WWW.THESIS.DISLIB.INFO
FREE ELECTRONIC LIBRARY - Online materials, documents
 
<< HOME
CONTACTS



Pages:     | 1 |   ...   | 3 | 4 || 6 | 7 |   ...   | 9 |

«Research Division Federal Reserve Bank of St. Louis Working Paper Series Understanding the Accumulation of Bank and Thrift Reserves during the U.S. ...»

-- [ Page 5 ] --

4.2.2 Banks differentiated by size We next differentiate banks by size and consider whether large banks had different cash and reserves accumulation responses than small banks. We define large banks as the top 2 percent of banks measured by assets and small banks as those with assets below the 95th percentile (leaving an intermediate group between large and small). In 2008:Q3, there were 148 banks classified in the top 2 percent; by 2010:Q2, there were 128 banks in this category, a 16 percent decline. This attrition reflects mergers, acquisitions, and failures. Since we use a pooled sample rather than a panel, sample attrition is unlikely to have a significant effect. Fig. 9 shows the cross-sectional distribution of excess reserves accumulation as a ratio to required reserves for small versus large banks.

Some noteworthy differences are reported in Tables 4 and 5.26 We focus on the CLAD results, though the Tobit results are similar.27 First, we find that large and small banks have a similar response to an increase in the opportunity cost of holding cash and ER: A 0.1 percent increase in the opportunity cost (measured as the difference between the yield on 1-year Treasury bills and the IOR) is consistent with a 1 percent decline in ER and cash holdings. The response is slightly smaller for small banks; tests of the equality of coefficients across groups reject equality at the 1 percent confidence level.

Second, we find a huge response to an increase in the penalty rate (measured by an index of interest rates on Treasury bill repos) for large banks and a much smaller response by small banks (the responses are significantly different at the 1 percent confidence level). For small banks, a 0.1 percent increase in the repo rate is consistent with a 3 percent increase in their ratio of ER and cash to deposits. We find the response of large banks to a 0.1 percent increase in the penalty rate is consistent with an increase in ER and cash of 40 percent. In the previous regressions with “all banks,” the strong response to the penalty rate is driven primarily by the response of large banks.

Returning to our discussion of disruptions in the repo and federal funds markets in 2008:Q3–2009:Q2 and 2009:Q4–2010:Q2, we find that small banks experienced a much smaller decline in trading volume in this market than large banks. While there was a decline in volumes of small bank activity, the decline, particularly between the end 26 Approximately 2 percent of the observations for the large bank sample and 0.15 percent of the small bank sample are censored.

27 The large coefficients on the 1-year Treasury bill yield minus the IOR measure of the opportunity cost for large banks are similar to the coefficients in the CLAD regression when exponentiated.

of 2009 and mid-2010, was much smaller than the decline in large bank activity. For large banks, trading volume dropped by more than half (in 2010:Q2, trading volume was 27 percent of what it was in 2008:Q3 for large bank trading). For small banks, trading volume was 51 percent of what it was in 2008:Q3.

To determine the effect of a larger capital ratio on ER and cash accumulation, we consider the total effect, which is the sum of the coefficient on the adjusted capital ratio and the coefficient on the interaction term for various levels of loan loss provision (exponentiated). In considering the effect of the capital ratio on large banks, holding the loan loss provision at 0, we find a 1 percent increase in the capital ratio results in about a 25 percent increase in the ratio of ER plus cash to deposits (focusing on the two specifications where there is significance). Holding the loan loss provision at zero, for small banks we find a 1 percent increase in capital adequacy results in a 4 percent decline in ER and cash holdings. These differences are statistically significant at the 1 percent level. What causes this discrepancy? To answer this question, we consider the total effect first for large banks and then for small banks, focusing on the coefficients for the regression that includes “bad loans 2,” since the coefficients on the relevant covariates are significant for both large and small banks for this specification.

When loan loss provisions are held constant at the 50th percentile, for large banks the total effect of a 1 percent rise in capital adequacy is a 27 percent increase in the ratio of ER and cash holdings to deposits. With loan loss provisions at the 75th percentile, the effect is a 19 percent increase. With loan loss provisions at the 95th and 99th percentiles, the effect is an 11.5 percent decrease and a 42.4 percent decrease, respectively, in cash and ER holdings. For small banks, the pattern is the opposite.

When loan loss provisions are held constant at the 50th percentile, the total effect of a 1 percent rise in capital adequacy is a 3 percent decrease in the ratio of ER and cash holdings to deposits. With loan loss provision at the 75th percentile, the effect is a 2 percent decease. However, at the 90th, 95th, and 99th percentiles of loan loss provision, there is a 2.7 percent increase, a 3 percent increase, and a 13 percent increase, respectively, in ER and cash holdings.

The behavior of small banks makes sense: As loan provisions increase, the probability of near-future write-downs rises, so we observe a small positive relationship between the capital ratios (which may be increasing due to the increase in loan loss reserves) and ER and cash accumulation—the high loan loss provisions reflect a risky position for small banks.





The behavior of the large banks is more difficult to understand. Loan assets are reported on bank balance sheets net of the loan loss reserve. When the bank increases its loan loss provision (an expense item against profits on the income statement), its loan loss reserves increase by the same amount. Therefore, higher loan loss provisions mean lower net assets (net of loan loss reserves), increasing the capital ratio. When a loan is written off, loan receivables are decreased by the size of the loan and the loan loss reserve is also reduced by the amount of the loan. These actions should not change net asset positions in the quarter in which the charge-off occurred. However, in the next quarter, the loan loss provision needs to be rebuilt; therefore, the loan loss provision increases. Banks may increase their loan loss reserves when the probability of imminent losses is higher. These accounting facts make disentangling the relationships among capital ratios, loan loss provisions, and ER and cash accumulation more difficult.

Then, why do large banks with high loan loss provisions decrease their ER holdings?

When we examine large bank behavior for the broader category of problem loans (bad loans 3), we find a 4 percent and 22 percent decline in ER at the 95th and 99th percentiles, respectively, of loan loss provisions for a 1 percent rise in the capital ratio— a smaller effect compared with the previous specification, but we still find the unusual decrease in cash and reserve holdings. Another consideration is that large banks may use a different strategy to increase their loan loss provisions than small banks. Large banks may have high loan loss provisions as an attempt to smooth income (i.e., for the tax savings they generate in times of reduced income). Thus, their loan portfolio is not as risky at the 99th percentile as the loan portfolio of small banks and therefore they are not concerned about holding more ER and cash. Alternatively, these results may reflect TARP-CPP funds. Most large banks received TARP funding during this period and the differential behavior of ER holdings may be due to higher equity holdings (in addition to lower asset holdings) from TARP investments.

We can examine the effect of loan loss provisions at a given capital ratio to attempt to answer these questions. When the capital ratio is held constant at the 50th percentile, the total effect effect of the loan loss provision on excess reserve and cash accumulation is a 41 percent decrease for large banks and a 30 percent decrease for small banks. For a capital ratio at the 90th percentile, the reduction in ER and cash is 60 percent for large banks and 46 percent for small banks. For a capital ratio at the 95th, the reduction is 70 percent for large banks and 57 percent for small banks. Thus, the differential effect of increasing capital ratios for a given loan loss provision must be related to some difference in how large and small banks account for loan loss provisions.

Finally, considering the effect of distressed loans on reserve and cash accumulation, we find larger effects for large banks, in the range of 0.6 to 1 percent, while the effect for small banks is between 0.1 and 0.2 percent. Large banks have significantly higher ratios of bad loans to deposits than small banks, and the variation across large banks is significantly higher than across small banks (the standard deviation of the ratio of bad loans 1 to deposits for large banks is 132, whereas it is 0.03 for small banks). These effects are significantly different at the 1 percent confidence level.

In summary, we find that large banks have a much stronger response to increases in the penalty rate than small banks, a stronger precautionary accumulation motive, and the relationship among loan loss provisions, capital ratios, and ER is significantly different between large and small banks — a fact that is possibly explained by accounting issues or different sources of liquidity.

Our results can be compared to those of Ashcraft et al. (2011), who examine highfrequency (intradaily) movements in ER balances rather than the lower-frequency quarterly data we use. They find that small banks appear to have credit constraints that prevent them from actively borrowing in the interbank market as large banks do; they also have limited borrowing or lending at the end of the day and hold larger intradaily and overnight reserve balances. Controlling for balance sheet characteristics, small banks are reluctant to lend at the end of the day, potentially due to the unpredictability of their payment shocks and the large fixed cost to enter the interbank market.

Ashcraft et al. (2011) find that in response to higher uncertainty about payments, banks—especially small banks—were reluctant to lend ER when balances were high and borrowing banks were more aggressive in bidding for borrowed funds when balances were low. Even though large banks may be relatively unconstrained and able to access funds easily on the market, aggregate reserve balances can become stuck in the accounts of small banks at the end of the day, leading unconstrained large banks to also keep precautionary balances. Our results are consistent in the sense that the stronger response of large banks to increases in the penalty rate and distressed loans could be caused by lack of available liquidity in the interbank market.

4.2.3 Thrifts

Thrifts are savings and loans institutions with separate charters from domestic commercial banks. Thrifts were originally created with a special function: to channel loans to the housing market. Their loan portfolios and the types of securities they can hold are also more closely regulated than commercial banks (Kwan, 1998). For example, thrifts have restrictions on the percentage of consumer and commercial and industrial loans in their asset portfolio and the percentage of nonconforming loans secured by residential or farm property that banks do not have (Office of the Comptroller of the Currency, 2013). There are also a number of other restrictions on lending that would reduce the risk of thrifts’ loan portfolios. In addition, in order to maintain its status as a qualified thrift lender, a thrift is required, among other things, to maintain qualified thrift investments equal to at least 65 percent of its asset portfolio. These investments include loans to purchase, refinance, and so on, domestic residential or manufactured housing, home equity loans, educational loans, small business loans, and loans made through credit cards, as well as securities based on mortgages on domestic residential or manufactured housing. Our results likely reflect these restrictions.

Thrifts respond similarly to all banks to the opportunity cost of holding ER: A 0.1 percent increase in the opportunity cost is consistent with a 1 percent decrease in ER and cash. Thrifts have a large positive response to increases in the penalty rate (the repo rate evaluated at the mean)—larger even than the response of large banks.28 We do not have a comparable measure of equity holdings for thrifts, so we use the Tier 1 capital ratio as a measure of capital adequacy. We find that thrifts behave similarly to small banks in terms of the relationship among Tier 1 capital requirements, loan loss provisions, and ER and cash accumulation: A 1 percent increase in the capital ratio when loan loss provisions are zero is consistent with a 17 percent decrease in ER and cash accumulation. Holding loan loss provisions at the 50th percentile, a 1 percent increase in the capital ratio generates a 16.5 percent decrease in ER and cash holdings. As the loan loss provision rises, a 1 percent increase in capital adequacy has a sequentially smaller negative effect on ER and cash accumulation. When loan loss provisions are at the 99th percentile, a 1 percent increase in capital adequacy generates only a 1 percent decrease in ER and cash holdings.

Thrifts’ reserve and cash accumulation response to an increase in distressed loans is similar to the response of large banks: A 1 percent increase in bad loans generates a 6 percent increase in ER and cash as a ratio to deposits.

In previous research, Contessi and Francis (2011) found the lending behavior of thrifts during the financial crisis behaved quite similarly to that of small banks. We find that thrift cash and ER accumulation patterns are similar to those of small banks except in two dimensions: The response to the penalty rate is much more similar to that of large banks, and the responsiveness to bad loans is much greater than that of 28 We could not separately identify the effect of the opportunity cost and penalty rate using the last observation in the quarter for the index of Treasury repo rates, which was our penalty rate for banks.



Pages:     | 1 |   ...   | 3 | 4 || 6 | 7 |   ...   | 9 |


Similar works:

«OCTOBER TERM, 2009 1 (Slip Opinion) Syllabus NOTE: Where it is feasible, a syllabus (headnote) will be released, as is being done in connection with this case, at the time the opinion is issued. The syllabus constitutes no part of the opinion of the Court but has been prepared by the Reporter of Decisions for the convenience of the reader. See United States v. Detroit Timber & Lumber Co., 200 U. S. 321, 337.SUPREME COURT OF THE UNITED STATES Syllabus MARYLAND v. SHATZER CERTIORARI TO THE COURT...»

«For Vets General Information Cryptosporidium spp. are intestinal protozoal parasites of animals and humans that cause the disease cryptosporidiosis. The primary clinical sign of infection is diarrhea, but subclinical infection also occurs. Like other protozoa, the taxonomy of Cryptosporidium is controversial. Originally the genus contained only two species, but now at least 23 species have been described. The species C. parvum, which has the widest host range, also includes several genotypes...»

«Managing a Diversified Portfolio Item type text; Electronic Thesis Authors Kolesikova, Katarina Publisher The University of Arizona. Rights Copyright © is held by the author. Digital access to this material is made possible by the University Libraries, University of Arizona. Further transmission, reproduction or presentation (such as public display or performance) of protected items is prohibited except with permission of the author. Downloaded 8-Jan-2017 05:55:22 Link to item...»

«The Alberta Gazette Part I Vol. 112 Edmonton, Saturday, January 30, 2016 No. 02 APPOINTMENTS Appointment of Non-Presiding Justices of the Peace (Justice of the Peace Act) October 19, 2015 Attrell, Stephanie Elizabeth of Lethbridge Gill, Kirandeep Kaur of Calgary Nickerson, Darcel Catherine of Morinville Petry, Kate Elizabeth of Lethbridge Smith, Lesley Ann of Calgary December 14, 2015 Copeman, Andrew Daniel of Edmonton Copeman, Jeremy Daniel of Edmonton Hobden, Larry Edward of Edmonton Le,...»

«Volunteer Manual Prancing Horse Therapeutic Riding Center is proud to be the only PATH (Professional Association of Therapeutic Horsemanship) Premier Accredited Center in the Sandhills area. Welcome to Prancing Horse! Dear Volunteer, Thank you for your interest in volunteering with Prancing Horse Therapeutic Riding. Volunteers are a vital part of our program! We could not offer these very beneficial services to our riders without you! Therapeutic riding uses equine-oriented activities for the...»

«7+((7(51$/)$7(2) 81%(/,(9(56 The following paper has been excerpted and adapted from Hell on Trial: The Case for Eternal Punishment by Robert A. Peterson (Phillipsburg, N.J.: Presbyterian and Reformed Publishing), 1995. Used by permission. Extract by Garry J. Moes. Introduction There is a day of great unforeseen catastrophe in store for men and women who die without Christ. Little do they imagine the horror that awaits them. Though the church has traditionally taught that the fate of the...»

«PAGE 5 1936 Marquette Golden Avalanche By Ed Pavlick Although they didn't go undefeated, the 1936 Golden Avalanche, coached by Frank Murray, was considered by many to be Marquette's greatest team. Playing a tough schedule against major teams from the West, South, and East as well as the Midwest, they gained the most prestige and fame of any Marquette team playing two games in Chicago's Soldier Field and in the very fIrst Cotton Bowl game. It featured one of the most dynamic backfields of the...»

«Hoover Press : Berkowitz/Conservative hberkc ch1 Mp_1 rev1 page 1 part i Classical Conservatism Hoover Press : Berkowitz/Conservative hberkc ch1 Mp_2 rev1 page 2 Hoover Press : Berkowitz/Conservative hberkc ch1 Mp_3 rev1 page 3 chapter one Understanding Traditionalist Conservatism Mark C. Henrie in the years following the Second World War, a group of writers emerged who became known as America’s New Conservatives, prominently including Richard M. Weaver, Peter Viereck, Robert Nisbet, and...»

«Materials Development for Hypersonic Flight Vehicles David E. Glass1 NASA Langley Research Center, Hampton, VA 23693 Ray Dirling 2 SAIC, Fountain Valley, CA 92708 Harold Croop3 AFRL, Wright Patterson Air Force Base, OH 45433-7402 and Timothy J. Fry 4 and Geoffrey J. Frank 5 University of Dayton Research Institute, Dayton, OH 45469-0110 The DARPA/Air Force Falcon program is planning to flight test several hypersonic technology vehicles (HTV) in the next several years. A Materials Integrated...»

«RP02/02-03 Operation of Trading Funds 18 February 2003 Prepared by Kitty LAM Research and Library Services Division Legislative Council Secretariat 5th Floor, Citibank Tower, 3 Garden Road, Central, Hong Kong Telephone : (852) 2869 8343 Facsimile : (852) 2509 9268 Website : http://www.legco.gov.hk E-mail : library@legco.gov.hk CONTENTS Page Executive Summary Part 1 Introduction 1 Background 1 Scope of research 2 Methodology 2 Part 2 Trading funds: origin and development 3 Trading funds as part...»

«WP/11/146 Recent Developments in European Bank Competition Yu Sun © 2011 International Monetary Fund WP/11/146 IMF Working Paper European Department Recent Developments in European Bank Competition Prepared by Yu Sun1 Authorized for distribution by L. Everaert June 2011 Abstract This paper investigates the degree of bank competition in the euro area, the U.S. and U.K. before and after the recent financial crisis, and revisits the issue whether the introduction of EMU and the euro have had any...»

«MANAGING BORROWING AND DEALING WITH DEBT Call for evidence in support of the Consumer Credit and Personal Insolvency Review Managing borrowing and dealing with debt REVIEW OF CONSUMER CREDIT AND PERSONAL INSOLVENCY A CALL FOR EVIDENCE FOREWORD The Coalition Agreement set out the Government’s commitment to the reform of financial services regulation, to curbing unsustainable lending and to the strengthening of consumer protections, particularly for the most vulnerable. This Call for Evidence...»





 
<<  HOME   |    CONTACTS
2017 www.thesis.dislib.info - Online materials, documents

Materials of this site are available for review, all rights belong to their respective owners.
If you do not agree with the fact that your material is placed on this site, please, email us, we will within 1-2 business days delete him.