Sources of Bank Charter Values - PowerPoint PPT Presentation

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Sources of Bank Charter Values

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  1. Sources of Bank Charter Values Frederick Furlong and Simon H. Kwan Federal Reserve Bank of San Francisco Disclaimer: Do not represent the views of the Federal Reserve

  2. Rebound in BHC charter value ratios

  3. Outline • Potential reasons for positive charter values in banking • Developments in U. S. banking that may have affected charter values • Data and empirical model • Empirical findings on factor affecting charter value ratios

  4. Bank-specific factors affecting CV • Funding • Federal safety net, reliance on insured deposits • Other sources of funding • Transactions services (access to payments system) • Portfolio lending • Synergies in deposit taking and lending • Other Non-interest income • Credit services—e.g. loan commitments • Economies of scope in financial services • Operational efficiency • Economies of scale • X efficiency

  5. Developments in U. S. banking that may have affected charter values • Restructuring • Financial innovation • Adoption of technology affecting operational efficiency • Legislative, regulatory, supervisory initiatives to limit conjectural guarantees from federal safety net

  6. Empirical Model

  7. Empirical Model

  8. Empirical Model

  9. Empirical Model

  10. Data • Federal Reserve Y-9C data • Sample period: 1986 Q2 to 2003 Q4 • Sub-periods: 1986 Q2 to 1994 Q4 1995 Q1 to 2003 Q4 • BHC stock price data from CRSP • Final sample: 624 BHCs with 22,338 firm-quarter obs. • Size classes: Large (top 10th percentile by assets) Medium (50th to 90th percentile ) Small (bottom 50th percentile)

  11. Stock index and bank charter value ratios

  12. BHC-specific and macro financial effects

  13. BHC-specific effects—deposit shares

  14. Declining transactions deposit shares

  15. BHC-specific effects—loan shares

  16. Real estate loan shares

  17. BHC-specific effects—non-interest shares

  18. BHC-specific effects—non-interest shares

  19. Rising non-interest income shares

  20. BHC-specific effects—size & efficiency

  21. BHC-specific effects—size & efficiency

  22. Rise in efficiency

  23. Conclusions • Bank-specific characteristics • Deposits: consistent positive effects from transactions and core deposits on CV ratios • No change in marginal effects, decline in shares • Portfolio lending: only consistent positive effect on CV ratios from consumer lending for large BHCs • Non-interest revenues: consistent positive effect on CV ratio for large BHCs • Increase in marginal effect, rise in share • CV ratios related to measure of efficiency • No change in marginal effect, rise in measured efficiency • Macro financial variable appear to have contributed to movements and some of the net rise in measured CV ratios