The Case for Bank Failure

Tussing, A. Dale

doi:10.1086/466633

Cited by 19 publications

(10 citation statements)

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“…Tussing, 1967 andCorrigan, 1983) was displaced by the view that, even if it is not subsidized by special privileges, every financial institution can hope for special advantages from its access to scale 1 , scope 2 . and network economies (see Katz and Shapiro, 1994;Economides, 1993) and to private information about its customers (Diamond, 1984;Fama, 1985).…”

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confidence: 99%

Event-Study Evidence of the Value of Relaxing Longstanding Regulatory Restraints on Banks, 1970-2000

Carow¹,

Kane²

2001

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In a partial-equilibrium model, removing a binding constraint creates value. However, in general equilibrium, the stakes of other parties in maintaining the constraint must be examined. In financial deregulation, the fear is that expanding the scope and geographic reach of very large institutions might unblock opportunities to build market power from informational advantages and size-related safety-net subsidies.This paper reviews and extends event-study evidence about the distribution of the benefits and costs of relaxing longstanding geographic and product-line restrictions on U.S. financial institutions. The evidence indicates that the new financial freedoms may have redistributed rather than created value.Event returns are positive for some sectors of the financial industry and negative for others. Perhaps surprisingly, where customer event returns have been investigated, they prove negative. In 1970, commercial banks could be distinguished from other kinds of financial institutions by two unique capacities: their right to offer demand deposits and their ability to make commercial loans. Restrictions on thrift, securities, insurance, and sales-finance companies made it hard for these and other kinds of nonbank institutions to offer close substitutes for banking's signature products.This paper seeks to clarify how and why technological change undermined and finally demolished geographic and product-line constraints on U.S. financial institutions and to review event-study evidence about the intersectoral distribution of the benefits and costs of relaxing particular restrictions. The evidence indicates that the demolition of these restraints intensifies public-policy concerns about the extent to which market power may be generated by large-bank mergers and safety-net subsidies that increase as an institution reaches megasize and megacomplexity.

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confidence: 99%

Event-Study Evidence of the Value of Relaxing Longstanding Regulatory Restraints on Banks, 1970-2000

Carow¹,

Kane²

2001

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“…Under the social optimum, failures will, and should, occur because the cost of preventing them, on the margin, is in excess of the social costs of their occurrence. This point has been made elsewhere by Tussing 1967.…”

Section: The Optimal Level Of Capitalmentioning

confidence: 57%

“…In fact, economists have gone even further to suggest that, rather than being totally undesirable, occasional bank failures may well be good for the economy‐an indication that the markets are working to penalize inefficient operations. See for example, Tussing 1967, 1970.…”

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confidence: 99%

Determining an Optimal Capital Standard for the Banking Industry

Santomero¹,

Watson²

1977

The Journal of Finance

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“…Surprisingly, banks were also operating with insufficient capital and liquidity ratios which resembles the causes of bank failures (illiquidity, bad assets, overbanking and mismanagement) during the Great Depression (Tussing 1967 Despite the fact that capital is a strong determinant of bank status, capital showed no significance in bank soundness. As banks grow in size, capital needs to increase proportionately to cushion against market shocks.…”

Section: Effects Of Liquidity On Stock Returnsmentioning

confidence: 99%

Bank Soundness: A PLS-SEM Approach

Ayadurai

Eskandari

2018

Partial Least Squares Structural Equation Modeling

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A u t h o r sAya d u r ai, C a n d E s k a n d a ri, R Typ e Book S e c tio n U RL This ve r sio n is a v ail a bl e a t : h t t p:// u sir.s alfo r d. a c. u k/id/ e p ri n t/ 4 6 2 9 3/ P u b l i s h e d D a t e 2 0 1 8 U SIR is a di git al c oll e c tio n of t h e r e s e a r c h o u t p u t of t h e U niv e r si ty of S alfo r d. W h e r e c o py ri g h t p e r mi t s, full t e x t m a t e ri al h el d in t h e r e p o si to ry is m a d e fr e ely a v ail a bl e o nli n e a n d c a n b e r e a d , d o w nlo a d e d a n d c o pi e d fo r n o nc o m m e r ci al p riv a t e s t u dy o r r e s e a r c h p u r p o s e s . Pl e a s e c h e c k t h e m a n u s c ri p t fo r a n y fu r t h e r c o py ri g h t r e s t ri c tio n s. Fo r m o r e info r m a tio n, in cl u di n g o u r p olicy a n d s u b mi s sio n p r o c e d u r e , pl e a s e c o n t a c t t h e R e p o si to ry Te a m a t: u si r@ s alfo r d. a c. u k . Abstract During the Global Financial Crisis (GFC) of 2007-09, even banks in industrial economies with long established markets suffered significantly. This highlights the weakness in the banking system and the importance of a sound banking sector. This article illustrates the drivers of bank soundness for G7 countries during the period 2003-2013. In creating a parsimonious model, the study assembles 18 manifest variables of 6 constructs as the cause of bank soundness. The structural equation model comprises of six latent exogenous constructs [Capital (C), Asset (A), Management (M), Earnings (E), Liquidity (L) and Sensitivity(S)] which explains the observed consequences of bank soundness in these countries. Results indicate that 43.8% of the variation in banks' soundness is explained by CAMELS. The model's predictive relevance (Q 2 ) with regard to endogenous construct stands at a strong category of 0.425. The results imply that banks placed high importance on off balance sheet and capital activities thus taking on higher risk. Surprisingly, these banks were operating at low levels of capital and liquidity resembling banks that failed during the Great Depression. The weakness in capital and liquidity measures calls for robust policy measures to create convergence with soundness.

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The Case for Bank Failure

Cited by 19 publications

References 0 publications

Event-Study Evidence of the Value of Relaxing Longstanding Regulatory Restraints on Banks, 1970-2000

Event-Study Evidence of the Value of Relaxing Longstanding Regulatory Restraints on Banks, 1970-2000

Determining an Optimal Capital Standard for the Banking Industry

Bank Soundness: A PLS-SEM Approach

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