Taxation of Interest Income,Deregulation and the Banking Industry

Removing interest rate ceilings on bank deposits or reducing the tax rate applicable to the interest earned on such deposits are alternative means of increasing the after-tax return to depositors. These alternatives, however, have differing impacts on the structure of a competitive banking industry. This paper develops a model which focuses on a bank's choice between paying an explicit interest rate on its deposits and paying a return in the form of services. The model allows banks to differ in their production technologies and depositors in their marginal tax rates and preferences for services. The effects of tax rate changes and a ceiling on the explicit deposit interest rate are analyzed.     

Deposit interest rate ceilings as credit supply shifters: Bank level evidence on the effects of Regulation Q

How did deposit interest rate ceilings, an important feature of the U.S. regulatory regime until the mid-1980s, affect individual banks’ lending and the transmission of monetary policy to credit? I estimate the effect of deposit rate ceilings inscribed in Regulation Q on commercial banks’ credit growth using a historical bank level data set starting in 1959. Banks’ credit growth contracted sharply when legally fixed deposit rate ceilings were binding. Interaction terms with monetary policy suggest that the policy impact on bank level credit growth was non-linear and significantly larger when rate ceilings were in place. Bank size and capitalization mitigate these effects. At the bank level, short-term interest rates exceeding the legally fixed deposit rate ceilings identify policy induced credit supply shifts that disappeared with deposit rate deregulation and thus weakened the bank lending channel substantially since the early 1980s.     

Deposit interest rates, asset risk and bank failure in Croatia

Financial deregulation, while beneficial in the long-term, seems to be linked to instability. Intense competition for deposits appears to be an ingredient in instability. We examine the aftermath of deregulation in Croatia, which included rapid growth of both deposits and deposit interest rates, followed by numerous bank failures.

Using panel regression techniques, we find evidence of “market-stealing” via high deposit interest rates. We connect high deposit interest rates to bank failure using logit models. High deposit interest rates were a reliable signal of risk-taking. When supervisory capabilities and powers are weak, deposit interest rate regulation may be worth considering.     

Optimal Bank Reorganization Policies and the Pricing of Federal Deposit Insurance

Optimal dynamic regulatory policies for closing ailing banks and for deposit insurance premia are derived as functions of the rate of flow of bank deposits, and interest rate on deposits, the economy's risk-free interest rate, and the regulators' bank audit/administration costs. Under competitive conditions, the threshold assets-to-deposits ratio below which a bank should be optimally closed is shown to be greater than or equal to one. Optimal deposit insurance premia and probabilities of bank closure are shown to be nondecreasing in the bank's risk on investment and nonincreasing in the bank's current assets-to-deposits ratio.     

An analysis of intra-industry differences in the effect of regulation: The case of deposit rate ceilings

This study examines the impact of deposit rate ceiling changes on the market value of commercial banks and stock savings and loan associations. Statistically significant increases in market value are found on announcement of the removal of ceilings on large denomination certificates of deposit. In contrast, retail commercial banks and savings and loans experienced declines in value on announcement of the elimination or relaxation of deposit rate ceilings on small denomination consumer accounts. In addition, for all events analyzed, significant differences were found in the effect of ceiling changes on the market value of wholesale and retail commercial banks.     

The impact of loan prepayment risk and deposit withdrawal risk on the optimal intermediation margin

Numerous studies have analyzed how a bank's intermediation margin varies with respect to such factors as credit quality, funding risk, bank capital, deposit insurance and other factors. However, these studies ignore the potential that loans tend to prepay if interest rates decline and deposits tend to be withdrawn if interest rates rise. Taking this very fundamental fact into account, we derive optimal loan rates and deposit rates when the bank is subject to loan prepayments and deposit withdrawals. Among other things, we find that greater volatility of interest rates tends to increase the margin. The strength of the correlation between the level of interest rates and the propensity to prepay loans (withdraw deposits) also plays an interesting role.     

Deregulation and oligopolistic rivalry in bank deposit markets

This paper provides a partial equilibrium analysis of a deregulated market for bank deposits in which banks behave oligopolistically but entry and exit are freely permitted. It is demonstrated that the effects of variations in market interest rates, reserve requirements, and bank cost and demand conditions upon the market quantity of bank deposit money are fundamentally altered if the degree of bank rivalry adjusts endogenously. Hence, banking deregulation may produce significant changes in the relationships between these variables and the stock of deposit money.     

An Analysis of the Impact of Interest Rate Ceilings

The first aim of this study is to estimate the interest rates paid for motor vehicle loans. The second aim is to identify those potential borrowers most likely to be rationed out of the market by the imposition of rate ceilings. Rate ceilings constrain the rates paid by successful loan applicants to be no greater than the applicable ceiling level. These constraints are dealt with by treating the interest rate paid as a variable truncated at the ceiling level. Assuming the dependent variable is truncated normal, consistent estimates are obtained by employing the maximum likelihood method of Hausman and Wise.     

Regulation and the Determination of Bank Capital Changes: A Note

The effectiveness of bank capital adequacy requirements is examined in this paper. Using empirical tests similar to those employed by Peltzman and Mingo, no significant relationship is found between changes in bank capital and the capital standards imposed by regulators. The findings conflict with those of previous studies. The conflict in findings, it is argued, results from the failure of previous studies to account for the effect of binding deposit rate ceilings.     

An Analysis of the Impact of Deposit Rate Ceilings on the Market Values of Thrift Institutions

This paper examines the impact of changes in deposit interest rate regulations on the common stock values of savings and loan institutions. The analysis indicates that stockholder-owned savings and loans (S & L's) have experienced statistically significant declines in equity market values at the announcement of the removal of ceilings on certain consumer (small saver) certificate accounts and the introduction of short term variable rate money market certificates. We find the evidence to be consistent with the hypothesis that S & L's have earned economic rents from restrictions on interest rates paid to small saver accounts, and that relaxation of interest rate ceilings has reduced these rents.     

Risk management strategies for banks

We analyze optimal risk management strategies of a bank financed with deposits and equity in a one period model. The bank’s motivation for risk management comes from deposits which can lead to bank runs. In the event of such a run, liquidation costs arise. The hedging strategy that maximizes the value of equity is derived. We identify conditions under which well known results such as complete hedging, maximal speculation or irrelevance of the hedging decision are obtained. The initial debt ratio, the size of the liquidation costs, regulatory restrictions, the volatility of the risky asset and the spread between the riskless interest rate and the deposit rate are shown to be the important parameters that drive the bank’s hedging decision. We further extend this basic model to include counterparty risk constraints on the forward contract used for hedging.     

Monetary policy effects in times of negative interest rates: What do bank stock prices tell us?

This paper investigates bank stock performance following different monetary policy actions in times of positive and negative interest rates. Controlling for the broader stock market, monetary policy announcements that cause an unanticipated downward shift in the yield curve and a flattening of the shorter-end of the yield curve are found to persistently reduce bank stock prices once the interest rate environment is negative. Consistent with the deposits channel of monetary policy, the effects are larger and more persistent for banks that are relatively dependent on deposit funding. By contrast, a surprise movement in the slope of the longer-end of the yield curve does not impact bank stock prices in times of negative interest rates. Accounting data confirm that a parallel drop in the yield curve following a monetary policy decision in a negative interest rate environment hurts banks through shrinking deposit margins.     

Evidence of Early Withdrawal in Time Deposit Portfolios

The embedded options found in some securities are known to have significant impact on product pricing, secondary market valuation, and risk measurement and management. The option to withdraw commonly found in bank deposits is one of the least studied of these. We help to fill this gap by examining the level and interest rate sensitivity of early withdrawals of retail time deposits using panel data from the Thrift Financial Report. We find that longer-maturity time deposit portfolios commonly experience early withdrawals at economically significant levels. Further, we find that depositors respond positively, with increased levels of early withdrawal, to the reinvestment incentive they face when new deposit rates rise. These findings increase our understanding of consumer behavior with regard to financial products and have significant implications for the competitive pricing of deposit products and the management of bank interest rate risk.     

An analysis of bank risk and deposit rate ceilings: Evidence from the capital markets

The effect of deposit rate regulation on bank solvency is an important and unresolved issue that has received only limited attention. In this paper, capital market data is used to assess changes in both systematic and non-systematic risk of a portfolio of bank stocks at the time of deposit rate deregulation. The evidence indicates that neither measure of capital market risk is significantly affected, leading to the conclusion that bank solvency risk will not be increased by the deregulation of interest rates on deposits.     

Estimating JP Morgan Chase's Profits From the Madoff Deposits

JP Morgan Chase had deposits from Bernard L. Madoff's investors totaling $5.5 billion at one point in 2008. The Chase account was supposedly where most of the funds in his Ponzi scheme were deposited. Any large deposit can be a considerable source of profit to a bank. Assuming that the deposits returned the bank's net interest margin and grew at a random geometric rate, this article estimates that JP Morgan Chase generated $435 million in after‐tax profits from this very large account over the course of 16 years. With JP Morgan Chase the target of pending lawsuits relating to the Madoff fraud, this article's methodology and results may be of interest to litigants, prosecutors, journalists, and academics.     

Consumer deposit demand,interest rate differentials,and public welfare

Empirical estimates of the bank certificate of deposit demand schedule obtained in this study provide the basis for evaluating interest rate deregulation. A Box-Jenkins transfer function estimates bank deposit responses to intraindustry pricing changes and a sensitivity analysis shows microeconomic effects of interest rate differentials. The study concludes that 1) the public substantially subsidizes banks but banks achieve suboptimum deposit levels under thrift differential regulation, 2) removal of deposit rate regulation causes bank deposit demand schedules to shift slowly, not immediately, up with respect to interest rates, and 3) the consumer deposit demand curve is clearly interest elastic.     

关于我国利率和利率传导关系的思考

当前我国银行体系利率大致可分为货币市场利率和信贷市场利率,其中由央行指定的利率主要有存贷款基准利率、再贴现率等。在货币市场上,隔夜同业拆借利率具有基准利率的地位。在信贷市场上,在特定时期,保持适当的存贷款利差具有积极意义。由于一些阻碍信贷市场与货币市场统一的制度安排的存在,这两个市场间的利率传导呈现出一定的不对称性。为推进利率市场化,进一步完善我国利率体系,下一步应逐步弥合市场分割,加强货币市场基准利率建设,培育商业银行利率定价能力。     

储蓄存款理财化与存款利率市场化问题研究——基于湖南省、市数据的实证分析

在居民储蓄存款的交易和预防需求得到一定程度的满足,及银行金融产品不断丰富的条件下,公众投机动机不断增强,居民存款＂理财化＂特征凸显。银行存款和理财产品因定价的差异,使居民放弃银行存款转而增加对理财产品的投资偏好,居民存款＂理财化＂必然推进存款利率的市场化。本文首先梳理了近几年来我国银行理财产品及储蓄存款的变动趋势,在此基础上就居民存款理财化原因进行剖析,并通过实证结果进一步检验了理财产品对储蓄存款存在长期的影响,最后分析了居民存款理财化对推动利率市场化进程的意义,提出相关建议。     

Financing bank stock ownership: A question of conflict of interest

The bank stock loan conflict of interest question arises when compensating balances are intermingled with a bank's correspondent balances for the benefit of those bank stockholders seeking a bank stock loan. This study attempts to determine if this practice exists usign two-stage least square regression analysis and cross-sectional data obtained from one-bank holding company applications in the Tenth Federal Reserve District. Our results suggest that bankers with established correspondent banking relationships capitalize on their correspondent balances to obtain favorable interest rates on bank stock loans.     

Determinants of household check writing: the impacts of the use of electronic banking services and alternative pricing of services

In recent years, there has been a simultaneous deregulation of interest ceilings on household deposits and a dramatic deployment of automatic teller machines (ATMs) by the banking industry. At one time, there was a belief that the U. S. would evolve into a “checkless society” because of the development of electronic funds transfer systems such as the ATM. That has clearly not happened. The purpose of this paper is to estimate the impacts of both the use of ATMs and the change in pricing due to deregulation on household check writing. The source of the data is a survey of households conducted by the Board of Governors of the Federal Reserve System. The results of the tests indicate that use of electronic banking services had no discernible impact on check writing while different methods of pricing checking account services did have a substantial impact on check writing.