This paper uses micro-level historical data to examine the causes of bank failure.For statecharactered Kansas banks during 19 10-28, time-to-failure is explicitly modeled using a proportional hazards framework.In addition to standard financial ratios, this study includes membership in the voluntary state deposit insurance system and measures of technical efficiency to explain bank failure.The results indicate that deposit insurance system membership increased theprobability of failure and banks which were technically inefficient were more likely to fail than technically efficient banks

We use a nonlinear reduction in a bank’s check-cashing fees and variation in regulated check-clearing times to identify the elasticity of demand for cashing checks rather than depositing them. We find that an extra day of check-clearing time makes account holders 65.5% more likely to cash a check than deposit it, which implies they are willing to pay $11.17 per day for faster access to their funds—an effective annualized discount rate of 11,054% for the average check. We use this elasticity to evaluate recent proposals that mandate faster check-clearing times

Federal Reserve Regulation A imposes formal guidelines on borrowing from the discount window and ensures that the facility is used for appropriate purposes. In a way, this regulation imposes a nonprice mechanism that compels depository institutions to be more prudent in exercising their borrowing privileges. In the 1980s, however, banks became increasingly more reluctant to borrow adjustment credit from the discount window. This behavior is puzzling because discount window guidelines have not changed. This paper investigates the reasons behind the weakened demand for borrowed reserves. Our empirical findings suggest that the growing reluctance to borrow stems from the deteriorating financial position of banks during this period. In particular, banks avoided the discount window because they feared that market participants might have interpreted their visits as a signal of serious funding difficulties

C LEARLY, one of the most significant institutional developments affecting the organization of American industry in recent years has been the trend toward diversification. Many important industries have been restructured as single product firms have been replaced (often by acquisition) by large conglomerates producing scores of diverse products. The rapid emergence of the conglomerate form of business organization has raised fundamental questions regarding the implications of this trend for the market system-a system in which interfirm competition is the basic regulating device.1 There has been a great deal of controversy within the economics and legal professions about the long-run implications of conglomerate firms for economic performance.2 This is due, in large part, to the fact that there is no theoretical framework and no general empirical evidence that is relevant to the intermarket relationships of multi-product firms. The shortcomings of theory arise from the fact that traditional microeconomic theory focuses only on the interrelationships of firms operating in the same market, while the lack of empirical evidence stems from the fact that appropriate micro level data for testing generally are not available. Although the lack of theoretical framework and data generally has precluded systematic analysis of the competitive effects of diversification,3 a number of intuitively appealing and workable hypotheses have been developed in connection with the conglomerate form of business organization. This study tests one of the major hypothesized consequences of conglomerate dominance-the development of mutual forbearance. The hypothesis holds that conglomerate firms that meet in many markets will develop a and let live philosophy since action initiated in any market may induce retaliation in other markets where they are more vulnerable.4 As a consequence, the prevalence of conglomerate firms will mean a reduction in rivalry even in markets with a relatively competitive structure based on traditional measures of market structure. This study uses a multiple regression model to analyze the relationship between market rivalry and intermarket contacts of dominant firms. The study develops a simple model that illustrates the implications of the mutual forbearance hypothesis and discusses the hypothesis in the context of commercial banking. It then sets out the estimating equation and develops a variable that is designed to capture the degree of intermarket contact among dominant firms. Additional variables are developed and used along with the intermarket contact variable in a regression analysis that covers a sample of 187 major banking markets. The study focuses upon the commercial banking industry because it is characterized by firms with relatively homogeneous product mixes that operate in a variety of relatively well defined geographic markets. Furthermore, and of particular importance, the necessary micro level data are available. Finally, the issue is highly relevant in banking today.5 However, by focusing upon the banking industry the results may be subject to question in two respects. First, it may be argued that the diversification subject to investigation in this study is Received for publication December 22, 1976. Revision accepted for publication June 7, 1977. * University of Florida and Board of Governors, Federal Reserve System, respectively. Support from the Center for Public Policy Research at the University of Florida and from the Board of Governors of the Federal Reserve System is gratefully acknowledged. The opinions are those of the authors and do not necessarily reflect the views of their respective institutions. I See Grabowski and Mueller (1970) and Grether (1970). 2 See, for example, Edwards (1955), Stocking (1955), Edwards (1964), Turner (1965), Federal Trade Commission (1969), St. John's Law Review (1970), Steiner (1975). 3 For a test of one consequence of conglomerate firms, see Rhoades (1973) and Rhoades (1974). 4 This hypothesis was first stated by Edwards (1955). In another context, Solomon (1970) suggested it may be important in the banking industry. 5 See, U.S. v. Marine Bancorporation, Inc., et al. (1974) and U.S. v. Connecticut National Bank et al. (1974

SINCE 1966, the Federal Reserve Board has experimented with the use of Regulation Q, the regulation which specifies the maximum interest rates banks are permitted to pay on time and savings deposits, as an active tool of monetary policy. Since September 1966, the Federal Home Loan Bank Board has been empowered to impose ceilings, on savings and loan associations and some mutual savings banks movements in these ceilings to be coordinated with movements in Regulation Q ceilings. In spite of our now-substantial experience with these ceilings, there appears to be no consensus on what purely macro-economic consequences emerge from the employment of deposit ceilings. We need answers to the following two questions: 1) Does the existence of effective deposit ceilings strengthen or weaken standard monetary policy actions? 2) Can the manipulation of deposit ceilings serve as an independent active tool of stabilization policy and, if so, what is the direction of its impact? 1 The official view of the Federal Reserve Board on question (2) appears to be that effective deposit ceilings (attention is typically focused on Q ceilings) are depressive while relaxation of those ceilings is expansionary.2 We know of no clear statement of their position on question (1). There is scant discussion of these issues in the professional literature. In the most general theoretical discussion of deposit ceilings, Tobin (1970) suggests (relying on some casual empirical evidence) that the sign of response of the level of economic activity to changes in interest rate ceilings may vary depending on whether an interest rate variable or a reserve variable is exogenous. He apparently believes that the response we are interested in (letting reserves be held constant) is typically inverse a rise in interest rate ceilings being restrictive. He does not consider question (1). Using a much more restrictive model, Warren Smith (1967) has argued that monetary policy is stronger with effective ceilings (only Q ceilings are considered) than without them. He does not consider question (2). We deal with both questions in this paper. Our analysis suggests that the Tobin and Smith conclusions (on questions (2) and (1), respectively) are incompatible. The model we employ in dealing with these questions differs from both the Smith and Tobin models.3 Our model builds on theirs by incorporating two intermediary claims (both commercial bank time deposits and nonbank intermediary claims), by including currency demand functions, and by considering the impact of incorporation of the price level in the model. Unlike Tobin, we employ the commonplace macro-economic assumption of a single marketable security.4

IN the symposium on the controversy over monetary policy, which I was privileged to read in proof, I was impressed by the great difference in practical approach to vital problems which derives from relatively small differences in emphasis among the writers. With much of what the distinguished participants in the symposium have said I am in agreement. There is also a great deal on which I differ, but I shall not take space here to discuss my disagreements. I firmly believe, however, that an airing of conflicting views in a professional publication is a valuable way to develop an area of agreement among economists, which can then be safely trodden by legislators and administrators. I agree emphatically with Friedman that economists must think things out on their merits without regard to political feasibility. Considerations of expediency not only tend to interfere with processes of thought (of the writer as well as of the reader) but also diminish the degree of reliance that legislators and administrators are likely to place on the experts' recommendations. When economists venture into politics, they are apt to cease being good economists and yet to fall far short of being good politicians. Paul Douglas may be an exception which confirms the rule. I wonder how many of the participants would accept the following propositions to which I subscribe. i. Monetary policy has some effect on economic stability, though the magnitude of this effect and the economic price that must be paid for it are controversial. 2. Limitations on the effectiveness of monetary policy are equally applicable to fiscal policy. In fact, in broader terms, they are two aspects of the monetary approach and must both contend with powerful non-monetary factors. 3. Direct controls do not attack the causes of inflation but only moderate its effects. If promptly imposed and effectively administered, they are useful in holding the line while methods of attacking inflation at its source are being adopted and put into operation. 4. size and urgency of government outlays in a modern war and in preparedness are such as to subject a free market economy to a strain that it may not be able to support without losing its character as a market mechanism. Among the participants in the symposium there are vast differences in approach, in analysis, in emphasis, and in proposed programs of action, but I am most interested in determining what area of agreement could be established. In the light of the four propositions stated above, what would be a feasible program for monetary authorities to pursue? It is clear that in an inflationary period they must not contribute freely to a growth in the money supply. Whatever the extent of its influence, it is a factor that cannot be disregarded, and it is the direct (and principal) field of responsibility of monetary authorities. They can have only an indirect and relatively minor influence on the intensity of use of the existing supply of money and must look to other institutions and groups for most of what can be done to influence it. In regulating the supply of money monetary authorities must operate principally, almost exclusively, through bank reserves. This point, in my judgment, is not sufficiently emphasized in the symposium. rate of interest as such is not effective in controlling money creation over the short run in an inflationary situation. Shortage of reserves at the disposal of banks, on the other hand, results in much more restrictive lending practices. Lerner does not like this, and many other economists think that this argument evades the real issue, which they believe revolves around the interest rate. It is true that money is practically always procurable at some rate (though not necessarily for all applicants). Monetary policy, however, deals not with absolutes but with day-to-day realities. A bank having no 1 S. E. Harris, L. U. Chandler, M. Friedman, A. H. Hansen, A. P. Lerner, and J. Tobin, The Controversy over Monetary Policy, this REVIEW, XXXIII (I95I), PP. I79-200

THE postwar instability of sterling has been produced part by the deficits of the independent sterling countries.' Until lately, these countries financed substantial import deficits from their own sterling balances and replenished their reserves without difficulty, mainly from an uninterrupted capital outflow from the United Kingdom and from enlarged export earnings during the post-Korean raw materials boom. Only recently have they faced a shortage of sterling exchange, resulting part from the reintroduction of monetary restraint the United Kingdom late I95I and early I952. The appearance of this shortage of sterling focuses attention upon the strategic role of monetary discipline, both Britain and the independent sterling countries, if the United Kingdom is to achieve for sterling a greater stability than has been attained since I945. Development of the sterling area. Before I9I4, many nations came to use sterling for financing foreign trade because of its universal acceptability. These nations tended to have close monetary and trading ties with Britain, selling much of their exports through British commercial houses; many were dependent upon the London market for capital; and virtually all major commercial banks kept balances and rediscounted bills London. With the end of hostilities I9I8, Britain tried to reestablish the international position of sterling. By I925, the pound had been restored to its prewar gold parity at the risk of internal deflation Britain. Capital lending was also resumed on a large scale, and Britain had a current-account surplus during the I920's. By I930, fact, Britain's total foreign assets were rebuilt almost to the prewar volume. although most of the new outflow had been invested within British Empire countries. Abandonment of the pound's gold parity September I93 I, and the resulting depreciation, altered sterling arrangements. Faced with the choice of following either sterling or gold, the British Commonwealth nations (except South Africa and Canada) decided to maintain stable rates with the pound. The introduction of Imperial Preference I932 strengthened the economic bonds of the Commonwealth. At the same time or shortly thereafter, a number of non-British countries were drawn into a close association with sterling by two practical facts: while prices I93I-32 were comparatively stable sterling, they continued to fall terms of gold; and the volume of Britain's imports was relatively well maintained during the depression. By the time war broke out August I939, however, most of the non-British countries had decided to loosen their ties with a pound that had fallen from $4.68 to $4.03 during the preceding twelve months. During the I930's, the sterling bloc relied upon Britain to maintain exchange stability with the nonsterling currencies. Since sterling remained freely convertible until the war, though the London price of gold was no longer fixed, foreign exchange reserves held as sterling balances could be used to obtain dollar and other currencies at the holder's option. The World War II exchange control machinery, established first Britain September I939 and then other sterling countries, converted the sterling from a loose association of nations into a grouping with a formal structure of administrative regulations as well as some unwritten conventions. Control over foreign currency transactions, introduced for the first time the United Kingdom, provided that no payment could be made in favor of a person who is resident outside the sterling area without Treasury permission.2 *The conclusions of this paper represent the personal opinions of the author and do not reflect the views of the Federal Reserve Board. The writer is indebted to Mr. Arthur B. Hersey for suggestions. 'The important independent sterling countries are Australia, New Zealand, Eire, Pakistan, India, Ceylon, and, for transactions not settled directly with the nonsterling world, the Union of South Africa. IS.R. and 0. 1940, Nos. 1254 and I256, dated July I7, 1940. Under these regulations, the sterling was defined for the first time as an administrative entity as the

EFFORTS to construct a workable system ~of international payments for Europe since the end of World War n1 have concentrated almost exclusively on the problem of finding suitable machinery to handle current account transactions between monetary areas. Capital transactions have been ignored, deprecated, and made as difficult as possible. This is in accord with the attitude toward international capital movements that has been dominant for the past ten or fifteen years. The concern of national treasuries to prevent a recurrence of the hot money movements of the I930's led the drafters of the Bretton Woods agreements to place capital movements in a kind of limbo where exchange controls, supposedly committed to let current transactions go free after the transition period, could exercise their ingenuity and regulate to the controllers' hearts' content. The resources of the International Monetary Fund cannot be used to finance capital movements unless the Fund's holdings of a currency remain below seventy-five per cent of that member's quota for more than six months, and then only if the effect of the operation does not raise holdings of that member's currency above seventy-five per cent and does not lower the Fund's holdings of the desired currency below seventy-five per cent of the appropriate quota. The existence of commitments to service debts in a money other than that of the debtor is regarded as an almost intolerable nuisance by technicians who have the duty of preparing and overseeing bilateral payments accords. Broadly speaking, a capital export, if it comes before the authorities at all, is treated by them as a hard currency transaction, whether it involves a movement of funds to a harder currency area or to an area whose money is as soft as that of the capital exporting country. Europe has innumerable committees dedicated to the removal of restrictions on international trade, and a good many sober groups working to establish greater freedom of movement across frontiers for labor. There are no committees to improve international capital movements, although there are lots of committees producing all kinds of reasons why countries need to import capital. The Bank for International Settlements is almost a lone voice in urging economic policy makers to remember that free movement of capital, both short and long term, has in the past been an important aid in the economic development of the world as a whole. 1 The problem of establishing greater convertibility of European currencies is commonly analyzed on the basis of the unstated assumption that there are no capital movements between monetary areas or between European and non-European parts of a given monetary area-i.e., that convertibility is possible only under circumstances in which net deficits and net surpluses on current account could be completely cleared, exception being made for more or less net capital inflow from the United States to European monetary areas as a group. The neglect of capital movements in current discussion and policy making has already led to serious practical difficulties. The United Kingdom balance of payments estimates have been consistently thrown off, and rather badly off, by the appearance of unexpected capital movements, both within the sterling area and with other areas. The figures are not very good, although Britain is the only country in Europe for which respectable data exist. At the time of the negotiations for the first U.S. loan to Britain, care was taken to establish criteria for disposing of the three billion odd pounds sterling of debt held by the (mostly sterling area) recipients of Britain's heavy overseas Dayments during the war. There is

T HE purpose of this paper is to evaluate the policy option of controlling cyclicality in housing and briefly review its policy-related implications. This subject has recently returned to the forefront of public concern,' because it is feared that housing cyclicality contributes to the high cost of housing (HUD, 1979) and has a detrimental effect on the continuity of urban change (as patterns of neighborhood development are affected (HUD, 1978)). The importance of housing derives from its dual role in the economy (Federal Home Loan Bank Board, 1969; Goldsmith and Lipsey, 1963). At the micro level it is a large component of both the consumer budget and asset portfolio (Artle and Varaiya, 1978). It also affects the quality of urban neighborhoods spatially. At the macro level, it accounts for 25% to 30% of gross domestic investment. Since the marked cycles in housing construction lead the business cycle, countercyclical monetary policy has relied on housing as a policy instrument (Harberger, 1970). Two arguments plead in favor of greater control of housing cyclicality: (i) the high and rising cost of housing causes housing unaffordability,2 raising questions of consumer welfare and equity: which socio-economic groups suffer most and deserve compensation; (ii) cyclicality destabilizes the macro economy, generating unemployment (hence the loss of urban jobs) while at the same time compounding the high cost of housing by creating inefficiency in the housing construction industry. These combined effects limit the redevelopment of urban neighborhoods called for under the 1974 Housing and Community Development Act and thus conflict with the aims of this Act. In section II we investigate the existence of significant cyclicality and characterize it. Problems of statistical methodology are discussed in section III. We conclude in section IV with an outline of the policy-related implications of our analysis, leaving the details of the statistical formulae and data sources to appendices A and B. The main highlights of the paper are (i) New Housing construction exhibits significant cyclicality. The length of the dominant cycle varies depending on which estimate of the spectral density is used. The smoothed periodogram shows a powerful cycle around 128 months' length. The unaveraged periodogram, on the other hand, is dominated by a shorter cycle of 70 to 80 months' length. These estimates of the spectral density are shown diagramatically. The difference in the length of the dominant cycles is attributed to the well-known problem of resolution when two peaks are near each other, the smoothed periodogram will be unable to distinguish between the two. The KolmoReceived for publication October 15, 1979. Revision accepted for publication December 9, 1980. * Cornell University and Boston College, respectively. This paper was developed while the first author was a Visiting Research Scholar with the Division of Policy and Research Development at the U.S. Department of Housing and Urban Development (HUD), Washington, D.C. A preliminary version of this paper was presented at the Annual Allied Social Sciences Meeting of the American Real Estate and Urban Economics Association, Atlanta, December 1979. The authors are grateful to Craig Swan and an anonymous referee for useful comments. Ibrahim Levent helped with the calculations. 1 The U.S. Department of Housing and Urban Development (HUD), the White House, the Council on Wage and Price Control, various Congressional committees, the Office of Budget Management, etc., are all now interested in housing cyclicality and its policy implications. 2 Housing costs increased faster than most components of the consumer price index (U.S. Department of Labor, 1978), and threaten to make housing unaffordable (Data Resources, Inc., 1978; Jacobe and Parliment, 1979; Weicher, 1977). Some studies deny this, pointing to several important elements which offset the cost of housing, especially during periods of high inflation. These include tax advantages accruing to homeowners and capital gains on houses (Diamond, 1979; Hendershott and Hu, 1979; Van Order, 1979; Villani, 1978). These studies, however, neglect the equity problem resulting from the income distribution welfare effect. In a recent study using a production function analysis, Clemhout (1979) found that fluctuations in residential housing starts (or expenditures) create a range of inefficiencies in production, thereby increasing costs. Additional increases can be attributed to government regulation (Seidel, 1978), but many costs could be reduced if fluctuations in construction were moderated