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The announcement of a bank loan by a borrowing firm has been shown to have a positive effect on the market value of the borrower’s claims. This is consistent with a lender’s implied endorsement of the borrower––an endorsement that has value to the borrower. In this paper, we investigate whether the lender is able to extract a premium loan rate or certification premium in return. We find empirical evidence that in the absence of collateral reputable lenders are able to exact a certification premium.

Why does forbearance for insolvent banks occur? We offer an explanation based on stockholders’ ability to appeal to the courts for reversal and monetary damages after the regulator has initiated a receivership action. Although this has always been theoretically possible, precedents and common law standards now exist. We calculate the market’s perceived postponement of receiverships for banks thought to be insolvent. We explain the receivership delays with the regulator’s reluctance to proceed when investors’ pricing of the bank’s stock and accountants’ assessment of the bank’s solvency do not support a receivership action. Our clinical evidence is consistent with this notion. Jel Classification: G180; G200; G210; G280

We have estimated the forward-looking bank asset volatility using market prices of bank equity and subordinated debt. This is in contrast to estimation procedures which rely on historical stock price volatilities. Important for bank regulatory policy, we find that, during 1987–1988, a time of financial stress in the banking industry, most bank asset volatility estimates based on contemporaneous market information were on average 40% higher than historically-based readings. Our results suggest that elevated asset volatilities would require higher risk-based capital standards to protect the deposit guarantor.

This paper develops a two-date state preference model which demonstrates that investors' valuation of third-party guaranteed debt depends on the financial condition of the guarantor. As the solvency ratio of the guarantor declines, investors demand higher promised rates on the firm's debt securities and price the firm risk variables more sensitively. The empirical results are derived from sample data of FSLIC guaranteed obligations from the late 1980s. Evidence shows differences in the market's perception of FSLlC's insolvency between 1987 and 1988. The market response to a decline in the financial condition of the guarantor affected the value of insured CDs, raising CD rates in relation to the Treasury curve and firm risk pricing of insured deposits emerged.

This study examines the effects that single-family rental properties in a residential neighborhood have on the value of single-family residences in that area. The analysis blends real estate valuation concepts with evidence found in the housing maintenance literature and urban succession theory to develop testable hypotheses regarding the property-specific, proximity-related, and neighborhood-wide impacts of rental properties on property values. The data used to test the hypotheses include the tenure status of 23,119 single-family residences and 1,162 single-family sales. Regression results support all three hypotheses. Although numerous studies on the value impacts of other externalities have been published, this is the first study to examine the separation of property rights. The results of this study provide additional insights into housing maintenance and also have implications for neighborhood zoning regulations.

In the absence of external guarantees, a private firm's debt trades in the market at rates reflective of its private default risk. Not all firms go it alone, however. There are entities, government-sponsored enterprises (GSEs), whose debt obligations enjoy federal guarantees. Federal guarantees affect housing finance indirectly in that they tend to enhance the creditworthiness of the debt obligations of the housing intermediary which lessens the debtholder's exposure to default. The market investor then becomes a willing buyer of GSE debt at a lower (subsidized) rate as a result of the government guarantee.

We develop a model of third party guaranteed debt and show that interest rate premiums are multiplicatively related to firm and guarantor risk. We apply the model to thrifts issuing CDs guaranteed by the FSLIC and then estimate firm probabilities of insolvency and guarantor risk across 20 observed months. This time period spans the insolvency of the guarantor followed by two recapitalizations. The relative stability in firm risk across time offers no evidence of generalized risk contagion among firms. We attribute elevated CD premiums and rate spreads to increases in guarantor risk rather than changes in firm risk. On third party guaranteed debt, the risk of both the issuing firm and guarantor determines the interest rate. We show that the interest premium above the riskless Treasury rate for guaranteed debt is multiplicatively related to two factors: the probability of firm insolvency, and the expected cost of an incomplete guarantor payoff. We demonstrate that the presence of the guarantor obscures firm risk. Despite this, our model provides the basis for measuring firm risk as well as guarantor risk. We explain how different rates can exist on different firms' debt with the same guarantor and how spreads among the different firms' rates widen when the guarantor becomes riskier. Only a riskless guarantor causes the spreads to disappear. Our model fits nicely the case where savings and loans issue certificates of deposit (CDs) and the guarantor is the government's deposit insuring agency, the Federal Savings and Loan Insurance Corporation (FSLIC). In this case, the debt instrument, the guarantor, and the guarantee are the same for all the firms. We apply the model over a 20-month period beginning in January 1987 when, fol? lowing hundreds of thrift failures, the FSLIC announced its own insolvency. The

This paper contains a theoretical development of the relationship of CD premiums to both the risks of the CD issuer and the third party government guarantor of those deposits. The theoretical development shows that the risk of the guarantor derives from the possibility that the guarantee could be repudiated and/or the restitution of the depositor's claim could be costly. The empirical analysis of the premiums for insured CDs indicates that during the years preceding the ultimate collapse of the FSLIC, the market priced the risk of both the guarantor as well as the firm. The guarantor risk pricing was responsive to the insolvency of the guarantor, the attempts to recapitalize the guarantor and the efforts to resolve the insolvent thrifts. During this eventful time period CD premiums rose to 187 basis points and averaged 79 and 54 basis points. Copyright 1994 by Ohio State University Press.

IN THE LAST DOZEN YEARS there has been a modest increase in the number of newly chartered black-controlled savings and loan associations. Starting from a base of 28 associations in 1960, by year end 1974 there were 41 FSLIC insured blackcontrolled associations. Much of this expansion has been attributed to a need for central city mortgage finance in districts populated by low-income ethnic minorities.' While we do not question the scarcity of mortgage finance in certain communities, the potential for black-controlled associations to supply long-term mortgage instruments is critically dependent on their ability to compete for deposits and to operate efficiently in the urban markets in which they reside. What is the competitive position of black associations? How efficient have seasoned associations become in providing financial services in their communities? Slight evidence regarding these questions is available. A recent study by Bradford [3], for example, examines the ability of a group of predominantly black minority associations to operate profitably. Utilizing ratio analysis, Bradford reports that minority associations had a higher ratio of operating expenses to gross income and thus a lower ratio of net to gross income when compared to a similar sample of white-controlled associations. Commenting on costs, Bradford finds higher compensation expense in minority associations.2 This resulted in lower rates of return for minority associations. Ratio analysis, although informative, does not clearly identify the economic causes for observed differences in performance. Accordingly, we review the revenue and cost structure expressed as annual rates per deposit dollar. Furthermore, by modelling the profit maximizing behavior of a financial intermediary we are able to econometrically separate the operating cost rate into financial production costs and implicit deposit rates for a group of black controlled associations and a matched white comparison sample. The results indicate that black associations earned higher rates on deposits and paid lower, explicit and implicit deposit rates. The spread between the asset and deposit rates for these associations was larger than the comparable white sample. Despite this larger rate spread, black associations were less profitable as their

Home ownership is a claim on the stream of net rents. Like any income-producing asset, the market capitalizes its value. The price-rent multiple depends upon the expected growth rate of revenues and expenses, on financing terms, and on taxes. This paper derives this price-rent multiple in terms of these variables and calculates its value from 1963 through 1978. The results indicate that housing prices grew more rapidly than rents and the CPI largely as the result of a 33% increase in the price-rent multiple over those years. This increase in the capitalization rate occurred, despite higher nominal financing terms, because the relative terms of housing finance tended to ease and because the expected growth rate of rents increased more than its discount rate.

CONCERN FOR THE SOCIAL objective of an efficient financial system led several researchers to study economies of scale in financial intermediation during the 1960s.' These studies were used to draw inferences regarding the optimal structure of financial institutions.2 Today, there is added reason to be concerned with the costs of providing financial intermediary services. In 1966, the Interest Rate Control Act3 extended deposit rate ceilings to savings and loan associations and other thrift institutions much as the Banking Act of 1933 had previously authorized these controls over deposit rates of banks. This imposition of deposit rate ceilings has created incentives for savings associations to attract deposits by inducements in addition to the payment of explicit deposit rates. In a depositrate-constrained savings deposit market,4 the competitive mechanism is exercised through the provision of financial and nonfinancial goods and services to depositors in order to increase deposit holdings. These goods and services take a great variety of forms but to the financial intermediary result in added expenditures for labor, capital equipment or intermediate product.5 Nonrate competition-the financial analogue to nonprice competition-has become an important equilibrating adjustment mechanism in the rate-controlled savings deposit market.6

The purpose of the paper is to develop a microeconomic theory of a non-life insurance firm in order to derive the profit maximizing price for its intangible product. It is shown that the economic theory of the insurance firm resembles both the theory of the production firm and the theory of the financial intermediary. Moreover, the profit maximizing price for the insurer is found to be one which reflects the marginal revenues and marginal costs associated with both underwriting and financial intermediary activities of the firm. The purpose of this paper is to develop an economic theory of the nonlife insurance firm. A firm which underwrites insurance displays many of the features of the typical production firm since it receives current premium revenues to cover current costs of underwriting. In addition, since the insurer holds a portfolio of earning assets, it displays many of the features of the typical financial intermediary. Given this mixture of operations, the insurer arrives at a profit maximizing price by taking into account the marginal revenues and marginal costs associated with both its underwriting and financial intermediary activities. The first section of this paper specifies the basic assumptions underlying the model of the profit maximizing insurer. Next, the cash balance decision of the insurer as a financial intermediary is discussed. Finally, the profit maximizing price is derived in terms of the marginal costs of underwriting and financial intermediation, given the competitive conditions of the insurance market. In this latter section, the insurer's price derived from a profit maximizing procedure also is compared to a price based upon a mark-up of average costs. The Model

The growing sensitivity of savings deposits to flow in response to changes in interest rate differentials has become so commonplace in the past decade that the term “disintermediation†has become a part of the economists' vocabulary. It is a major conclusion of this paper that the volatility of savings deposits began to increase as early as 1950 for savings and loan associations and credit unions and as early as 1945 for mutual savings banks. As an indication of this, we proxy changes in the competitive environment for savings deposits by making yearly estimates of the elasticity of savings deposits with respect to deposit rates at savings and loan associations, mutual savings banks, and credit unions.

Concern for the social objective of an efficient financial system led several researchers durnng the 1960's to study economies of scale in financial intermediation. These studies were used to draw inferences regarding an optimal structure of financial institutions. Today, there is added reason for the concern for the social cost of providing financial intermediary services. Since 1966, deposit rate controls have been extended to savings and loan associations as well as other thrift institutions whereas the Banking Act of 1933 had previously extended these controls to commercial banks.

THE PURPOSE of the dissertation is to integrate financial intermediation into a theoretical model of real economic output and growth. The methodology involves construction of a model in which capital accumulation is based upon an interest-elastic demand for the capital stock. This model is shown to be capable of adjusting to an equilibrium capital intensity and saving share. To this growth model is added a financial intermediary sector to form a two-sector model of an economy. The production sector uses real inputs of capital and labor to produce a homogeneous good which is then allocated to consumption and real capital accumulation. The financial intermediary sector uses real inputs of capital and labor to produce financial intermediary services. Financial intermediary output is described by a production function for the financial intermediary in which real capital and labor inputs are related to the units of real capital placed by the financial intermediary with production sector firms. That is, for each unit of real capital used to produce the homogeneous good, the financial intermediary expends real resources of capital and labor to gather capital from surplus households in order to place this capital with deficit production units. It is assumed that at the firm level the financial production functions exhibit the usual decreasing average product after some point, which leads to increasing average unit costs. At the aggregate sector level the financial production function exhibits constant returns to scale and constant unit costs, as expansion is carried out by the introduction of new and similarly efficient financial intermediaries. The financial intermediary thus employs real capital and labor in profit-maximizing quantities and pays these factors the competitive factor returns. The intermediary pays deposit rates to attract deposit capital which it then lends to production sector units and earns a loan rate equal to the marginal product of capital. The financial intermediary earns unit revenues equal to the difference between the loan rate and deposit rate. This quantity, called the unit cost of finance, is a per period rate per unit of capital. Total revenues of the intermediary are then composed of these per unit charges. When competition prevails in the financial intermediary market for deposit capital the intermediary is forced to pay a high enough deposit rate so that the intermediary merely covers its real factor input costs. The intermediary thus is capable of adjustments in deposit rates and factor inputs; and in a competitive equilibrium situation it produces financial services at minimum average costs. The deposit rate in a competitive equilibrium is then equal to the production sector marginal product of capital (loan rate) less the minimum average unit cost of financial services. The solution for the variables of the system are determined by a simultaneous solution of the sectoral production functions, the capital demand function (saving function), and capital and labor allocation equations (perfect substitutability). The model is solved for the sectoral capital intensities, the distribution of labor and capital between sectors, the real rates in the system (deposit rate and marginal product of capital), as well as aggregate and per capita income, investment and consumption.