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Working
Paper
76-1
BANK ~UillAGEMENT, COMPETITION, AND INTEREST RATES:
A PORTFOLIO MODEL OF DISCOUNT \vINDOW ACTIVITY
William
Federal
Reserve
July
Jackson
Bank of Richmond
1976
The views expressed here are solely
those of
the author and do not necessarily
reflect
the
views of the Federal Reserve Bank of Richmond.
Introduction*
The ability
valuable
to borrow
incentive
for
behavior
Fifth
they appear
at,
that
extensively
borrow
they differ?
the
maximizing
extends
should
financial
paper
institutional
changes.
The resulting
using
time
and
borrowing
determine
why
organizations
If
so,
how do
criteria
activity?
important
The answers
of bank portfolio
behavior
to
in
of receD,t years.
Capital
Asset
portfolio
model of a bank as a utility-
This
model of bank risk-return
Pricing
demand for
borrowing
do not?
and microeconomic
a theoretical
varying
to
Do banking
that
our knolwledge
investor.
markets,
window.
over
recent
organizations
member bank borrowing
develops
the
a potentially
Reserve System.
markedly
paper examines
macroeconomic
window is
Federal
varies
from those
climate
financial
empirically,
credit
discount
enrich
the well-known
discount
to the
banking
the
individual
questions
This
District
differ
Are both
stormy
of
This
or avoid,
in determining
these
source
organizations.
of large
at the
a bank to belong
Member bank use of this
among banking
funds
Model to encompass imperfect
financial
services,
and interest
model of bank behavior
at the
discount
management
is
rate
tested
window as the
dependent
variable.
Portfolio
Choice
of
The Capital
competitive,
especially
Competitively
Traded
Asset
Model explains
unregulated
Pricing
markets.
This
Securities
starting
portfolio
choice
point
the
for
*The author is indebted
to Emily Cart,
Peggy Nuckols,
Marsha Shuler for computational
assistance.
in
analysis
and
of
2.
2.
bank portfolios
for
proofs
is
of this
based on several
assumptions
(see [18,24,31,55]
model).
They are:
(1)
Investors
choose portfolios
single-period
time horizon,
Their
of holding
utility
random variables:
standard
(2)
Investors
interest
rate
assets
to
asset
only
(3)
utility
a(R):
risk
(5)
transactions
Interest
This
equity
valuation
a
based on the
and risk--expected
asset
that
at a low
risky
dominate
risk-
sets.
efficient
portfolios
with
a(R).
positively
class
with
within
which
their
E(R) and negatively
with
marketable,
with
aversion.
are divisible,
and taxf1~ee.
estimates
rates
horizon:
basic
opportunity
choose a risk
identical
(6)
is
a riskless
of assets
a given
costs,
with
within
framework.
can be combined with
choose Markowitz
Securities
planning
or lend
This asset:
investment
varies
assets
1:'eturn E(R),
form combinations
Investors
operate
a (R) .1
RF.
maximum E(R) for
(4)
financial
can borrow
Investors
they
uti1ity-maximizing
expected
deviation
as if
Investors
are not E!xpected to
security
returns
wide
analysis.
no
are price-takers
of 1~eturn and risk
model has found
and portfolio
salable
for
any asset.
change over
the
are not state-dependent.
acceptance
Its
in the
implications
theory
may be
1The tildes
denote random va1:,iables.
Differentiation
with
respect to random variables,
which assume values according
to a
prescribed
probability
density function,
is of course impossible.
Investors
define
utility
over the anticipated
mean and standard
deviation
of such distributions.
~
of
i
3.
clarified
by examining
behavior
is
the behavior
to determine
aggregated
Under
of individual
market relationships.
the conditions
postulated
by assumptions
individual
investors
of competitive
(1)
follows
through
investors,
security
(6),
the
the continuous,
whose
markets
utility
twice
function
differentiable
form:
K
k
-U = f
[E(R),
where the
utility
increases
with
of the k-th
expected
investor
return,
au
but
a(R)],
from holding
decreases
>0.
au
"ai"(R)'
Rational
functions.
requires
As the
a larger
probability
aversion
isoutility
space.
investors
is
defined
locus
is
to
An individual
bears
compensate
investor's
by his
locus
convex
to the risk
utility
of constant
axis
more risk,
for
he
the higher
,
degree
of risk
utility.
This
in risk-return
That is,
where second order
conditions
> 0
2
,
a
a
-
E~!~
a(R)2
> 0
are met by the second partial
term..
Conservative
they will
<0.
risk-averse
investor
return
a E(R)
a a(R)
derivative
possess
representative
of loss.
risk:
-a-am-
thus
expected
with
a portfolio
accept
only
investors
low risk.
prefer
low expected
Aggressive
investors
returns
since
seek high
ofI
4.
expected
returns
assumptions
strive
for
they
maximum expected
with
market
relationship
return
asset,
emerges.
tradeoff
of risk.
A is
Rr is
the riskless
return
be in
a positive
the
for
exceeds
excess
them again
suffer
hold
loci,
falling
identical
their
the rate
of
that
predicted
on the
is
less
than
prices.
_
rise
appropriate
all
between
utility
[~=A'
.~)J
is
price
Assets
the slope
optimum tradeoff
market
portfolios
market
line.
'I
is:
zero,
market
until
for
portfolios
Similarly,
their
investors
of all
risk
and
thus
line
should
containing
assets
class
will
do not have to
investors'
expected
is
of risk,"
whose expected
capital
market line.
Although
portfolios,
change of
"the
prices
"capital
and its
+ A 0' (R),
by the
capital
shows the
e:fficient
of interest.
demand; their
lie
whose return
rate
of risky
risk-return
on an asset
defines
constant,
or minimum
holdings
reuationship
--
investors
risk,
by combining
E (R) = ~
where
given
a det:erminate
line
Following
risk-averse
the return
The tradeoff
market
high risk.
all
for
This
between
The capital
if
return
the riskless
equilibrium
accept
however,
maximum expected
assets
degree
which,
(2) and (3),
for
risk
for
return
isoutility
and risk
when
5.
With
returns,
constant
expected
the
investors
absolute
utility-maximizing
can
assume
an
risk
aversion
and
normally
portfolio
exponential
form
relationship
such
where
the
k-th
parameter
investor's
by
his
own
risk
AMB.
toward
this
asset
return
low
all
low
points
by
Line
CML
it
line
Chart
is
1
>
is
originates
such
as
as
at~.
O.
tangent
to
the
portfolio
expects
investor
along
utility
investors
maximize
high
They
proportion
crc ).
of
They
investor
lie
a
this
lend
asset
portfolio
closer
to
asset
to
to
assume
2
See
functions
taking
generate
[24].
implies
falls
when
negative
higher
The
unrealistic
wealth
marginal
than
average
common
risk.
Their
of
along
investors
assumption
behavior.
increases
utility.
of
It
and
that
high
very
utility
that
high
returns
CML
who
expected
quadratic
suggests
the
with
proportion
riskless
holds
~.
utility
low
the
this
who
when
their
hold
down
obtainable
return
that
segment
M denotes
receive
loci
set
moves
highest
increases
isoutility
portfolios.
(R
to
the
c,
prefer
The
determined
The
It
An
return
a
6).
appears
combination.
made
and
(p.
Point
Conservative
assets
clarified
combination.
cases,
axis.
risky
(R)/2)],
c
market
portfolio
risk
are
risk,
capital
risk-reward
"average"
investments
the
-ccr
avoidance:
combinations
until
portfolio"
In
at
axis
risk
"market
risk
only
Market
risk
efficient
be
asset
Capital
the
[-c(E(R)
investor
along
may
risky
The
-exp
preference.
theory
efficient
-
U(R)]=
denotes
position
This
of
c
for
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--
7.
return
find
portfolios
that
are supported
their
utility
are expanded
by high
these
along
points
This
certainty
portfolios
such as (Ra,cra).
equivalents
the behavior
markets.
decisions,
investors
to points
describes
in bond and equity
and operating
leverage
Aggressive
.along CML when their
is maximized
CML are
theory
by borrowing.
It
can also
including
real
In particular,
it
portfolio
of regulated
of individual
analyze
financial
behavior
Banks as Institutional
Unlike
marketable
basic
securities.
is
supplying
information
obtained
securities.
than
less
that
perceived
securities)
Banks issue
at rates
no explicit
charge
almost
about
~
to
budgeting
and
to analyze
riskless
a bank.
(2),
the
their
along
a
superior
and "customer
banks issue
than
(deposits)
In particular,
in
high
return
such loans
investors.
i~1 less
securitie~1
time
lending
]~isk of extending
by individual
Their
(5),
in nonmarketable
perceived
and traditionally
lying
to assumption
in
only
price-takers;
bank loans
to invest
whose return
invest
entirely
experienc:e
assumption
or less.
interest
income to
banks
Their
And contrary
(secondary
Contrary
through
allows
is
capital
financial
institutions.
bankf; do not
indivisible
demand curve.
primary
business
can be modified
Banks are not
downs loping
relationships"
investors
Investors
most individuals,
business
of
of ~.
sector
merger proposals.
All
the
liabilities
lending
bearing
rate.
interest
most demand deposits
represent
clnd savings
pay
a source
of service
deposits
represent
8.
a riskless
(Federally
insured
in
most cases)
pooling
of funds,
asset
to conservative
nonbank investors.
The resulting
information,
specialization,
and lending
is
and transactions
responsible
for
mediaries.
Correspondingly,
investnents
available
securities-only
could.
and equity
To the
Market
extent
elastic
Line.
adjusted
return.
It
quantity
setting
firm
an efficient
This
set
preferred
receive
not
that
Line
necessarily
alternative
Its
from realizing
would
earns
set
invest
in
investors
underlie
it
face
the
same
the Capital
an excess
setting
an unregulated
risk-
and partly
of 'this
full
If
level
of risk,
return
would
remains
model,
potential
a
hold
Line
[17].
opportunity
an unregulated
it
would
be (RA- ~).
intermediation,
bank
expect
It
to
would
since
the
available.
regulation
return.
Market
investment
intermediary.
investment
bank could
the Capital
anyone by this
context
their
it
the higher
excess
"exploit"
of direct
In the
also
private
a rate
dominate~;
to assume the market
RA'
loan!~,
partly
reflects
to a financial
return
that
that
thus
opportunity
bank could
markets
9) shows that
portfolio
available
the
[50].
2 (p.
Bank Market
risky
do so,
extends
is
of
would
financial
But as it
Chart
it
inter-
bank dominates
securitiel;
that
locus
investment
An unregulated
debt
infinitely
efficient
in borrowing
of financial
opportunity
to an unregulated
[35,40,49,50,55].
costs
the existence
the
Markowitz
any of the
based on divisibility,
may prevent
Reserve
banks
requirements
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10.
clearly
lower
asset
beyond
return
expected
that
returns,
required
on a portfolio
since
for
transa(~tions
containing
i and E(Xi)
r
on portfolio
falls
the proportion
denotes
the expected
cash is
clearly
proportionally
terms,
holding
instead
with
required
of secondary
lower
certainty
Wi
less
reserves
proportion
to total
market
risk
to risk,
investor
along
the Capital
restraint
represent
in
The zero return
expected
cBLshholdings.
asset
return
In risk-adjusted
in th,e form of primary
portfolio
reserve
profitability
assets
to a
the
capital
of portfolio
risk
beyond
2.
size,
from
could
If
in
reserves
a regulated
RA to ~
be less
same risk
than
the Proportional
are held
bank's
[49].
that
preference
requirements,
assets,
in
reward
If
the
for
bank is very
of a conservative
whose portfolio
further.
certainty
prohibitions
and other
some absolute
speculative
earnings
the
Chart
appears
lies
Market Line.
on earning
risk-adjusted
Line
return
with
Moreover,
in
declines
its
private
assuming
Hence,
reserves
portfolio
from
invested
from asset i.
than~.
reduces
of required
Line
types
return
reserves
Bank Market
certain
The weighted
E(i i )'"
of the portfolio
portfolio
Reserves
averse
purposes.
equivalent.
The effect
assuming
an inefficient
n
=
i=l
represents
always
n a~;sets is:
~
E(R)
where wi
cash is
(All
equivalent
regulations
level
returns
[27].
does not
points
against
lying
of the
holding
prevent
banks
The resulting
necessarily
along
zero-risk
reduce
a Bank Market
intercept
rate.)
-
11.
11.
These restrictions
strengthen
public
application
tends
limit
accounting
confidence
of risk-asset
to reinforce
risk-averse
solvency
are not
as though
is
to
not
traded
utility
preference."
goals
[17,
p.
judgments
of banker
prudence,
isoutility
loci
Bank utility
functions
involve
positive
offset
utility
the dollar
liabilities
The risk
will
full
true
sheets,
of
liability
33,
and Risk
36,
Since
"bank management behaves
and attempts
to
about stockholder
regulation,
with
and stockholder
the properties
marginal
shown above.
utility
of return,
cost,
and negative
risk.
Increased
returns
costs
of assuming
marginal
are required
to
increased
38,47,51].
Aversion
preference
holding
functions.
liability
and psychological
[2,22,
Bank Portfolios
balance
or
and
764.]
generates
of asset
utility
markets,3
of its
They try
profitability,
det:ermined
preferences
utility
profit-maximizers.
of liquidity,
in "perfect"
on the basis
marginal
Regulatory
in particular,
have homogenous! expectations
The combination
negative
ratios,
they
by banks.
unconstrained
subjectively
stockholders
maximize
capital
behavior
conflicting
according
bank stock
while
Investors
Banks thus
the
of return,
the b.anking system.
and other
Banks as Institutional
to reconcile
in
riates
of individual
interregional
banks may be suggested
and intertemporal
variations
by their
in
3"Simply attempting
to maximize the market value of the stock
not yield
the highest
utility
if the market does not reflect
the
value of the bank and if its stockholders
are unable to obtain
the
value by liquidating
their holdings."
[17, p. 764].
12.
demand constant
liability
Vault
Federal
e
10,12,28].
Consider
the following
asset
and
schedule:
Cash:
~
[2,9,
Cash,
Other
Borrowed
Funds Sold
Correspondent
Federal
Funds Purchased
Government
~
Other
Deposits
~
='
~
Government
~
'Pol
-~
~
='
co
~
4J
cx:
Securities
Certificates
of Deposit
~
CI)
~
~
~
4J
Securities
IPC Demand Deposits
'Pol
0
.Q
IPC Time and Savings
Deposits
Fixed
Assets
Capital:
Total
Assets
Total
Financial
This
simplified
of assets
return,
and operating
balance
sheet
and liabilities
curve
prevails
More liquid
corresponding
capitalized
of
to
value.
in
these
accounts
may shift
a bank.
characteristics
conditions.
assets
Illiquid,
receive
credit
risk
returns.
assets,
equipment
used in operations,
the
require
lower
and high
somewhat risky
portfolio
(The cost,
if
a downsloping
money periods.)
generally
low or zero
Fixed
for
the risk-return
"normal"
tight
cx:
Equity
are identical
orders
~
Liabilities=Assets
under
and volatility
yield
risks
Debt,
~
~
~
Loans
cx:
largely
loans
returns,
predictability
earn
the
highest
nonmarketable
j~ven higher
expected
of
plant
and
returns
than loans.
Conversely,
risk
~
~
'Pol
<
;:I
~
cu
~
~
~
~
~
Balances
Reserves
of withdrawal
more liquid
or
unavailability
assets
possess
generally
higher
volatility.
increases
as liability
The
13.
volatility
to
increases
short-run
from debt
withdrawal,
through
liabilities.
t-lhi1e the
require~nts)
may decrease
sloped
yield
available
curve,
l'Any increase
in
dollar
the
portfolio
paribus_,
deposit
should
find
both
accumulates
the risk
Hence,
or
may sell
in
drains
secondary
severe
be sought
maturity
connection
between
adjustments
only
rising.
enough to
or volatility
of operations
in
the
discount
While
assets
a bank's
of higher
longer
term
bank risk
preference
thus
occurs
through
the balance
short
run.
the
in
cash drains,
at the
by the promise
running
deficiencies
short-run
raises
returns.
banks
window,
may
and liabilities,
overall
risk
The
and shorter
term
sheet identity:
4
Kaufman's study [34] orders the variability
of deposits
as
follows:
U.S. Government deposits>
demand deposits
due to banks>
other demand deposits
~ other time deposits
~ total
demand deposits>
total
deposits>
time and savings deposits>
savings deposits.
-"
'--'-'.'"c.
'"
cc.c.
p.
thus
raises
create
of their
[49].
Such a bank
acceptance
borrow
of the
I' [33,
thereby
levels
management activities.
any category
and should
assets,
exposure.
funds,
risk
a positively
Ceteris
aggressively
risk
To meet these
reserve
liability
to match the
to lend long"
liability
reserves.
or engage in other
risk
and/or
reserve
deposit
set.
risk
based on volatile
for
management"
opportunity
overall
short-term
size
or aggregate
aggregate
subject
given
total
"liability
cash below required
liquidity
banks
reserve
loans
its
or operational
higher
and its
asset
legal
attempt
increases
return
its
to the
individual
a bank's
short
retains
increasing
of
worsens
not
liquid
increases,
at:tached
of
is
(ad.1usted
1jlquidity
increa~;ing
"borrows
of depleting
probability
with
volatility
that
oj: liabilities
as their
the volatility
unambiguously
A bank
cost
which
4 to highly
depol;its,
uncertainty
rises
balances
and eq1~ity capital,
120].
14.
r assets
= r liabilities
are attainable
although
in
only
longer
in
provides
by accepting
term
the long run.
assets
and equity.
low risk
earning
risk
in
be almost
the
ratios
short
run,
can be attracted
as important
[2,28,49,50].
on these
asset
and !'capital'!
should
profits
new evidence
liability
deposits
Liabilities
determining
Higher
as
(The Appendix
relationships.)
Demand Variations
These portfolio
along
a given
avoidance.
Bank Market
reserve-adj
us ted
Bank Market
Line
that
level
It
result
attain
environment
Line,
environment.
assets
differences
bank risk
should
also
vary
both
into
returns
available
somewhat riskier
a higher
level
ratios
of utility
rise
the barriers
bank structure.
[49].
to entry,
in
Chart
to all
assets
available
The resulting
returns
from
that
underlies
the
3.
then
or liabilities.
encourage
banks
They can clearly
profitability)
relaxation
customer
growth.
higher
banks
(risk-adjusted
This
High Demand
income or population
demand curve
Line
usted
in demand may result
each bank to achieve
bank loan
"normal"
returns
increase
from a concentrated
allows
the previous
efficient
This
High Demand Bank Market
encompasses
individual
and a reserve-adj
shows the greater
less-elastic
Loan/deposit
interbank
15) depicts
of economic activity:
The higher
to shift
3 (p.
Bank Market
from a high
the higher,
varying
bank earning
Chart
in a more favorable
may also
describe
and over time.
For example,
steeper
Line:
The demand for
cross-sectionally
market
preferences
[24,
of assumption
relationships,
and
(5)
36].
/
~~
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Z
1-1
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15.
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16.
restrictions
on branching
transfer
to
the
resources
across
realistic
related
to
that
economic
health
rate
on Bank
of
~furket
in
Market
it
increases
Line
[24].
This
financial
investors
The
can
required
then
of
lines.
It
profitability
geographic
climate
banks
is
highly
territory.
even
more
dramatic
money raises
the
risk1ess
the
and slope
the
Capital
rises
height
have
and rotates
>0.'
receive
to
conforms
When tight
line
~
a~
All
its
ability
as state
a bank's
of
Lines.
interest,
the
general
such
that
Variations
effects
the
distances
observation
the
limit
of
when
RF increases:
'i!-C!-ffi
>0.
aRF
a higher
return
at
the
same risk
level.
E (R) rises:
~~~-
>0
at equilibrium.
oRF
The Bank
to
assumption
rates
to
rise,
(6).
the
accommodate
particularly
becomes
relative
~Iarket
Bank
the
to
by extensive
security
sloped
returns
liability
their
portfolios
banks
may increase
loans
[44].
management
despite
their
stimulus,
[33].
Their
loan
rise,
Tight
money periods
behavior.
Banks
and industrial
rates
when banks
contrary
[51].
increases.
commercial
disintermediation
aggressive
this
state-dependent
usually
customers
when
to
highly
demand for
long-term
positively
strongly
are
bank
rising
of
reacts
returns
demand for
that
more
Line
as loan
seek
[38,44].
This
to
attempt
loans,
supply
returns
are
pattern
function
increase
also
tyPified
or
expand
maintain
Even
As
conservative
is
shown
in
17.
Chart
3 when the
steeply
sloped
riskless
Tight
rate
increases
Money Bank Market
to RC.
Line
The higher,
stimulates
more
bank risk
acceptance.
Bank Risk,
Utility,
and Borrowing
Member bank borrowing
a bank.
It
but
the
also
cost
of
involves
only
forms
Reserve
of
the
cost
opportunity
of other
Federal
not
represents
of
explicit
liability
management,
to borrow
earning
assets,
marginal
cost
Federal
Reserve
of the
is
subjective
represents
[30]
discount
the
and the
to
rate,
opportunity
implicit
cost
"
the marginal
pressure
element
minus
the
pretax
pecuniary
return
on
of borrowing.
a strong
such as loans
cost
of disuti1ity
asset management,
Bank "surveillance.
The incentive
a source
on extensively
to the
the amount of borrowing
true
cost
and psychological
borrowing
banks adds
of borrowing.
and C represents
If
the dollar
B
cost
of borrowing:
~ <0
dB
'
according
this
to [2,
reluctance
preference
21,47].
Only the
to borrow.
and interest
~ <0
ac'
rates
lure
Accordingly,
should
2
and ~
a
B2
of high
returns
both
influence
>0
individual
borrowing.
overcomes
bank risk
18.
The Financial
Climate
When the
profit-conscious
discount
rate
banks should
intermittent
rate
and Borrowin~
benefit
below earning
lags
behind
rising
to
be attracted
of Federal
Reserve
money market
discount
the
window.
System membership,
asset
rates,
rates,
RF in
One
a discount
then becomes available.
bill
rates,
(See Chart 4,
p.19).
As Treasury
climb
in
tight
opportunity
assets
money periods,
cost
of any bank along
tend
to exceed
distance
Federal
funds
its
position
exceeds
Federal
funds
incentive
the
rate
their
48,
rate
the
Bank Market
its
total
extensions
discount
tight
discount
of borrowing
Model,
rises.
The
reserve
3,
the
Line
position
would
vertical
line
utility
would.
by borrowing
then borrow
~
buy
of loans.
bank reserve
in
Chart
by a greater
bank would
of other
exceeds
rate
Pricing
secondary
Money Bank Market
increase
larger
In
a "normal"
cost
disutility
position
instruments
money periods.
When the
rate,
reserve-deficient
overcome
banks
by the resulting
profit
to borrow.
Empirical
level
the
its
bank loans
l3J.
discount
A more aggressive
to fund
usually
[7,11,
along
Asset
by selling
Tight
bank could
run.
Moreover,
may find
increases
the prevailing
than
short
reserves
the resulting
Even a conservative
in the
the demand for
of adjusting
simultaneously
the Capital
of interest
53J--and
with
studies
find
rates--financial
interest
rate
that
borrowing
demand [1,
may vary
2,
5, 11,
differentials--opportunity
with
both
13,15,22,
the
30,
P ercent
19.
$ Billions
13
4.0
11
3.0
Member bank borrowings
from Federal Reserve
Banks (right scale)
9
2.0
7
1.0
5
'I
3
3-month Treasury bill rate
on new issue (left scale)
0
Discount rate -FRB
Daily avg. rate (left
N. Y.
scale)
1
1967
1968
1969
1970
1971
1972
1973
1974
1975
Chart 4.
Adjusted aggregate borrowings, the
Discount Rate, and the Treasury bill
rate, January 1967,
through June 1975. (This borrowings series removes
the emergency credit extended to the Franklin
National Bank in 1974. The amount by which borrowings
by large New York City banks from May 1974, through
October 1974, exceeded the corresponding 1973 amounts
is subtracted from the aggregate series for a nonconfidential
adjustment.)
,
20.
costs
of
asset
and liability
profit-seeking
most of
money"
[19,
Treasury
is
is
that
more
loans.
the
The Supply
discount
with
of
Federal
[29]).
of
"...
periods
of tight
to
their
of greater
of
Treasuries
when rates
speculate
are
on capital
investment
when loan
gains
should
demand falls;
relationships
demand for
the
demand for
in
borrowings
discount
rate
borrowings
most markets
generally
in
Chart
relationship
varies
[4,42,
directly,
4.
Borrowings
of member banks when they
window appears
funds
of the
business
Conversely,
form of low' risk
derived
The accommodation
for
that
support
direction
use of funds
to price-quantity
not inversely,
tion
to
liquidation
incentive
most profitable
The aggregate
borrowed
form
then decline.
contrary
the
their
29].
This
The corresponding
53].
during
borrow
Indeed,
[3, 6,
Government securities.
borrowings
is
because
banks have a profit
represent
A occur
banks then
holdings,
to borrowing
falling,
by the observation
of Regulation
unlikely
toward
related
supported
This
p. 61].
security
utility
in
is
the violations
It
is
behavior
management [14,15,20].
at the existing
discount
Reserve
or monetary
credit--is
conditions.
their
term,
isoutility
an elastic
supply
rate
56].
discount
window--whether
Over the longer
banks decreases
to create
it
is
not supposed
(For
[39,
"open"
approach
schedule
for
The administra-
or "shut"
to vary
exceptions
"counseling"
loci
initially
with
to this
of extensively
away from the return
to requests
changes
in
policy,
see
borrowing
axis.
This
21.
"surveillance"
is
individual
essentially
bank borrowing
The Determinants
run.
the
result
of prolonged
[46].
of Borrowings
Borrowings
short
endogenous,
thus
are
primarily
The more aggressively
demand-determined
in the
a bank seeks profitable
loans,
the lower
will
be its
effective
liquidity,
and the more it
utilize
the
discount
window.
The higher
its
into
loans,
more it
relative
would
characterize
to its
be expected
individual
incoming
cash flow
to borrow.
outgoing
is
likely
cash flow
from deposits,
the
These relationships
banks and the banking
system [2,
3, 7, 9,
10,14,16,20,29,32].
"Aggressive-management"
items,
such as Federal
and time
deposits
positively
and internal
held,
savings
borrowings,
section
the
ratio
related
that
is
supported
analysis
of all
of borrowed
to 'volatile"
comprise
control.
connection
internal
or highly
certificates
of
deposit
Less volatile,
such as cash,
cash should
accounts,
reserves
to
balances
other
securities,
related
portfolio
items,
somewhat atheoretical
required
His
study
reserves
and is
negatively
or
subject
are
to
bank management.
member banks [41].
reserves
be
fund-providing,
correspondent
"attitudes,"
by Morgan's
loans,
should
be negatively
more "conservative"
between
volatile
Government deposits,
Government securities,
and vault
reflecting
This
borrowing
items,
funds sold,
deposits,
purchased,
to borrowings.
reserve
Federal
funds
including
related
fund-using
and
crossshows that
is
positively
related
to
to greater
items
bank
to
.~
22.
Empirical
Sources
of Borrowing
Borrowing
marizes
amounts
of borrowed
as the
behavior
and frequency
reserves
dependent
managerial
variable
for
The hypotheses
empirical
explanatory
microbanking
studies,
of 80-95% of the
is
initially
used
examined.
financial,
borrowings.
are of the general
to required
and the inevitable
"e'l tends
observed
ratio
and
The supply
elastic.S
to be tested
of borrowed
variables
are
the competitive,
BIRR = f (Xl'
where the ratio
figure
sum-
analysis.
of the demand for
be fairly
that
the averaged
This
variables
represent
determinants
should
reserves.
independent
largely
of borrowings
of borrowing:
to required
Twenty-eight
These variables
can be shown by one measure
x2'
...,
reserves
error
to be extremely
linear
form:
xn ),e~
depends
term "el'.
large,
on n
(In most
on the
order
variation.)
5
The possibility
that inter-District
differences
in borrowing
behavior
may reflect
varying
attitudes
of discount
administrators
has
been raised
[37].
Such variations
would amount to regional
monetary
policy.
It is more likely
that computed inter-District
differences
in borrowing
indicate
differences
in bank attitudes
toward the discount
window, bank structure,
or the demand for bank services.
These
microeconomic
factors
should be more important
determinants
of borrowing than the nonprice
rationing
that would occur if some discount
windows were open wider than others [2, 39, 52,52].
Moreover,
all of
Hinderliter's
[29] attempts
to quantify
non-price
rationing
in timeseries
analysis
were unsuccessful.
.-.23.
The portfolio
are portrayed
characteristics
by the variables
of these
available
from
banking
reserve
organizations
position
accooots:
ASSETS
CASH
Actual reserves plus
process of collection
deposits;
CaRR
Correspondent
balances
total
deposits;
DEMDEP
Demand deposits
deposits;
FFPUR
Federal funds
total
assets;
purchased
FFSOLD
Federal
assets;
sold
GOVDEP
u.S.
total
Government
deposits;
deposits
GOVSEC
I
'.
The average
organization;
asset
U.S.
total
Government
assets;
securities
LOANS
Loans and discooots
foods
size
of each banking
cash items in
divided
by total
held
divided
divided
by
by total
divided
divided
by
by total
divided
by
divided
divided
by
by total
assets;
OTHERSEC
Other securities
bonds") divided
(such as "mooicipal
by total
assets;
SAVDEP
Savings deposits
deposits;
TlMEDEP
Time deposits
(including
deposit)
divided
by total
USSEC
u.S. Government securities
divided
Government deposits:
a proxy for
Government securities;
VCASH
Vault
cash divided
divided
by total
certificates
deposits;
by total
of
by u.S.
unpledged
deposits.
24.
The popular
portfolio
image of large
managers
smaller
banks.
might
suggest
It
of securities
involves
transactions
[9, 16].
Sone. of these
Others,
with
lower
borrowing
41].
since
proportional
to
organizations
includes
banking
that
for
desired
in
that
generate
(zero-one)
organization:
mu1tibank
higher
J"
"",~,"",","
the
of funds
should
depress
may be
into
be less
output
returns
of micro-demand
variables
companies
that
exhibit
banks is
Virginia
holding
"""
of these
should
account,
than
banking
stimulate
borrowings.
effects,
the analysis
show the
location
tested
all
of each
The possibility
different
banking;
companies.
--
"""..,""",
should
[10].
[44].
branching
6They dominate
are multibank
Virginia
low cash
relationship
assets
factors
sources
banks,
DC, MD, NC, SC, and VA.
holding
large
smaller
funds,
borrowing
to nondeposit
the demand for
the existence
binary
than similar
size
economies
relatively
of banks are taken
reserve
is
and other
to stimulate
characteristics
deposit
Variations
than
more than
of alternative
The assets-borrowing
when other
particularly
costs
borrow
fluctuations,
such as the
tend
aggressive
and borrowing
preferences,
bank access
transactions
[16,
negative
To test
would
such as larger
deposit
risk
factors,
banks,
size
and availability
of cash management,
of larger
they would
between
relative
economies
ratios
that
The relationship
more complex.
banks as highly
borrowing
behavior
by the VA variable.
firms
in
.-.,
the
sample
'-?
6
from
~"'",.,
25.
Financial
rates
demand variations
and interest
rate
are represented
differentials.
by interest
They are:
DRATE
Fifth
District
discount
rate,
under
sections
13 and l3a of Regulation
A;
FFRATE
Federal
funds
rate;
FFLD
Federal
funds
less
TBILL
New issue
3~onth
Treasury
bill
rate;
TLD
New issue 3~onth
discount rates.
Treasury
bill
less
The higher
the level
be borrowing.
is
usually
in
the
Although
associated
discount
ferentials
should
Q2. Q3.
Banks
that
in
an increase
lessens
rate.
the
rates;
the higher
discount
rate
in borrowing,
should
itself
an increase
the FFLD and TLD interest
dif-
depress borrowing.
borrowing
48.53.54].
are examined
interest
an increase
with
rate
Finally.
[13.20,
of any single
discount
activity
may follow
The possible
by binary
variables
seasonal
that
seasonal
influences
represent
patterns
on borrowings
each quarter:
Ql.
and Q4.
Examined
The sample
organizations
consists
consolidated
of 23 large
companies
are large
management.
They hold
approximately
in each location:
~~""
District
on a member-bank basis.
bank holding
deposits
Fifth
-"~.~--""---~
enough to practice
three-quarters
the District
banking
These banks
and
liability
of member bank
of Columbia.
Maryland.
.'C"
North
"
Carolina.
c",
26.
26.
-7
and Virginia.
South Carolina,
that
serve
a diverse
group
They operate
of customers.
Restricting
Reserve
District
differences
eliminates
determine
the
possibility
the other
influences
one business
cycle
through
July
The use of monthly
1975).
of random,
from day to day.
reserves
being
aggregate
reserve
the analysis
(It
periods
positions
that
discount
may
transient
partly
far
average
factors
longer
individual
January
variables
1971
minimizes
that
lagged
affect
bank reserves
the
ameliorates
such as quarterly
aggregate
are examined over
(recovery-boom-recession:
based on two-week
over
any
of the
factors
on borrowing
roughly
impact
of confusing
activity.
The monthly
the
one Federal
administration
rationing--with
borrowing
", ,':-:
the sample to
in District-by-District
window--nonprice
numerous offices
effect
of required
deposits.)
It
than
those
relevant
or
yearly
intervals.
banks
into
does not
possibly
to
bank
Nor does
nonhomogenous
groups.
Variable Relationshi~s
The 28 variables
independent
and liability
of each other.
that
may explain
The behavioral
management postulates
that
borrowings
may not be
model of a bank's
strong
relationships
asset
exist
7The smallest
of these banking organizations
held over onequarter
billion
dollars
in deposits
as of December 31,1974.
West
Virginia's
small unit banks behave differently
from those sampled [23].
27.
among portfolio
ratios
themselves,
as well
as with
the monetary
climate.
A test
the
independent
analysis.8
analysis
9
numbers of variables
while
to
"distmce"
of
the
separates
each other--"
analysis
between
tionships
between
portfolio
items,
unrelated
thus
variables.
interest
It
patterns
rates,
interest
In this
the
explanatory
analysis
(not
the
strongest
differentials,
way,
knowledge
are is
are
dimensions.
rate
variables
traits
that
portrays
shows the mutually
large
related
in multiple
map" that
analysis
relate
highly
onto
angles"
a "road
and seasonality.
independent
factor
that
clusters
traits
in
of the data
Essentially,
It
that
present
dimensionality
coefficients
at right
is
technique
common influence
compact space.
correlation
among
made by factor
a multivariate
to each other.
it
Factor
is
reduces
It
multidimensional
orthogonal
the common relationships
patterns
of a relatively
together;
of
variables--multicollinearity--is
data set.
that
mutually
extent
the higher-order
any large
creates
the
Factor
reveals
to
for
relalocation,
of how
used to reduce
multicollinearity.
Methodolo8Z
The factor
8
Multicollinear
coefficients
(a singular
equations,
particularly
shown) suggests
operational
variables
generate indeterminate
cross-product
deviation
matrix)
those computed with an intercept.
specifications
estimates
of
in regression
9William Jackson,
Commercial Banking Performance and Structure:
A Factor Analysis
Appro~ch,
Federal Reserve Bank of Richmond, ~~orking
Paper 74-5,1974.
28.
to
test
rates
the initial
Bank Market
and interstate
models,
which
indicates
demand shifts
a smaller
dimensions
regression
analysis.
set
of possible
hypothesis
all
that
to-borrow"
only
theory
of the 1930's,
feel
random short-term
reserve
gives
the
borrowing:
differing
it
units
each variable's
influence
the
standardized
Y = bl
Y
-~
Sy
This
regression
the
"need"
"need-
borrow
caused by
"b"
+
B
1
(--+-)
Xl
sl
of each predictor
2
(--+-)
X2
s2
regression
bn ~
...+
of
the larger
is
its
These
model:
+ e
(8) coefficients
8
of
value
predictors.lO
of the
b2 X2 + ...+
in
their
absolute
coefficient,
coefficients
Xl
are presented
method of presentation
the
to the other
standardized
.,
the null
banks
of interpreting
The larger
relative
the
that
fo'r
in which
resembles
postulated
problem
of measurement.
into
a random process,
of the importance
the serious
lOThe computed
are converted
independent
against
of the regressions
coefficients.
on borrowing
tested
of unpredictable
results
comparison
avoids
are
the
It
pressures.
of standardized
direct
portfolio
used as input
hypothesis
which
the pressure
Technically,
the form
null
interest
space and over time.
They are
essentially
This
disregards
encompasses
These regressions
are zero.
when they
across
of variables
is
which
and the extended
"causality".
borrowing
coefficients
Model,
demand variations,
utilize
that
Line
of:~
8
n
(-+ )
Xn
sn
e'
where I's" represents
the standard
deviation
of a variable.
For each
increase
of one standard deviation
of an explanatory
variable,
the
standard deviation
of Y should increase
by that variable's
S. The
standardized
coefficients
of absolute dollar,
binary,
interest
rate,
and ratio
variables
can be compared directly.
Conventional
regression
("b") coefficients
cannot be compared directly
because of their
different
units of measurement.
Colin Clark et. al.,
Business and E~onomic
Forecasting:
An Econometric
Approa""Ch (HOmewood, Irwin:
1961),pp.
74-75.
Robert Ferber and P. J. Verdoorn,
Research Methods in Economics ~n~
Business
(New York:
Econometric
Theory
Macmillan,
(New York:
1962), p. 99.
Arthur
Wiley,
1964), p. 54.
S. Goldberger,
'7.
29.
coefficients
have been used in many economic
Bank Portfolios,
Size,
The test
Table
1 (p.
associated
loans.
cash,
Federal
minimizes
while
it
volatile
that
other
its
typified
Its
bank that
Regulation
and
funds soldll,
and bank-
organization
Federal
Government
tends
funds.
It
securities,
involves
relatively
profit-oriented
It
enterprise
returns.
equation
This
than
positively
Government deposits.
presumably
suggests
but rather
better
banking
structure
by fluctuating
grow larger,
banking
Federal
additions:
liability
an increasing
large
with
and unpledged
to borrow
proportion.
load
reserves
out loans.
seeks high
as they
are
in
Government deposits,
large
reserve
as a risk-accepting,
tend
model appears
Government securities,
borrowing
short-term
primary
seeks
This
not
associated
12 unpledged
a typical
deposits,
behaves
[41].
size.
That is,
to purchase
Line
borrowings
funds purchased.
cash items,
organization
Bank Market
1 shows that
They are negatively
vault
ing
Table
with
including
and Borrow!~g-
of the initial
30).
studies,
finding
organizations
smaller
ones.
that
large
proportion
that
may reflect
to match
The largest
banking
organizations
of their
they borrow
supply
banking
ability
and demand for
organizations
llAn institutional
consideration
is relevant:
sold Federal funds was regarded as violating
A during this period.
l2The factor
analysis
reveals
on different
factors,
reflecting
reserves
a decreasing
the longer-term
the
required
do
of very
funds
were
a borrowing
the spirit
of
that vault
cash and total
cash items
possibly
differing
bank characteristics.
30.
TABLE 1.
Borrowed Reserves/Required
Reserves
Explained
by Portfolio
Items Only*
Explanatory
Variable
Standardized
Regression
Coefficient
FFPUR
0.2672
t
Statistic
7.06
Significance
of t
0.0001
FFSOLD
-0.2399
-8.08
0.0001
VCASH
-0.2145
-4.81
0.0001
0.1703
3.51
0.0008
-0.1497
-5.65
0.0001
LOANS
0.1349
10.67
0.0001
USSEC
-0.1031
-3.33
0.0013
ASSETS
-0.0968
-2.65
0.0082
GOVDEP
CASH
R2
0.3242
F(8,1211)
72.63
*The intercept
has been suppressed to lessen multicollinearity.
The
t statistic
is computed under a null hypothesis
of a zero relationship.
Its significance
is the probability
that the relationship
is zero (unity
minus the confidence level).
Stepwise mode estimation
is used with the
significance
level for variable
acceptance or deletion
set at 0.05.
This regression
as a whole is significant
at the 0.0001 level.
Co
~-
31.
generally
able
to obtain
nondeposit
commercial
paper,
common stock,
terms
than
smaller
ones during
these
liability
and equity
organizations
borrowings
of
would
large
banks,
(Such a finding
The test
between states,
location
of the
appears
variables
each state,
the
These coefficients
Columbia
banking
South Carolina
the high
demand for
the positive
economic
activity
suggests
that
in
these
borrow
areas.l3
example,
l~or
1974 per
DC
MD
VA
NC
SC
Bank ~larket
""'~
associated
vary
of the
with
has been suppressed.
and District
of
somewhat more than similar
This
associated
finding
with
The Virginia
companies
capita
Lines
The coefficients
tend
may reflect
generally
high
coefficient
to borrow
slightly
incomes were:
$7,479
5,881
5,265
4,612
4,258
The Virginia
coefficient
appears to be more related
companies than to economic activity.
'",
typical
of multicollinearity.)
Maryland,
banks.
services
holding
factors
intercept
Virginia,
multibank
size-
intercept
Carolina
banking
banking
2 (p. 32).
conventional
and North
these
and Borrowin8.
in Table
organizations
that
Any positive
second hypothesis:
show that
extent
low cash holdings.
example
Size,
identify
since
funds,
to depend on other
relatively
notes,
on more favorable
To the
provide
be a clear
Portfolios,
period.
to borrow.
appears
would
Bank Location,
this
items
such as their
such as capital
and Eurodollars
not desire
relationship
funds
to bank holding
32.
32.
TABLE2.
Borrowed Reserves/Required Reserves
Explained by Portfolio
Items and Location*
Explanatory
Variable
Standardized
Regression
Coefficient
t
Statistic
Significance
of t
~
VA
0.6542
6.37
0.0001
MD
0.6263
7.02
0.0001
DC
0.6228
9.29
0.0001
SC
0.4484
8.27
0.0001
NC
0.4242
7.02
0.0001
FFPUR
0.2896
8.79
0.0001
FFSOLD
-0.2432
-8.43
0.0001
CASH
-0.2329
-7.95
0.0001
VCASH
-0.1503
-3.34
0.0012
SAVDEP
-0.1388
-2.98
0.0033
USSEC
-0.1232
-4.03
0.0002
GOVDEP
0.1201
2.44
0.0140
LOANS
0.0729
3.75
0.0004
R2
0.3815
F(13,1206)
57.22
*See the notes to Table 1.
'o~-.c..,
"..~".,,'
."
33.
more than similar
apparently
banks.
large banks, since multibank
seek out higher
risk
14 These coefficients
concentration
ratio
effects
asset size,
confirms
tionship,
confirms
This equation,
which is related
relationship
the expected positive
and portfolio
allocation
to the
to expectations.
composition
however, does not include
It does include
and borrowing.
are a highly
rela-
dependable low risk
The expected interaction
lowers the influence
a negative
This finding
deposit volatility-borrowings
since savings deposits
a bank.
either
the portfolio
to location.
between savings deposits
source of funds for
than non-affiliated
change, contrary
generally
shown in Table 1.
company banks
do not appear to be related
or to its
This regression
and returns
holding
between demand
of the loan/asset
ratio
taken by itself.
IAterest
Rates, Portfolio
The third
Lines vary with
Items, Seasonality.
regression
tests
the financial
of the seasonal borrowing
to enter
the equation
location
variables,
of interest-related
if
the hypothesis
climate.
privilege,
and Borrowi!!~~
In view of the importance
it
allows
they are significant.
whose effects
variables.
that Bank Market
quarterly
(It
variables
does not include
should be swamped by the effects
See Chart 3, p. 15.)
-
l4William Jackson, ~¥!.tiba~k ~ol~~ng ~ompan~~s and Bank Behav!~E,
Federal Reserve Bank of Richmond, Working Paper 75-1,1975.
,!:\
'""""""""'cL"""""",,,J'.;;",
I
I
34.
Table
climate
3 (p.
35) indicates
and bank decisions
ratios.
Its
explanatory
that
lessens
interaction
between
the importance
power is
fairly
high
the
financial
of some portfolio
for
a micro-banking
regression.
The Federal
now the
strongest
purchased
of
interest
ratio
to the factor
confirming
the
to appear
at the
competitors.
with
Finally,
a negative
collateral
against
No seasonal
considered
by aggressive
periods
banks
management (Federal
the demand for
f ace no explicit
economic
rather
that
funds
than
coefficient
banking
a strong
their
regression,
reappears,
slightly
securities
ability
with
organizations
than their
Government
appear
in
Table 3,
the equation.
of
lack
sold,
borrowings.
"seasonal
The level
is
this
and
smaller
again
to
~
serve
appear
as
reserves.
to enter
during
larger
despite
variables
eligible
on reserves
unpledged
borrowed
rate,
not be used in
window less
coefficient,
sold
borrowings.
bill
The size
the
discount
with
funds
is
FFLD, and USSEC are so correlated
LOANS could
for
differential
Federal
associated
analysis.)
tendency
rate
by the Treasury
(It,
that
interest
of borrowings.
represented
on borrowings.
loan/asset
discount
to be strongly
rates,
according
~
less
determinant
continue
influence
the
funds
tight
Rather,
money,
secondary
unpledged
need to borrow"
terms.
loan
particularly
reserves
These banking
temporal
although
U.S.
suitable
securities)
organizations
that
cannot
they were
demand pressures
those
for
felt
asset
describe
apparently
be described
in
34.
35.
TABLE 3.
Borrowed Reserves/Required Reserves Explained
by Portfolio
Items, Interest Rates, and Seasonality*
Standardized
Regression
Coefficient
Explanatory
Variable
t
Statistic
Significance
of t
9.20
0.0001
-
FFLD
0.3186
FFSOLD
-0.2735
-10.30
0.0001
FFPUR
0.1874
5.48
0.0001
TBILL
0.1747
6.91
0.0001
ASSETS
-0.0771
-2.46
0.0135
USSEC
-0.0581
-2.26
0.0225
R2
0.4499
F(6,12l3)
165.33
*See the notes to Table 1.
Time variables
are eliminated
selection
algorithm
since they are not significant.
,...~
~"."
~c."".._c,'
-"
by the
.--36.
Summary and Conclusi~?s
This
asset
develops
and liability
extended
it
study
to
of individual
management behavior.
analyze
provides
a model
bank reactions
the framework
bank risk-return
While
to regulation
to examine
the use
of the
of the portfolio
model are tested
by large
District
organizations
risk
Fifth
banking
model could
and other
Three versions
forces,
discount
using
be
window.
borrowing
as an indicator
of
acceptance.
Borrowing
oriented
banks
approach
volatile
liabilities,
deposits,
items,
asset
vault
lagging
borrow
cash,
longer-term
of this
rate.
behavior
of money,
the financial
further
raises
rate
market
monetary
aspects
the
as complementary,
funds
the
rises,
discount
supply
rate.
short
sold,
cash
as gross
increases
than
the
typically
This
as well
run response
Reserve policy.
window,
see
seem to use borrowings
not
low-
particularly
of loans,
Federal
discount
faster
organizations
dampens the
of the
banks thus
rates
banking
exceeds
in a way that
their
bank behavior
from lending
stimulates
and Government
They minimize
"aggressive"
return
purchased
Government securities.
economy to restrictive
Aggressive
purchased
funds
funds
profit-
They accept
such as Federal
Individual
when the absolute
presumably
mana~ement.
loans.
and unpledged
money climate
when the Federal
supply
portfolio
management accounts
discount
procyclical
a risk-accepting,
such as Federal
The incidence
when a tight
follow
to their
and extend
earning
'._-""""
this
substitute,
as the
of
(For
[32].)
and Federal
sources
funds
of short-
,,",c
I
-
37.
term
reserve
funds
adjustments.
apparently
Conservative
large
This
require
with
for
banks
"need"
can practice
deposit
study
borrowing
banks
appear
that
be considered
It
to
holding
that
of borrowing.
the
accounts.
to
utility
raise
short
count window,
banking
face
They do
organizations
are negatively
associated
special
treatment
since
with
within
required
influences
induced
the
is
no seasonal
time variables.
and deposit
run,
in areas
than similar
on
"Seasonal
reserve
spirit
banks in
pressures
of Regulation
less
A
activity
prosperous
also
areas,
suggests
that
more than similar
general
are inconsistent
consistent
risk
acceptance.
with
the
with
the profit-risk
window funds
at an elastic
"need"
of a bank.
of discount
the extension
particularly
indeed
economic
It
borrow
of their
relationships
model
of high
to assume risk.
indicator
They are
The availability
in
(FFLD).
of the year,
company organizations
These systematic
appears
loan
banks
borrow
banks--one
managerial
that
times
appropriate
demand inducements
unaffiliated
theory
volatile
them "seasonal."
are more likely
multibank
costs
when macro and micro-level
represent
does suggest
reflecting
assets
simultaneously
may thus
larger
suggest
at different
borrowing"
calling
that
Total
Nor does it
are examined
without
on these
They do not
from volatile
suggest
surveillance.
in borrowing
could
in their
asset management.
withdrawals
does not
special
borrowing
dependence
to borrow.
borrowing.
shifts
relative
depends on the difference
potential
not
Their
of
credit
during
may be the decisive
by these
ti~ht
banking
money periods.
inducement
for
rate
thus
organizations
An open
banks
dis-
to remain
38.
38.
38.
members of the Federal
predictable
tions.
by observing
This
study
Bank Market Lines,
in
these
Reserve System.
lines,
finds
The use of this
bank portfolio
that
as well
are important
banking
ratios
and money market
organizations'
as interstate
determinants
window may be
location
and interest-related
of
bank borrowing.
condi-
along
shifts
39.
APPENDIX:
_Bank Portfolios
and Profitabilit_~
The Bank Market
exists
Line
between nominal
liabilities.
This
banking
data,
necessary
profitability
connection
since
Fifth
expressed
and the
reserve
a strong
riskiness
can be tested
District
rate
as a potential
regression
is
variables
are entered
less
1,644
banks in
than
against
connection
of assets
independent
accounts
do not
cent of all
the equation
and
micro-
contain
for
the
Table
It
after
loan
indicates
losses
source
This
ratios.
the text,
only until
(then)
is
highly
composition.
that
This
that
contribution
their
historically
to
reports
high
sample includes
accordingly
except
from regulatory
loans
of funds
that
(Strong
multicollinearitYt
from being
It
time
by
interest
more than 11 per-
and savings
included
lower
the balance
broad
categories
of
shown in Appendix
returns
shows that
are a still
through
to four
regressiont
earn higher
than
demand deposits
related
This
are deducted.
cationt
more variables
in
is
banks.
Bank profitability
and liability
the
capital
portfolio
are derived
and 1971.*
insured
asset
of eighteen
The data
44 states
on bank equity
the same way as those
into
0.001.
of 1969,1970,
of return
function
computed in
R2 is
expensive
that
information.
The accounting
period
Model indicates
than investmentst
equity
capital
depositst
cost
sheet
is
even
a more
and by impli-
source
identity,
of funds.
prevents
in the regression.)
*The data were provided
by the Federal Deposit Insurance
Corporation.
They are described
in William
Jacksont Commercial Bank Regulation,
~trusture.
and Performanc~
(doctoral
dissertationt
University
of North
Carolina,
1974).
"""',1.. ",.""'-"
,."
ill_."
-"""
40.
40.
Appendix
Statistical
Characteristics
Table
of Profitability
Standardized
Regression
Coefficient
Explanatory
Variable
I
Equation
t
Statistic
Significance
of t
--
Loans/Total
Deposits
0.9868
28.00
0.0001
Investments/
Assets
0.7454
25.59
0.0001
-0.4409
13.87
0.0001
-0.3022
8.31
0.0001
Equity Capital/
Assets
Time and Savings
Deposits/Total
Deposits
R2
0.9500
F (4,1640)
7787.29
On the
side
while
profitability,
asset
on the
sources
of funds
a strong
positive
risk
and accounting
decrease
of
liability
profitability.
association
rates
the balance
exists
sheet,
side,
greater
longer-term
These findings
between
bank asset
loans
less
increase
risky
suggest
or
that
liability
of return.**
**Ex ~
realized
returns
from highly
risky loans declined
later
in the 1970Ts with a higher level
of loan losses.
The state
of nature--a
recession--generated
the unfavorable
portion
of the distribution
of returns for many banks.
-""",,"
,
41.
41.
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