Optimal equityholder decisions involve trade-offs between risk-minimizing strategies, which reduce the likelihood of losing the charter, and risk-maximizing strategies, which exploit the insured-deposit base. When banks cannot respond dynamically to market information, we have seen that the bank...

We define forbearance as the failure of regulators to enforce mandated capital standards at the end of 1979, and calculate the outcome of the forbearance bet taken by policymakers at the end of the 1970s. By comparing the cost of prompt regulatory intervention with the estimated resolution cost...

Recent advances in asset pricing - the reduced-form approach to pricing risky debt and derivatives - are used to quantitatively evaluate several proposals for mandatory bank issue of subordinated debt. We find that credit spreads on both fixed- and floating-rate subordinated debt provide...

Most models of deposit insurance assume that the volatility of a bank's assets is exogenously provided. Although this framework allows the impact of volatility on bankruptcy costs and deposit insurance subsidies to be explored, it is static and does not incorporate the fact that equityholders...

The Gramm-Leach-Bliley Act of 1999 amended the lending authority of the Federal Home Loan Banks to include advances secured by small enterprise loans of community financial institutions. Three reasons for the extension of this selective credit subsidy to community banks and thrifts are examined,...

Most models of deposit insurance assume that the volatility of a bank's assets is exogenously provided. Although this framework allows the impact of volatility on bankruptcy costs and deposit insurance subsidies to be explored, it is static and does not incorporate the fact that equityholders...

We examine how a combination of credit market and asset quality information can jointly be used in assessing bank franchise value. We find that expectations of future credit demand and future asset quality explain contemporaneous bank franchise value, indicative of the feedback in credit market...

Increasingly policymakers are looking to the small business sector as a potential engine of economic growth. Policies to promote small businesses include tax relief, direct subsidies, and indirect subsidies through government lending programs. Encouraging lending to small business is the primary...

This paper makes a fundamental contribution by studying loan-loss provisioning over the credit cycle as three distinct phases. Looking at the three distinct phases of the financial crisis — the pre-crisis period, crisis period, and post-crisis period — is important as loan-loss provisioning...