reserves, as defined by law, available to them. This practice continued after establishment of Federal Reserve System, and in fact still continues. That is to say, Federal Reserve member banks do not as a general practice maintain more (reserves in of those required by law) than are needed use as clearing balances at Federal Reserve banks. special circumstances of period from I934 to I942, when this practice was interrupted or only partially followed and excess reserves were abnormally large, are discussed below. On June 30, I 9I7, legal of banks which were members of Federal Reserve System were fully concentrated in Federal Reserve banks. Since that date of member banks have consisted solely of deposit balances in Federal Reserve banks. aggregate amount of these balances depends on volume of assets held by Federal Reserve banks in of other liabilities, including capital accounts, of Federal Reserve banks. Consequently, since I9I7 most important influence on money supply-and during most of period since that date dominant influence is volume of assets held by Federal Reserve banks. It is not an exaggeration to say that has consisted primarily of asset acquisition and relinauishment Dolicies of Federal Reserve f' e opinions expressed in this article represent personal views only. 2 Robert V. Rosa, The Revival of Monetary Policy, this REVIEW, XXXIII (February 1951), 29-37. 'Ibid., p. 35. 'In Federal Reserve Policy-Making (New York, I950), which is work of Professor Bach to which Mr. Rosa refers, specific mention is made of I929-I933 period (p. 251). Reference is also made to cognizance for at least last decade or two of the cross-implications of banksupervisory and policies (p. 250).