Measuring the Determinants of Average and Marginal Bank Interest Rate Spreads in Chile, 1994-2001

The study of bank interest rate spreads is central to our understanding of the process of financial intermediation. Data limitations generally restrict empirical analyses to interest rate spreads that are constructed from bank income statements and balance sheets. In this paper we make use of a data set that allows us directly to compute interest rate spreads based on individual bank loan and deposit rates reported on a monthly basis to the Central Bank of Chile. The information is disaggregated by unit of account (peso, inflation-indexed, and dollar) over the period 1994-2001. We find that the estimated impacts of industry concentration, business cycle variables, and monetary policy variables differ markedly between interest rate spreads based on balance sheet data and interest rate spreads based on disaggregated loan and deposit data. Since empirical work on interest spreads is used for guiding policy recommendations, these findings have important implications for the interpretation of interest spreads regressions. Our analysis calls for some caution in the interpretation of estimated empirical determinants of bank spreads that are constructed from income statements and balance sheet data. At the same time, our analysis shows how information from the two types of interest rate spreads can be combined to create a more complete portrait of bank behavior than either type alone is capable of creating. The results for Chile suggest the potential importance of gathering such disaggregated data in other countries.

Stock loan with Automatic termination clause, cap and margin

This paper works out fair values of stock loan model with automatic termination clause, cap and margin. This stock loan is treated as a generalized perpetual American option with possibly negative interest rate and some constraints. Since it helps a bank to control the risk, the banks charge less service fees compared to stock loans without any constraints. The automatic termination clause, cap and margin are in fact a stop order set by the bank. Mathematically, it is a kind of optimal stopping problems arising from the pricing of financial products which is first revealed. We aim at establishing explicitly the value of such a loan and ranges of fair values of key parameters : this loan size, interest rate, cap, margin and fee for providing such a service and quantity of this automatic termination clause and relationships among these parameters as well as the optimal exercise times. We present numerical results and make analysis about the model parameters and how they impact on value of stock loan.Comment: 30 pages, 7 figure

Was there a bubble in the 1929 Stock Market?

Standard tests find that no bubbles are present in the stock price data for the last one hundred years. In contrast., historical accounts, focusing on briefer periods, point to the stock market of 1928-1929 as a classic example of a bubble. While previous studies have restricted their attention to the joint behavior of stock prices and dividends over the course of a century, this paper uses the behavior of the premia demanded on loans collateralized by the purchase of stocks to evaluate the claim that the boom and crash of 1929 represented a bubble. We develop a model that permits us to extract an estimate of the path of the bubble and its probability of bursting in any period and demonstrate that the premium behaves as would be expected in the presence of a bubble in stock prices. We also find that our estimate of the bubble's path has explanatory power when added to the standard cointegrating regressions of stock prices and dividends, in spite of the fact that our stock price and dividend series are cointegrated.

Why do savings banks transform sight deposits into illiquid assets less intensively than the regulation allows?

For their short-term payment obligations, savings banks hold substantially more liquid assets than the liquidity regulation requires. This paper investigates whether sight deposits, an important funding source for savings banks, help in explaining liquid asset holdings in excess of regulatory requirements. We analyze whether savings banks transform sight deposits in illiquid assets less intensively than is permitted because (i) the liquidity regulation underestimates actual withdrawal rates (underestimation effect) and/or (ii) savings banks are subject to limits in their lending to non-banks that they do not offset by, for instance, medium-term interbank lending or fixed asset holdings (lending effect). In our sample, we do not find the underestimation effect to be applicable as actual deposit withdrawal rates are in most cases lower than the regulatorily specified rate. However, we find the lending effect to be at work: Savings banks with low shares of loans to non-banks do not transform sight deposits into illiquid assets as intensively as savings banks with high shares of non-bank loans. Our analysis does not only show that liquid assets positively depend on sight deposits, but also shines a light on how bank size and the individual bank's position in the interbank market affect liquid assets. --Liquid assets,sight deposits,prudential liquidity regulation

Ledger Provision in Hog Marketing Contracts

Price-dependent loan agreements at low interest rates have sometimes been included in North American hog sector long-term marketing contracts. We show that a general form of this stipulation can be viewed as a hybrid between a forward rate agreement and a bundle of commodity spot options. In some cases, the provision amounts to a commodity swap. These observations provide an approach to valuing the provision. Historical data are used to estimate expected payouts to the producer under the contract feature.