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. To evaluate these propositions, we measure depositor reaction to 87 Federal Reserve announcements of enforcement actions. We compare deposit growth rates and yield spreads before and after the announcements at the sample banks and a control group of peer banks. The data show no evidence of unusual deposit withdrawals or spread increases at the sample banks following the announcements of formal actions. These results suggest that public announcements of enforcement actions did not spark bank runs or enhance depositor discipline. Apparently, depositors did not care a great deal about our sample actions.Bank supervision ; Deposit insurance

Decoding messages from the yield curve

Bank supervision ; Federal Reserve District, 5th

Dividends, stock repurchases and signaling: evidence from U.S. panel data

This paper exploits yearly accounting data from 1977 to 1994 to test the relative signaling power of dividends and net stock repurchases. The specification controls for potential agency cost and asset dissipation effects. Specifically, we regress changes in future income before extraordinary items on changes in dividends, changes in net stock repurchases, and a host of control variables. We also split the sample at 1981 to measure the impact of changes in the relative taxation of distribution methods. For the full twenty-year sample, only dividend changes are correlated with changes in future income. Moreover, the dividend coefficient and the repurchases coefficient differ statistically different in every future income equation. Splitting the sample reveals that the pre-1981 subsample drives the full-sample results. Put another way, the empirical link between changes in dividends and changes in future income vanishes just as a revision of the tax law reduced the tax disadvantage of dividend distributions. This evidence supports the notion that, at least for a period in time, firms deliberately exposed shareholders to punitive taxation to signal favorable prospects.Corporate governance

A search for OH 6 GHz maser emission towards southern supernova remnants

OH masers at 1720 MHz have proven to be excellent indicators of interactions between supernova remnants and molecular clouds. Recent calculations suggest that the 6049 MHz OH maser line is excited for higher column densities than for the 1720 MHz line. It is therefore a potentially valuable indicator of remnant-cloud interaction. We present preliminary results of a survey using the Parkes Methanol Multibeam receiver for 6049 MHz and 6035/6030 MHz OH masers towards 36 supernova remnants and 4 fields in the Large and Small Magellanic Clouds. While no 6049 MHz masers have been found, three new sites of 6035 and 6030 MHz OH maser emission have been discovered in star-forming regions.Comment: 2 pages, 1 fig, iaus.cls. To appear in IAU 242, Astrophysical Masers and Their Environments, eds. J. Chapman & W. Baa

Is the Federal Home Loan Bank system good for banks? a look at evidence on membership, advances and risk

Since the early 1990s, commercial banks have turned to Federal Home Loan Bank (FHLBank) advances to plug the gap between loan and deposit growth. Is this trend worrisome? On the one hand, advances implicitly encourage risk by insulating borrowers from market discipline. On the other, advances give borrowers greater flexibility to managing interest rate and liquidity risk. And access to FHLBank funding encourages members to reshape their balance sheets in ways that could lower credit risk. Using quarterly financial and supervisory data for banks from 1992 to 2000, we assess the effect of FHLBank membership and advances on risk. The evidence suggests liquidity and leverage risks rose modestly, but interest-rate risk declined somewhat. Credit risk and overall failure risk were largely unaffected. Although the evidence suggest FHLBank membership and advances have had, at best, only a modest impact on bank risk, we caution that the 1990s constitute one observation and that moral hazard could be pronounced if leverage ratios revert to historical norms.Government-sponsored enterprises ; Federal home loan banks ; Bank liquidity

Can feedback from the jumbo-CD market improve off-site surveillance of community banks?

We examine the value of feedback from the jumbo-certificate-of-deposit (CD) market in the off-site surveillance of community banks. Using accounting data, we construct proxies for default premiums on jumbo CDs. Then, we produce rank orderings of community banks -- defined as institutions holding less than $500 million in assets (constant 1999 dollars) -- based on these proxies. Next, we use an econometric surveillance model to generate rank orderings based on the probability of encountering financial distress. Finally, we compare these rank orderings as tools for flagging emerging problems. Our comparisons include eight out-of-sample test windows during the 1990s. We find that feedback from the jumbo-CD market would have added little value in community-bank surveillance during our sample period. Specifically, rank orderings based on output from the econometric model significantly outperformed rank orderings based on jumbo-CD default premiums. More important, the jumbo-CD orderings improved little over a random ordering. Other attempts to extract risk signals from the jumbo-CD data yielded similar results. Taken together, our findings validate current surveillance practices. We conclude by arguing that the robust economic environment of the 1990s probably plays a large role in our results.Community banks ; Bank supervision

Accurate computation and continuation of homoclinic and heteroclinic orbits for singular perturbation problems

In earlier papers, Doedel and the authors have developed a numerical method and derived error estimates for the computation of branches of heteroclinic orbits for a system of autonomous ordinary differential equations in R(exp n). The idea of the method is to reduce a boundary value problem on the real line to a boundary value problem on a finite interval by using a local (linear or higher order) approximation of the stable and unstable manifolds. A practical limitation for the computation of homoclinic and heteroclinic orbits has been the difficulty in obtaining starting orbits. Typically these were obtained from a closed form solution or via a homotopy from a known solution. Here we consider extensions of our algorithm which allow us to obtain starting orbits on the continuation branch in a more systematic way as well as make the continuation algorithm more flexible. In applications, we use the continuation software package AUTO in combination with some initial value software. The examples considered include computation of homoclinic orbits in a singular perturbation problem and in a turbulent fluid boundary layer in the wall region problem

Could a CAMELS downgrade model improve off-site surveillance?

The Federal Reserve’s off-site surveillance system includes two econometric models that are collectively known as the System for Estimating Examination Ratings (SEER). One model, the SEER risk rank model, uses the latest financial statements to estimate the probability that each Fed-supervised bank will fail in the next two years. The other component, the SEER rating model, uses the latest financial statements to produce a “shadow” CAMELS rating for each supervised bank. Banks identified as risky by either model receive closer supervisory scrutiny than other state-member banks.> Because many of the banks flagged by the SEER models have already tumbled into poor condition and, hence, would already be receiving considerable supervisory attention, we developed an alternative model to identify safe-and-sound banks that potentially are headed for financial distress. Such a model could help supervisors allocate scarce on- and off-site resources by pointing out banks not currently under scrutiny that need watching.> It is possible, however, that our alternative model improves little over the current SEER framework. All three models—the SEER risk rank model, the SEER rating model, and our downgrade model—produce ordinal rankings based on overall risk. If the financial factors that explain CAMELS downgrades differ little from the financial factors that explain failures or CAMELS ratings, then all three models will produce similar risk ratings and, hence, similar watch lists of one- and two-rated banks.> We find only slight differences in the ability of the three models to spot emerging financial distress among safe-and-sound banks. In out-of-sample tests for 1992 through 1998, the watch lists produced by the downgrade model outperform the watch lists produced by the SEER models by only a small margin. We conclude that, in relatively tranquil banking environments like the 1990s, a downgrade model adds little value in off-site surveillance. We caution, however, that a downgrade model might prove useful in more turbulent banking times.Bank supervision

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. Our comparisons include eight out-of-sample test windows during the 1990s. We find that rankings obtained from jumbo-CD data would not have improved on rankings obtained from conventional surveillance tools. More importantly, we find that jumbo-CD rankings would not have improved materially over random rankings of the sample banks. These findings validate current surveillance practices and, when viewed with other recent empirical tests, raise questions about the value of market signals in bank surveillance.Finance ; Banks and banking ; Bank supervision

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. One of the models that the Federal Reserve System uses for surveillance was estimated to predict bank failures. Because bank failures have been so rare during the last decade, the coefficients on this model have been "frozen" since 1991. Each quarter the surveillance staff at the Board of Governors provide the supervision staff in the Reserve Banks the probabilities of failure by the banks subject to Fed supervision, based on the coefficients of this bank failure model and the latest call report data for each bank. The number of banks downgraded to problem status in recent years has been substantially larger than the number of bank failures. During a period of few bank failures, the relevance of this bank failure model for surveillance depends to some extent on the accuracy of the model in predicting which banks will have their supervisory ratings downgraded to problem status in future periods. This paper compares the ability of two models to predict downgrades of supervisory ratings to problem status: the Board staff model, which was estimated to predict bank failures, and a model estimated to predict downgrades of supervisory ratings. We find that both models do about as well in predicting downgrades of supervisory ratings for the early 1990s. Over time, however, the ability of the downgrade model to predict downgrades improves relative to that of the model estimated to predict failures. This pattern reflects the value of using a model for surveillance that can be re-estimated frequently. We conclude that the downgrade model may prove to be a useful supplement to the Board's model for estimating failures during periods when most banks are healthy, but that the downgrade model should not be considered a replacement for the current surveillance framework.Bank supervision