Abstract
The decade of the eighties was the most turbulent era for commercial banks since the Great Depression. Various bank-related events contributed to this agitation including deregulation, astronomical interest rates, massive bailouts, and great uncertainty. In this study the researchers examine the effects of these events on the cost of the leading source of funds for the banking industry during this period—purchased funds. The results indicate the pricing structure of the federal funds market reacts more to changes in Federal Reserve policy regarding monetary growth and economic stabilization activity than to particular bank problems.
This is a preview of subscription content, log in via an institution to check access.
Similar content being viewed by others
References
Aharony, Joseph, andItzhak Swary. “Contagion Effects of Bank Failures: Evidence From Capital Markets.”Journal of Business 56 (July 1983): 305–322.
Board of Governors of the Federal Reserve System.Federal Reserve Bulletin. Washington D.C.: Government Printing Office, 1972–1987.
Carrington, Tim. “U.S. Won’t Let 11 Biggest Banks In Nation Fail.”The Wall Street Journal, 20 September 1984, 2.
Cook, Timothy P., andPatric H. Hendershott. “The Impact of Taxes, Risk and Relative Security Supplies on Interest Rate Differentials.”Journal of Finance 33 (September 1978): 1173–1186.
Diamond, Douglas W., andPhilip H. Dybvig. “Bank Runs, Deposit Insurance, and Liquidity?.”Journal of Political Economy 91 (1983): 401–419.
Dickinson, Amy, David R. Peterson, andWilliam A. Christiansen. “An Empirical Investigation into the Failure of First RepublicBank: Is There a Contagious Effect?”The Financial Review 26 (1991): 303–318.
Ellis, David M., and Mark Flannery. “Does The Debt Market Assess Large Bank’s Risk? Time Series Evidence From Money Center CDs.” Working Paper, University of Florida, 1991.
Fama, Eugene F., andKenneth R. French. “Business Conditions and Expected Returns on Stocks and Bonds.”Journal of Financial Economics 25 (1989): 23–49.
Farley, John U., Melvin J. Hinich, andTimothy W. McGuire. “Some Comparisons of Tests for a Shift in the Slopes of A Multivariate Linear Time Series Model.”Journal of Econometrics 3 (1975): 297–318.
Ferri, Michael G., andJames P. Gaines. “A Study of Yield Spreads in the Money Market: 1971 to 1978.”Financial Management 9 (Autumn 1980): 52–59.
Frazer, Donald, andJ. Patrick McCormack. “Large Bank Failures and Investor Risk Perceptions: Evidence from the Debt Market.”Journal of Financial and Quantitative Analysis 13 (September 1978): 527–532.
Frazer, Donald, andR. Malcolm Richards. “The Penn Square Bank Failure and the Inefficient Market.”The Journal of Portfolio Management 11 (Spring 1985): 34–36.
Gorton, Gary, andAnthony M. Santomero. “Market Discipline and Bank Subordinated Debt.”The Journal of Money, Credit and Banking 22 (February 1990): 119–128.
Hanman, Timothy, andGerald A. Hanweck. “Bank Insolvency Risk and the Market for Large Certificates of Deposit.”The Journal of Money, Credit and Banking 20 (May 1988): 203–211.
Hill, G. Christian, andEdwin A. Finn. “Big Depositors’ Runs On Beleaguered Banks Speed The Failure Rate.”The Wall Street Journal 23 August, 1984, 1.
Kane Edward J., andHaluk Unal. “Modeling Structural and Temporal Variation in the Market’s Valuation of Banking Firms.”Journal of Finance 45 (March 1990): 113–136.
Kidwell, David S., andCharles A. Trzcinka. “The Risk Structure of Interest Rates and the Penn Central Crisis.”Journal of Finance 34 (June 1979): 751–760.
Lamy, Robert, andG. Rodney Thompson. “Penn Square, Problem Loans, and Insolvency Risk.”Journal of Financial Research 9 (Summer 1986): 103–111.
O’Hara, Maureen, andWayne Shaw. “Deposit Insurance and Wealth Effects: The Value of Being ‘Too Big to Fail’.”Journal of Finance 45 (1990): 1587–1600.
Peavey, John W., III, andGeorge H. Hempel. “The Penn Square Bank Failure: Effect On Commercial Bank Security Returns—A Note.”Journal of Banking and Finance 12 (1988): 141–150.
Pettway, Richard H. “The Effects of Large Bank Failures Upon Investors’ Risk Cognizance in the Commercial Banking Industry.”Journal of Financial and Quantitative Analysis 11 (September 1976): 465–477.
Quandt, Richard. “The Estimation of the Parameters of a Linear Regression System Obeying Two Separate Regimes.”Journal of American Statistical Association 53 (December 1958): 873–880.
Quandt, Richard. “Tests for the Hypothesis That a Linear Regression System Obeys Two Separate Regimes.”Journal of American Statistical Association 55 (June 1960): 324–330.
Sinkey, Joseph F., Jr.Commercial Bank Financial Management. New York: Macmillan Publishing, 1983.
Stover, Roger, andJames Miller. “Additional Evidence on the Capital Market Effect of Bank Failures.”Financial Management 12 (Spring 1983): 36–41.
Swary, Itzhak. “Stock Market Reaction to Regulatory Action in the Continental Illinois Crisis.”Journal of Business 59 (July 1986): 451–473.
Wall, Larry D., andDavid R. Peterson. “The Effect of Continental Illinois’ Failure On The Financial Performance of Other Banks.”Journal of Monetary Economics 26 (1990): 77–99.
Watt, P.A.. “Tests of Equality Between Sets of Coefficients in Two Linear Regressions When Disturbance Variances are Unequal: Some Small Sample Properties.”Manchester School of Economics and Social Studies 47 (1979): 391–396.
Author information
Authors and Affiliations
Rights and permissions
About this article
Cite this article
Johnson, S.A., Lindley, J.T. The reaction of financial markets to changes in FDIC policies on bank failures. J Econ Finan 17, 43–58 (1993). https://doi.org/10.1007/BF02920081
Issue Date:
DOI: https://doi.org/10.1007/BF02920081