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Costs of Adjustment, Portfolio Separation, and the Dynamic Behavior of Bank Loans and Deposits

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Author Info

  • Elyasiani, Elyas
  • Kopecky, Kenneth J
  • VanHoose, David

Abstract

This paper develops a model of the banking firm and tests for the presence of 'portfolio separation.' The theoretical model generalizes existing intertemporal adjustment-costs models by assuming that these costs coexist simultaneously on both sides of the bank's balance sheet. Our analysis predicts that bank loan demand and deposit supply respond to past, current and expected fixture values of the federal funds rate, deposit rate, and loan rate. We estimate the model and find that the restrictions imposed by the portfolio separation assumption are inconsistent with the estimated behavior of the banking firms in our sample. We also find some limited empirical support for our extended model of the adjustment cost process. Copyright 1995 by Ohio State University Press.

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Bibliographic Info

Article provided by Blackwell Publishing in its journal Journal of Money, Credit and Banking.

Volume (Year): 27 (1995)
Issue (Month): 4 (November)
Pages: 955-74

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Handle: RePEc:mcb:jmoncb:v:27:y:1995:i:4:p:955-74

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Web page: http://www.blackwellpublishing.com/journal.asp?ref=0022-2879

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Cited by:
  1. Oliver Hülsewig & Eric Mayer & Timo Wollmershäuser, 2005. "Bank Loan Supply and Monetary Policy Transmission in Germany: An Assessment Based on Matching Impulse Responses," Ifo Working Paper Series Ifo Working Papers No.14, Ifo Institute for Economic Research at the University of Munich.
  2. Ishikawa, Daisuke & Tsutsui, Yoshiro, 2013. "Credit crunch and its spatial differences in Japan's lost decade: What can we learn from it?," Japan and the World Economy, Elsevier, vol. 28(C), pages 41-52.
  3. Shaw, Ming-fu & Chang, Juin-jen & Chen, Hung-Ju, 2012. "Capital Adequacy and the Bank Lending Channel: Macroeconomic Implications," MPRA Paper 41056, University Library of Munich, Germany.
  4. Massimo Giulidori & Enzo Dia, 2009. "The Determinants of Bank Interest Margins: Estimates of a Dynamic Model," Working Papers 157, University of Milano-Bicocca, Department of Economics, revised Mar 2009.
  5. Elyasiani, Elyas & Mansur, Iqbal, 1998. "Sensitivity of the bank stock returns distribution to changes in the level and volatility of interest rate: A GARCH-M model," Journal of Banking & Finance, Elsevier, vol. 22(5), pages 535-563, May.
  6. Enzo Dia, 2004. "Imperfect Information and Monopolistic Pricing in the Banking Industry," Working Papers 74, University of Milano-Bicocca, Department of Economics, revised May 2004.
  7. Kopecky, Kenneth J. & VanHoose, David, 2006. "Capital regulation, heterogeneous monitoring costs, and aggregate loan quality," Journal of Banking & Finance, Elsevier, vol. 30(8), pages 2235-2255, August.
  8. Sharma, Anurag & Jha, Raghbendra, 2012. "Fiscal deficits, banking crises and policy reversal in a semi-open economy," Economic Modelling, Elsevier, vol. 29(2), pages 271-282.
  9. Lakshmi Balasubramanyan & David D. VanHoose, 2012. "Bank balance sheet dynamics under a regulatory liquidity-coverage-ratio constraint," Working Paper 1209, Federal Reserve Bank of Cleveland.
  10. Dutkowsky, Donald H. & VanHoose, David D., 2013. "Interest on reserves, unregulated interest on demand deposits, and optimal sweeping," Journal of Macroeconomics, Elsevier, vol. 38(PB), pages 192-202.
  11. Kopecky, Kenneth J. & VanHoose, David, 2012. "Can capital requirements induce private monitoring that is socially optimal?," Journal of Financial Stability, Elsevier, vol. 8(4), pages 252-262.
  12. Wu, Pei-Shan & Huang, Chien-Ming & Chiu, Chien-Liang, 2011. "Effects of structural changes on the risk characteristics of REIT returns," International Review of Economics & Finance, Elsevier, vol. 20(4), pages 645-653, October.
  13. Devaney, Michael, 2001. "Time varying risk premia for real estate investment trusts: A GARCH-M model," The Quarterly Review of Economics and Finance, Elsevier, vol. 41(3), pages 335-346.
  14. Dutkowsky, Donald H. & VanHoose, David D., 2011. "Interest on bank reserves and optimal sweeping," Journal of Banking & Finance, Elsevier, vol. 35(9), pages 2491-2497, September.
  15. David VanHoose, 2013. "Implications of Shifting Retail Market Shares for Loan Monitoring in a Dominant-Bank Model," Scottish Journal of Political Economy, Scottish Economic Society, vol. 60(3), pages 291-316, 07.
  16. David Vanhoose, 1997. "Macroeconomic stability in a free banking system," Atlantic Economic Journal, International Atlantic Economic Society, vol. 25(4), pages 331-343, December.
  17. Kopecky, Kenneth J. & VanHoose, David, 2004. "Bank capital requirements and the monetary transmission mechanism," Journal of Macroeconomics, Elsevier, vol. 26(3), pages 443-464, September.
  18. David VanHoose, 2011. "Regulatory Constraints on Performance-Based Managerial Compensation, Bank Monitoring, and Aggregate Loan Quality," Atlantic Economic Journal, International Atlantic Economic Society, vol. 39(4), pages 315-328, December.
  19. Nobuo Inaba & Takashi Kozu, 2005. "A note on the recent behaviour of Japanese banks," BIS Papers chapters, in: Bank for International Settlements (ed.), Investigating the relationship between the financial and real economy, volume 22, pages 82-105 Bank for International Settlements.
  20. Kopecky, Kenneth J. & VanHoose, David, 2004. "A model of the monetary sector with and without binding capital requirements," Journal of Banking & Finance, Elsevier, vol. 28(3), pages 633-646, March.

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