Using a cash flow-based framework, we decompose exchange rate into short-term and long-term elements for 105 individual US banks over 1988–1998. We show that significant long-term exposure is more prevalent than significant short-term exposure, reflecting the difficulty in recognizing, modeling, and managing the longer-term effects of exchange rate risk. Our analyses reveal that 72% of internationally oriented and 88% of domestically oriented banks in the sample have significant exposure to at least one of five currency pairs. This result supports the theory that domestic banks are exposed and should be concerned about the indirect impact of exchange rate risk. Furthermore, we provide some evidence that economies of scale may exist for institutions with extensive international operations.

This study extends the work of Akella and Greenbaum [Journal of Banking & Finance 12 (1988) 419] through the use of a much larger, nationwide sample of US saving and loan associations and supports their original finding of significant expense-preference behavior in mutual savings and loans during their original study period (1979–80). This study also provides evidence that over the time period of substantial deregulation and changes in the competitive environment in the US financial services industry, expense-preference behavior for savings and loans decreased. The results are consistent with the idea that the removal of barriers that restrict competition should improve managerial efficiency in firms that survive.

By placing a ceiling on the amount of possible depositor loss, deposit insurance should result in a lower deposit risk premium. However, this effect may be modified if either the insurance promise has low credibility or the moral hazard incentives generated by deposit insurance result in a greater probability of bank default. Using financial and institutional panel data from thirteen countries, we find that the risk premium is over 40 basis points higher on average in uninsured countries than in countries that offer insurance up to some pre-specified maximum. However, the risk premium has a non-linear relationship with the level of maximum insurance coverage, suggesting that the market recognizes the moral hazard potential. Moreover, the effect of deposit insurance on the risk premium is weaker in countries with strong creditor rights, consistent with the view that investors view the latter as a substitute for explicit deposit insurance.

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.