Competitive effects of Basel II on US bank credit card lending

We analyze the potential competitive effects of the proposed Basel II capital regulations on US bank credit card lending. We find that bank issuers operating under Basel II will face higher regulatory capital minimums than Basel I banks, with differences due to the way the two regulations treat reserves and gain-on-sale of securitized assets. During periods of normal economic conditions, this is not likely to have a competitive effect; however, during periods of substantial stress in credit card portfolios, Basel II banks could face a significant competitive disadvantage relative to Basel I banks and nonbank issuers.     

Introduction to Retail Payments: Mapping Out the Road Ahead

This article introduces four papers that were presented at a payments conference “Retail Payments: Mapping Out the Road Ahead,” which was held at De Nederlandsche Bank in Amsterdam in April of 2016. These papers focus on various behavioral aspects of consumers and merchants in their choice and acceptance of payment instruments and payment activity. End-user behavior has implications for how the retail payment landscape is likely to evolve and, therefore, will need to be considered by policymakers charged with overseeing the development of retail payments.     

Recovering Risky Technologies Using the Almost Ideal Demand System: An Application to U.S. Banking

We present and estimate a model that shifts the focus of modeling production from the traditional assumptions of profit maximization and cost minimization to a more general assumption of managerial utility maximization that can incorporate risk incentives into the analysis of production and recover value-maximizing technologies. We implement the model using the almost ideal demand system. In addition, we use the model to measure efficiency in a more general way that can incorporate a concern for the market value of firms assets and equity and identify value-maximizing firms. This shift in focus bridges the gap between the risk incentives literature in banking that ignores the microeconomics of production and the production literature that ignores the relationship between production decisions and risk. Our estimation of the model for a sample of U.S. commercial banks illustrates that results obtained from our generalized model can differ significantly from those obtained from the standard profit-maximization model, which ignores risk.     

Why are credit card rates sticky?

Summary This paper investigates credit card rate stickiness using a screening model of consumer credit markets. In recent years, while the cost of funds has fallen, credit card rates have remained stubbornly high, spurring legislators to consider imposing interest rate ceilings on credit card rates. The model incorporates asymmetric information between consumers and banks, regarding consumers' future incomes. The unique equilibrium is one of two types: separating (in which low-risk consumers select a collateralized loan and high-risk consumers select a credit card loan), or pooling (in which both types of consumers choose credit card loans). I show that a change in the banks' cost of funds can have an ambiguous effect on the credit card rate, so that the credit card rate need not fall when the cost of funds does. Usury ceilings on credit card rates are detrimental to consumer welfare, so would be counter to their legislative intent.I thank George Mailath, Paul Calem, Gerhard Clemenz, Sally Davies, George Kanatas, Leonard Nakamura, Tony Santomero, Tony Saunders, participants in the 1990 Financial Management Association Meetings, and co-editor Michael Woodford for helpful comments.The views expressed here are those of the author and do not necessarily represent the views of the Federal Reserve Bank of Philadelphia or the Federal Reserve System.     

The possibilities of entering new markets for Romanian companies from wood manufacturing industries

Romania has the potential of resources, labor and real capacity to adapt to the gait of a global economic competition. But it required a long term policy and environment which could support this potential value. If not, we will risk turning into a consumer economy, consumption will not be funded on internal production and become supplier of labor services for peripheral. In the context of economic crisis, Romanian furniture retains its significant competitive advantages, including the price in export markets. The most important markets for exporters of furniture from Romania are Ukraine and Russia, markets with great potential, but affected by problems such as devaluing local currencies, and recently, imposing new duties.     

Are scale economies in banking elusive or illusive?: Evidence obtained by incorporating capital structure and risk-taking into models of bank production

This paper explores how to incorporate banks' capital structure and risk-taking into models of production. In doing so, the paper bridges the gulf between (1) the banking literature that studies moral hazard effects of bank regulation without considering the underlying microeconomics of production and (2) the literature that uses dual profit and cost functions to study the microeconomics of bank production without explicitly considering how banks' production decisions influence their riskiness.Various production models that differ in how they account for capital structure and in the objectives they impute to bank managers – cost minimization versus value maximization – are estimated using U.S. data on highest-level bank holding companies. Modeling the bank's objective as value maximization conveniently incorporates both market-priced risk and expected cash flow into managers' ranking and choice of production plans.Estimated scale economies are found to depend critically on how banks' capital structure and risk-taking are modeled. In particular, when equity capital, in addition to debt, is included in the production model and cost is computed from the value-maximizing expansion path rather than the cost-minimizing path, banks are found to have large scale economies that increase with size. Moreover, better diversification is associated with larger scale economies while increased risk-taking and inefficient risk-taking are associated with smaller scale economies.     

A quality and risk-adjusted cost function for banks: Evidence on the “too-big-to-fail” doctrine

We estimate a multiproduct cost function model incorporating measures of bank output quality and the probability of failure. We model a bank's uninsured deposit price as an endogenous variable depending on the bank's output level, output quality, financial capital level, and risk measures. Accounting for these aspects in the cost model significantly affects measures of scale and scope economies. We find evidence that the too-big-to-fail doctrine significantly affects the price a bank pays for its uninsured deposits. For large banks, an increase in size, holding default risk and asset quality constant, significantly lowers the uninsured deposit price.     

Deposits and relationship lending

We empirically examine whether access to deposits with inelasticrates (core deposits) permits a bank to make contractual agreementswith borrowers that are infeasible if the bank must pay marketrates for funds. Such access insulates a bank's costs of fundsfrom exogenous shocks, allowing it to insulate its borrowersagainst exogenous credit shocks. We find that, controlling forloan market competition, banks funded more heavily with coredeposits provide more loan rate smoothing in response to exogenouschanges in aggregate credit risk. Thus we provide evidence fora novel channel linking bank liabilities to relationship lending.