The Journal of Finance publishes leading research across all the major fields of finance. It is one of the most widely cited journals in academic finance, and in all of economics. Each of the six issues per year reaches over 8,000 academics, finance professionals, libraries, and government and financial institutions around the world. The journal is the official publication of The American Finance Association, the premier academic organization devoted to the study and promotion of knowledge about financial economics.
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Interest Rate Uncertainty and the Financial Intermediary's Choice of Exposure
Published: 03/01/1983 | DOI: 10.1111/j.1540-6261.1983.tb03631.x
SUDHAKAR D. DESHMUKH, STUART I. GREENBAUM, GEORGE KANATAS
The financial intermediary's choice of operating as a broker with minimal risk exposure or as an asset‐transformer with interest rate risk is modeled as a funds inventory decision made prior to the resolution of uncertainty regarding the borrowing or lending interest rates. It is shown that an increase in the interest rate uncertainty leads the intermediary to reduce its exposure, thereby offering decreased asset‐transformation and more brokerage services. However, a stochastic increase in the interest rates leads to greater asset‐transformation and less brokerage services.
Lending Policies of Financial Intermediaries Facing Credit and Funding Risk
Published: 06/01/1983 | DOI: 10.1111/j.1540-6261.1983.tb02507.x
SUDHAKAR D. DESHMUKH, STUART I. GREENBAUM, GEORGE KANATAS
This paper compares the optimal lending decisions of financial intermediaries that differ in their risk exposure. All intermediaries are assumed to face a loan demand described by a random applicant arrival process with each applicant offering a unique risk‐adjusted rate of return; loan demand is therefore uncertain in both quantity and quality. The intermediaries differ in terms of their risk exposure because of disparate funding practices. Intermediaries functioning as brokers minimize their exposure by borrowing funds only as demand is realized, whereas those behaving as asset‐transformers borrow in advance of realizing loan demand, thereby maintaining a loanable funds inventory and sustaining the related exposure. The optimal sequential lending policy is shown to involve setting a credit standard that becomes stricter with the length of the intermediary's planning horizon and the volume of loans outstanding. Most importantly, it is shown that brokers adopt stricter credit standards than asset‐transformers and therby reduce their volume of lending.
Bank Forward Lending in Alternative Funding Environments
Published: 09/01/1982 | DOI: 10.1111/j.1540-6261.1982.tb03589.x
SUDHAKAR D. DESHMUKH, STUART I. GREENBAUM, GEORGE KANATAS
This paper examines the effects of loan commitments on bank lending behavior in both deposit‐funding and liability management environments. Assuming that the bank lends exclusively under commitments and that the number of commitments exercised is uncertain, the bank must choose its supply of commitments. Given this choice, the bank becomes a passive lender to commitment holders. Our focus on forward credit markets sheds new light on the private bankers' assertion that they do not directly determine their level of lending, but merely “accommodate” the credit needs of their customers. Similarly, the central banker's claimed inability to control monetary aggregates in the short‐run becomes understandable in a new context. It is shown that the advent of liability management will reduce the volume of loan commitments and the expected size of the bank and of the banking system. It is also shown that increased uncertainty regarding borrower takedown behavior diminishes the volume of commitments, expected bank and banking system size.
Is Fairly Priced Deposit Insurance Possible?
Published: 03/01/1992 | DOI: 10.1111/j.1540-6261.1992.tb03984.x
YUK‐SHEE CHAN, STUART I. GREENBAUM, ANJAN V. THAKOR
We analyze risk‐sensitive, incentive‐compatible deposit insurance in the presence of private information and moral hazard. Without deposit‐linked subsidies it is impossible to implement risk‐sensitive, incentive‐compatible deposit insurance pricing in a competitive, deregulated environment, except when the deposit insurer is the least risk averse agent in the economy. We establish this formally in the context of an insurance scheme in which privately informed depository institutions are offered deposit insurance premia contingent on reported capital; the result holds for alternative sorting instruments as well. This suggests a contradiction between deregulation and fairly priced, risk‐sensitive deposit insurance.