Academic Publications

A list of articles published by members of the Dallas Fed Research staff.

2003 | 2002 | 2001 | 2000

2003 Academic Publications

Is the Community Reinvestment Act in Need of Further Reform? Evidence from Equity Markets during the 1995 Reform Process
Journal of Financial Services Research, February 2003
David P. Ely and Kenneth J. Robinson

In May 1995 the Federal Banking Agencies adopted major reforms to the implementation of the Community Reinvestment Act (CRA) to make the examination process more objective and performance-based, promote consistency, and reduce regulatory burden. This study presents tests of excess stock returns around key events in the reform process and examines whether the patterns of returns were affected by financial institution type and size. While we find that portfolios of banks and thrifts recorded statistically significant excess returns for certain events, the cumulative response was mostly statistically insignificant. A policy implication of our findings is that the potential for further improvement in the administration of CRA requirements still existed following the 1995 reform efforts.

Privatization, Competition, and Supercompetition in the Mexican Commercial Banking System [off-site PDF]
Journal of Banking & Finance, February 2003
William C. Gruben and Robert P. McComb

Much literature before and after the privatization of Mexico's commercial banking system in 1991–1992 argued that the system was collusive and noncompetitive and would likely continue to be for years. Banks would collude to underloan so that—at least in comparison with what would happen in a competitive system—they could overcharge. Because a parallel literature on lending after bank privatization suggests that the problem is often not too little, but too much, we resolved to test for competitive behavior in the Mexican banking system. Using an empirical approach developed by Shaffer (Econom. Lett. 29 (1989) 321, J. Money Credit Bank. 25 (1993) 49, Federal Reserve Bank of Philadelphia, Working paper no. 93-28R), we find a structural break in the middle of the privatization period that signals the start of an episode of what Shaffer calls "supercompetitive" behavior. In such a supercompetition, banks run at levels of output where marginal cost exceeds marginal revenue. This behavior is consistent with a struggle in which banks take losses now because they think the market share they get in the bargain offers a positive present value of expected future return. The behavior can also be consistent with just the sort of banking crises that ensued in Mexico.

Early Warning Models in Real Time
Journal of Banking and Finance, October 2003
Jeffery W. Gunther and Robert R. Moore

Using a unique set of banking data containing both originally reported and subsequently revised financial variables, we find adverse revisions to accounting statements are associated with downgrades in supervisory ratings. To assess the financial significance of the revisions, we compare the ability of the original and revised data to map into exam ratings. The relationship between accounting data and exam results is significantly stronger for revised data than for real-time data. Our findings document significant differences between real-time and revised banking data, highlight the auditing role of bank exams, and provide a more realistic assessment of early warning model accuracy.

Loss Underreporting and the Auditing Role of Bank Exams
Journal of Financial Intermediation, April 2003
Jeffery W. Gunther and Robert R. Moore

Using a unique set of banking data containing both originally reported and subsequently revised financial variables, we study accounting restatements. Our results indicate the worse a bank's financial condition, the more likely it is for originally reported data to understate financial losses. Also, we find supervisory exams have an important role in uncovering financial problems and prompting accounting restatements to correct loss underreporting. While revisions are directly related to financial difficulties, exam-based restatements are evident at even the earliest states of deterioration, indicating substantial accounting misstatements—at both banks and other types of companies—can occur well outside severe business circumstances.