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The highly publicized problems of Long Term Capital Management (LTCM) in 1998 have once again focused the attention of policymakers and the financial press on the hedge fund industry. LTCM's [...]

Like the bank notes that circulated in this country from 1863 to 1913, stored-value cards substitute the liabilities of private banks for government and central-bank liabilities. This shift may have important implications for the federal budget, the money supply, and monetary policy., Stored-value cards are among the most interesting payments innovations of recent years. Balances on these cards can typically be transferred without involving a depository institution directly. In this respect, the [...]

Why aren't more consumers replacing cash and checks with electronic innovations like stored-value cards? This Economic Commentary focuses on one of the reasons: A consumer's benefits from having a card depend on how many businesses will take it in payment. However, merchants will refuse to invest in the systems needed to accept the cards until they are sure there will be enough consumer demand to justify the expense. This interdependency of demand will remain an obstacle until the innovation achieves critical mass, either in its own time or with policymakers' help., Electronic payments tools, such as stored-value cards, have not reached their projected popularity. These cards differ from debit cards in that payment does not necessitate involvement of a financial institution. They contain a cash-equivalent balance which can be directly transferred to a retail transaction. However, users' benefits from these cards are dependent on the number of stores accepting the card. Merchants, likewise, deem the system as lucrative only if it is widely used by shoppers. This interdependence of demand serves to stifle the mass acceptance of this tool., There are no technical barriers to the spread of electronic funds transfer. It parallels all the work done by the check system, and does it better, more cheaply, faster, and [...]

It is tempting to look at the recent growth in the number of banking offices as evidence that industry consolidation has not meant a deterioration in banking services. However, much of this expansion can be traced to thrift conversions and the growth of supermarket branching. An examination of state-by-state data reveals that higher banking office growth does not necessarily imply higher growth in small business lending, one banking service of particular concern to smaller markets and poorer communities., Measuring output in the nation's service industries has always been problematic, but in recent years, economists have been focusing more intensely on this issue. Their findings have important implications for [...]

This article uses official 1985-91 intervention data to investigate the impact of U.S. and German central-bank interventions on the forward discount puzzle for two exchange rates -- the German mark/U.S. dollar and the Japanese yen/U.S. dollar. Evidence on the importance of intervention is strongest for the mark/dollar exchange rate. However, whereas Flood and Rose (1996) found that the puzzle was stronger for floating than for fixed exchange-rate regimes, this study finds it to be stronger during periods of intervention than at other times. Thus, if intervention is associated with fixed-rate regimes, the results reported here are inconsistent with those of Flood and Rose., Introduction Although neither the Federal Reserve System nor the U.S. Treasury has intervened in foreign exchange markets since August 1995, the policy has not been officially abdicated by the United [...]

Observers acknowledge that improvements in Mexico's economic conditions hinge on the latest banking reforms being successful but not too costly. However, the ultimate cost of the reform efforts will depend on monetary policy restraint and behavioral responses to the reforms. If interest rates are lowered to help the banks, or if banks expect continued government assistance, the final cost could easily exceed recent estimates., Analyses of the Mexican financial system in the wake of the 1994-95 peso crisis have generally focused on the fiscal costs of recapitalizing the nation's banks and of satisfying bank [...]

The 1993 amendment to the Federal Deposit Insurance Corporation Act made depositors' claims on failed banks superior to those of general creditors. The legislation's stated purpose was to reduce the cost to the FDIC of resolving bank failures, but how effective is it likely to be? This paper examines the impact of state's depositor preference laws from 1984 through 1992 and finds that although resolution costs were lower, creditors' responses may have partially offset the legislation's benefits to the FDIC.

Critics question the viability of the Savings Assn. Insurance Fund (SAIF) and the thrift's industry's ability to capitalize it. Three policy options for capitalizing SAIF are being evaluated, namely to adopt a wait and see attitude and handle future problems when they become imminent, merge the SAIF into the Bank Insurance Fund and capitalize the SAIF. Policymakers are advised to consider the role of specially chartered housing finance lenders before casting their decisions., The ability of the thrift industry to capitalize the Savings Association Insurance Fund (SAIF) is becoming increasingly uncertain. By the end of the year, SAIF-insured thrifts may face deposit insurance [...]

Foreign exchange intervention by central banks purportedly influences exchange rates by signaling changes in future monetary policy. However, for this signaling mechanism to make sense, the linkage between intervention and monetary policy should be clear, the implied policy should be credible, and information about intervention should be communicated accurately to market participants. The author discusses why all three requirements are highly questionable and why the signaling mechanism should therefore be viewed with skepticism., According to news accounts, on March 3 of this year, 18 central banks spent approximately $500 million to support the international value of the U.S. dollar. The Federal Reserve System [...]

As the Savings Association Insurance Fund (SAIF) begins its operations, its financial stability is being questioned in many quarters. Here, the authors argue that Congress needs to reassess the condition of the fund and weigh the options for recapitalizing it. One option that merits particular consideration is merging the SAIF into the Federal Deposit Insurance Corporation's Bank Insurance Fund.

This paper presents a comparison of official data on U.S. foreign exchange intervention with newspaper reports. The authors find that the series are systematically different, which calls into question the ability of intervention to signal monetary policy accurately. Alternatively, this divergence may reflect the fact that not all market participants have equally accurate information about exchange market intervention.

The exposure of banks to highly leveraged transactions (HLT) was assessed. This involved the utilization of confidential information from the first quarter of 1991 to the first quarter of 1992. The different risks represented in the highly leveraged activity were used as the parameters of the evaluation. It was ascertained that the serious involvement of banks with HLT does not have any bearing on bank capital or to the insurance fund.

A cash-flow version of the capital asset pricing model that assumes the possibility of Federal Deposit Insurance Corp's (FDIC) forbearances was used to develop an explicit pricing model for subordinated debt. The model was then used to evaluate the applicability of subordinated debt in instilling market discipline. The study indicates that FDIC forbearance affects the value of the subordinated debt while increasing the investors' required rates of return. Furthermore, implementing a forbearance policy negates the usefulness of subordinated debt in lowering deposit insurance premiums and effecting market discipline.

Intervention by central banks in foreign exchange markets could affect these markets in terms of volatility and efficiency, however, narrower bid-ask spreads appear to be links to times when intervention has purportedly occurred. If intervention is expected, spreads tend to be less wide, so long as intervention occurs, according to the results of research on whether anticipation is linked to a wider spread. Empirical evidence, then, does not appear to back this relationship, when the forward and spot markets for dollars compared to yens and marks.

In light or research questioning the usefulness of economists' models of exchange-rate determination, this paper investigates the rationality of survey measures of expectations for deutsche mark/dollar exchange rates for 1989-97. Using Liu and Maddala's (1992) 'restricted cointegration' test the author cannot reject the assumption that survey measures are unbiased exchange-rate forecats. This finding is related to market participants' anticipation of the impact of economic policies., Introduction Analyses of economic and financial developments often rely on propositions about the rationality of market participants. Particularly in financial markets, where information is widely and readily disseminated, it is [...]

Foreign-exchange-market intervention is generally ineffective when undertaken independent of monetary policy. But when undertaken as a goal of monetary policy, exchange-rate management can compromise price stability. This Economic Commentary explains [...]

Introduction Throughout most of the United States' financial history, correspondent banking has been an underpinning of our banking system. Banks use correspondent banking relationships to deliver services to customers in [...]

Increasingly controversial, the Exchange Stabilization Fund is used to influence the international value of the U.S. dollar and to provide aid to foreign countries. The debate surrounding the Fund will [...]

Introduction The subsidy inherent in the current deposit-insurance system creates perverse incentives for risk taking by insured depository institutions (Kane [1985]). The thrift debacle and its attendant financial and political [...]