In this paper we model the dynamic portfolio choice problem facing banks, calibrate the model using empirical data from the banking industry for 1984–1993, and assess quantitatively the impact of recent regulatory developments related to bank capital. The model implies a U-shaped relationship between capital and risk-taking: As a bank's capital increases it first takes less risk, then more risk. A deposit insurance premium surcharge on undercapitalized banks induces them to take more risk. An increased capital requirement, whether flat or risk-based, tends to induce more risk-taking by ex-ante well-capitalized banks that comply with the new standard. Journal of Economic Literature Classification Numbers: G20, G28.

Controversial econometric studies of mortgage data show that mortgage loan applications by some minorities are denied more frequently than are applications by whites with similar observable default risk factors. But recent evidence indicates that minority borrowers also default more frequently than whites with similar observable risk. This paper presents a simple equilibrium model of discriminatory credit rationing and finds parametric restrictions consistent with both these empirical findings. However, in this model, proposed antidiscrimination policies have surprising side effects. Thus, policy analysts accepting this empirical evidence should not expect to derive model-free conclusions about the effects of proposed policies. Journal of Economic Literature Classification Numbers: G21, G28, D63.

This study investigates the structure/conduct/performance relationship in retail deposit markets. The study explicitly incorporates conduct as the link between structure and performance in local deposit markets. It attempts to determine whether banks typically behave competitively or strategically, and whether their conduct is influenced by market concentration. The empirical investigation is guided by an equilibrium model of a retail deposit market. The model is applied to regression equations for local (MSA) MMDA and three- and six-month CD rates. The empirical results indicate that strategic conduct is the norm in MMDA and in three- and six-month CD markets. Copyright 1991 by MIT Press.

Although credit history scoring offers benefits to lenders and borrowers, failure to consider situational circumstances raises important statistical issues that may affect the ability of scoring systems to accurately quantify an individual’s credit risk. Evidence from a national sample of credit reporting agency records suggests that failure to consider measures of local economic circumstances and individual trigger events when developing credit history scores can diminish the potential effectiveness of such models. There are practical difficulties, however, associated with developing scoring models that incorporate situational data, arising largely because of inherent limitations of the credit reporting agency databases used to build scoring models.

We show that bank branching tends to mitigate localized market power by broadening the geographic scope of competition among banks, even though branch banking allows banks to differentiate themselves through their choices of branch locations. Banking services at peripheral locations will be priced more competitively when those locales are served by branch networks. We develop a theoretical model in support of this view and offer empirical evidence.

To explain persistence of credit card interest rates at relatively high levels, Calem and Mester (AER, 1995) argued that informational barriers create switching costs for high-balance customers. As evidence, using data from the 1989 Survey of Consumer Finances, they showed that these households were more likely to be rejected when applying for new credit. In this paper, we revisit the question using the 1998 and 2001 SCF. Further, we use new information on card interest rates to test for pricing effects consistent with information-based switching costs. We find that informational barriers to competition persist, although their role may have declined.

This paper examines the association between consolidation and changes in levels of bank branching as measured by changes in the number of bank branches per capita. Using a specially-constructed data set, we address this issue as well as how this relationship varies with the type of consolidation and initial regulatory, competitive, and market conditions. We find that merges where merging institutions have branch networks which overlap within a ZIP code (within-ZIP merger) are strongly associated with a reduction in offices per capita in that ZIP code. This result is robust across time and holds in both rural and urban areas. The findings also suggest that, contrary to popularly held views, consolidation is not unambiguously negatively associated with changes in the number of banking offices per capita. Neither within-market-but-not-within-ZIP mergers nor out-of-market mergers consistently show such a relationship. We also find that the relationships between within-ZIP and within-market-but-not-within-ZIP mergers and changes in the number of bank offices per capita are more negative in low-income neighborhoods than in other neighborhoods. However, because most states now have unrestricted branching and because savings associations are less prevalent and financially healthier than in the past, these findings may not be indicative of future branching patterns.

This paper identifies the impact of borrowing constraints on homeownership in the U.S. in the aftermath of the 2008 financial crisis. While homeownership declines and tightened credit are evident, the role the tightening of credit has had on the probability of individual households to become homeowners has not been previously identified. The homeownership rate in 2010-2013 is estimated to be 2.3 percentage points lower than if the constraints were set at the 2001 level.