Wednesday, September 30, 2009
Charters and regulations of mutual savings banks
Mutual can be chartered by either the sates or the federal government. Moreover, state and federal governments also share responsibility for insuring their deposits. About 70 percent of all savings banks have their deposits insured by the Federal Deposit Insurance Corporation (up to $100,000); the remainders are covered by state insurance programs. Today, only 17 states permit the chartering of mutual within their borders, but these institutions are not bound by geography in raising funds or making loans and investment. Their mortgage-lending activities reach nationwide and occasionally even abroad to support the building of commercial and residential projects. The largest mutual savings bank in the United States is the Philadelphia savings fund society of Pennsylvania, which at year-end 1979 reported total deposited of almost $5.9 billion. Close behind was Bowery Savings Bank of New York City, with $4.7 billion in total deposits. Of the10 largest mutual in the United States, all but 3 are headquartered in the state of New York.
Number and distribution of mutual savings banks
The number of mutual operating today is small- less than 500. Moreover, the savings bank population has been on the decline through most of this century. For example, in 1990 there were 626 mutual operating in the United States, and the total number rose to a peak of 637 in 1910. Thereafter, a progressive decline set in until the number of savings banks totaled only 463 at year-end 1979.
Nevertheless, industry assets and deposit have grown quite rapidly. In 1950 total assets of all mutual stood at $22 billion, but at year-end 1980, industry assets had reached almost $172 billion. Of course, with declining numbers and rapidly expanding assets, the average size of mutual savings banks has grown tremendously and now exceeds $300 million in total assets. Thus, the average mutual savings bank is far larger than most credit unions, savings and loan associations, or even commercial banks. This increase in average size has aided mutual in offerings a greater variety of services and in keeping their operating costs low.
Mutual savings banks are not evenly distributed across the United States but rather are located primarily in New England and the Middle Atlantic States. For example, Massachusetts leads the list with 163 mutual operating as of year-end 1979, followed by New York with 112. other states which have mutual headquartered within their borders include Alaska, Connecticut, Delaware, Indiana, Maine, Maryland, Minnesota, New Hampshire, New jersey, Oregon, Pennsylvania, Rhode Island, Vermont, Washington, and Wisconsin.
Nevertheless, industry assets and deposit have grown quite rapidly. In 1950 total assets of all mutual stood at $22 billion, but at year-end 1980, industry assets had reached almost $172 billion. Of course, with declining numbers and rapidly expanding assets, the average size of mutual savings banks has grown tremendously and now exceeds $300 million in total assets. Thus, the average mutual savings bank is far larger than most credit unions, savings and loan associations, or even commercial banks. This increase in average size has aided mutual in offerings a greater variety of services and in keeping their operating costs low.
Mutual savings banks are not evenly distributed across the United States but rather are located primarily in New England and the Middle Atlantic States. For example, Massachusetts leads the list with 163 mutual operating as of year-end 1979, followed by New York with 112. other states which have mutual headquartered within their borders include Alaska, Connecticut, Delaware, Indiana, Maine, Maryland, Minnesota, New Hampshire, New jersey, Oregon, Pennsylvania, Rhode Island, Vermont, Washington, and Wisconsin.
Tuesday, September 29, 2009
How municipal bonds are marketed?
The selling of municipals is usually carried out through a syndicate of banks and securities dealers. These institutions underwrite municipals by purchasing them from the issuing unit of government and reselling the securities in the open market, hopefully at a higher price. Prices paid by the underwriting firms may be determined either by competitive bidding among several syndicates or by negotiation with a single securities dealer or syndicate. Competitive bidding normally is employed in the marketing of general obligation (GO) bonds, while revenue bonds more frequently are placed through negotiation.
In competitive bidding, syndicates interested in a particular bond issue will estimate its potential reoffer price in the open market and their desired underwriting commission. Each syndicate wants to bid a price high enough to win the bid, but low enough so that the securities can later be sold in the open market at a price sufficient to protect the group's commission. That is,
Bid price+ underwriting commission= market reoffer price
The winning bid carries the lowest net interest cost (NIC) to the issuing unit of government. The NIC is simply the sum of all interest payments that will be owed on the new issues of municipal bonds is a treacherous business. Prices, interest rates, and market demand for municipals all change rapidly, often without warning. In fact, the tax-exempt securities market is one of the most volatile of all financial markets. This is due in part to the dominant role of commercial banks, whose demand for municipals fluctuates with their net earnings and loan demand. Legal interest-rate ceilings, which prohibit some local governments from borrowing when market rates climb above those ceilings, also play a significant role in the volatility of municipal trading. These combined factors render the tax-exempt market highly sensitive to the business cycle, monetary policy, inflation, and a host of other economic and financial factors. The spectre of high interest rates often forces the postponement of hundreds of millions of dollars of new issues, while the onset of lower rates may unleash a flood of new security offerings.
There is trend today away from competitive bidding and toward negotiated sales of new state and local bonds, due partly to the treacherous character of the tax-exempt market. For example, during 1978 an estimated 53 percent of bonds issued in the market for long-term municipals were negotiated, compared with only 15 percent a dozen years before. This trend has aroused some concern among financial analysis because competitive bidding should result in the lowest net interest cost, reducing the burden on local taxpayers. A recent study sponsored by the Municipal Finance Officers Association (MFOA) concluded that taxpayers have borne some added interest burden as a result of the recent emphasis upon negotiated, rather than combative, sale.
This problem is especially severe in certain states. For example, the AFOA-sponsored study found that in Pennsylvania, where competitive bidding is not required by law, about 95 percent of all bonds sold by local governments were handled through negotiation with a single underwriter group. It was estimated that Pennsylvania local governments paid approximately $14 million in excess interest costs on bond sales totaling about $360 million. On the other side of the coin, underwriting firms argue that they provide extra services to borrowing governments during the negotiation process-services not generally available through competitive bidding. These include preparing legal offering statements, scheduling the sale of new securities, helping to secure desirable credit ratings, and contacting potential buyers.
In competitive bidding, syndicates interested in a particular bond issue will estimate its potential reoffer price in the open market and their desired underwriting commission. Each syndicate wants to bid a price high enough to win the bid, but low enough so that the securities can later be sold in the open market at a price sufficient to protect the group's commission. That is,
Bid price+ underwriting commission= market reoffer price
The winning bid carries the lowest net interest cost (NIC) to the issuing unit of government. The NIC is simply the sum of all interest payments that will be owed on the new issues of municipal bonds is a treacherous business. Prices, interest rates, and market demand for municipals all change rapidly, often without warning. In fact, the tax-exempt securities market is one of the most volatile of all financial markets. This is due in part to the dominant role of commercial banks, whose demand for municipals fluctuates with their net earnings and loan demand. Legal interest-rate ceilings, which prohibit some local governments from borrowing when market rates climb above those ceilings, also play a significant role in the volatility of municipal trading. These combined factors render the tax-exempt market highly sensitive to the business cycle, monetary policy, inflation, and a host of other economic and financial factors. The spectre of high interest rates often forces the postponement of hundreds of millions of dollars of new issues, while the onset of lower rates may unleash a flood of new security offerings.
There is trend today away from competitive bidding and toward negotiated sales of new state and local bonds, due partly to the treacherous character of the tax-exempt market. For example, during 1978 an estimated 53 percent of bonds issued in the market for long-term municipals were negotiated, compared with only 15 percent a dozen years before. This trend has aroused some concern among financial analysis because competitive bidding should result in the lowest net interest cost, reducing the burden on local taxpayers. A recent study sponsored by the Municipal Finance Officers Association (MFOA) concluded that taxpayers have borne some added interest burden as a result of the recent emphasis upon negotiated, rather than combative, sale.
This problem is especially severe in certain states. For example, the AFOA-sponsored study found that in Pennsylvania, where competitive bidding is not required by law, about 95 percent of all bonds sold by local governments were handled through negotiation with a single underwriter group. It was estimated that Pennsylvania local governments paid approximately $14 million in excess interest costs on bond sales totaling about $360 million. On the other side of the coin, underwriting firms argue that they provide extra services to borrowing governments during the negotiation process-services not generally available through competitive bidding. These include preparing legal offering statements, scheduling the sale of new securities, helping to secure desirable credit ratings, and contacting potential buyers.
Operational Problems in Offering Credit Cards
Banks and other companies offering credit cards must solve several significant operational problems. First, the break-even point in card operations appears to be relatively high, placing pressure on credit card companies to sign up enough merchants to accept the cards and enough individuals to use them. The two problems are, of course, interrelated. Merchants are willing to accept a card only if they believe there will be sufficient customers using it to make the program worthwhile. Similarly, individuals are willing to make use of their cards only if a large number of merchants will accept them in payment for goods and services. One problem that has plagued credit-card operations for many years is losses due to customer fraud. Recent estimates by the Federal Reserve System find that fraud losses represent 15 to 20 percent of total card charge-offs for most plans.
During the late 1960s some U.S. banks tried to overcome the card-acceptance barrier by mass mailing of unsolicited cards, resulting in large-scale credit and fraud losses. Fearing that the safety and soundness of the banking system might be jeopardized and public confidence in banks shaken, Congress Passed the Consumer Credit Protection act, which prohibits unsolicited mailing of credit cards. Moreover, once the card-issuing company has been notified, the customer is no longer liable for any unauthorized use of his or her card. Prior to notification, the cardholder can only be held responsible for a maximum of $50 in unauthorized charges per card. Moreover, the customer cannot be held liable for unauthorized use of his or her credit card if the card was not requested or used, if it carries a means of identifying the authorized user (such as a signature or photograph), or if the customer was not notified of the $50 maximum liability. In addition, card issuers must provide the customer with a means of notifying them in case of card loss or theft.
Federal legislation has done much to enhance public acceptance of credit cards. Most cards are issued to customers today only after a careful analysis of their credit standing. That is why cardholders frequently are able to use their cards as a credit reference to aid in the cashing of checks or to obtain other forms of credit. Most merchants know that charge-card holders tend to have higher incomes and better payment record than the general population.
The most profitable credit-card accounts from the point of view of the issuing companies are those with high balances which are not paid off immediately (I.e., those held by installment users). However, less than half the sales volume experienced by most card programs winds up as carry-over balances subject to finance charges. Most card users are convenience users, who pay off their credit purchases within the normal billing cycle. Banks have found that they cannot make significant profits on their credit card operations when over half their cardholders are only convenience users. Moreover, cards users with the highest incomes and best repayment records typically economize on their cash balances and delay payment as long as possible, which further reduces the earnings from card operations. However, the performance of credit-card programs does improve with experience. Card companies become more skillful at identifying profitable groups of customers and at minimizing fraud and bad-debt losses. In addition, credit card programs bring in customers who may purchase other financial services from the same institution, such as installment loans and savings plans.
During the late 1960s some U.S. banks tried to overcome the card-acceptance barrier by mass mailing of unsolicited cards, resulting in large-scale credit and fraud losses. Fearing that the safety and soundness of the banking system might be jeopardized and public confidence in banks shaken, Congress Passed the Consumer Credit Protection act, which prohibits unsolicited mailing of credit cards. Moreover, once the card-issuing company has been notified, the customer is no longer liable for any unauthorized use of his or her card. Prior to notification, the cardholder can only be held responsible for a maximum of $50 in unauthorized charges per card. Moreover, the customer cannot be held liable for unauthorized use of his or her credit card if the card was not requested or used, if it carries a means of identifying the authorized user (such as a signature or photograph), or if the customer was not notified of the $50 maximum liability. In addition, card issuers must provide the customer with a means of notifying them in case of card loss or theft.
Federal legislation has done much to enhance public acceptance of credit cards. Most cards are issued to customers today only after a careful analysis of their credit standing. That is why cardholders frequently are able to use their cards as a credit reference to aid in the cashing of checks or to obtain other forms of credit. Most merchants know that charge-card holders tend to have higher incomes and better payment record than the general population.
The most profitable credit-card accounts from the point of view of the issuing companies are those with high balances which are not paid off immediately (I.e., those held by installment users). However, less than half the sales volume experienced by most card programs winds up as carry-over balances subject to finance charges. Most card users are convenience users, who pay off their credit purchases within the normal billing cycle. Banks have found that they cannot make significant profits on their credit card operations when over half their cardholders are only convenience users. Moreover, cards users with the highest incomes and best repayment records typically economize on their cash balances and delay payment as long as possible, which further reduces the earnings from card operations. However, the performance of credit-card programs does improve with experience. Card companies become more skillful at identifying profitable groups of customers and at minimizing fraud and bad-debt losses. In addition, credit card programs bring in customers who may purchase other financial services from the same institution, such as installment loans and savings plans.
Monday, September 28, 2009
The determinants of consumer borrowing
Consumers represent one of the largest groups of borrowers in the financial system. Yet individual consumers differ widely in their use of credit and their attitudes toward borrowing money. What factors appear to influence the volume of borrowing carried out by households? Gross income is a common standard in this instance. For younger borrowers, without substantial assets to serve as collect for a loan, a cosigner may be sought whose assets and financial standing represent more adequate security. The duration of employment of the borrower is often a cortical factor, and many institutions will deny a loan request if the customer has been employed at his or her present job for less than a year.
The past payment record of a customer usually is the key indicator of character and the likelihood that the loan will be repaid in timely fashion. Many lenders refuse to make loans to those consumers who evidence "pyramiding of debt"-that is, borrowing from one financial institution to pay another. Evidence of sloppy money handling, such as unusually large balances carried on charge accounts or a heavy burden of installment payments, is regarded as a negative factor in the loan decision. Loan officers are particularly alert to evidence of a lack of credit integrity as reflected in frequent late payments or actual default on past loans. The character of the borrower is the single-most-important issue in the decision to grant or deny a consumer loan. Regardless of the strength of the borrower's financial position, if the customer lacks the willingness to repay his or her debt, then the lender has made a bad loan.
Most lenders feel that those who own valuable property such as land, buildings, or marketable securities are more reliable than those who do not own such property, especially if the property itself is pledged to secure the loan. For example, homeowners are usually considered to be better risks than those who rent. Moreover, borrowers´ chances of getting a loan usually are better if they do other business (such as maintain a deposit) with the lending institution. If more than one member of the family works, this is often viewed as a more-favorable factor than if the family depends upon one breadwinner who may become ill, die, or simply lose his or her job. Having a telephone at home is another positive factor in evaluating a loan application, since the telephone gives the lender an inexpensive way to contact the borrower. One way to lower the cost of a loan is for the consumer to pledge a bank deposit, marketable securities, or other liquid assets behind the loan. The disadvantage here is that such a pledge "ties up" the asset pledged as security until the loan is repaid.
The past payment record of a customer usually is the key indicator of character and the likelihood that the loan will be repaid in timely fashion. Many lenders refuse to make loans to those consumers who evidence "pyramiding of debt"-that is, borrowing from one financial institution to pay another. Evidence of sloppy money handling, such as unusually large balances carried on charge accounts or a heavy burden of installment payments, is regarded as a negative factor in the loan decision. Loan officers are particularly alert to evidence of a lack of credit integrity as reflected in frequent late payments or actual default on past loans. The character of the borrower is the single-most-important issue in the decision to grant or deny a consumer loan. Regardless of the strength of the borrower's financial position, if the customer lacks the willingness to repay his or her debt, then the lender has made a bad loan.
Most lenders feel that those who own valuable property such as land, buildings, or marketable securities are more reliable than those who do not own such property, especially if the property itself is pledged to secure the loan. For example, homeowners are usually considered to be better risks than those who rent. Moreover, borrowers´ chances of getting a loan usually are better if they do other business (such as maintain a deposit) with the lending institution. If more than one member of the family works, this is often viewed as a more-favorable factor than if the family depends upon one breadwinner who may become ill, die, or simply lose his or her job. Having a telephone at home is another positive factor in evaluating a loan application, since the telephone gives the lender an inexpensive way to contact the borrower. One way to lower the cost of a loan is for the consumer to pledge a bank deposit, marketable securities, or other liquid assets behind the loan. The disadvantage here is that such a pledge "ties up" the asset pledged as security until the loan is repaid.
Fair Housing and Home Mortgage Disclosure Acts
Two other important antidiscrimination laws are the Fair Housing Act, which forbids discrimination in lending for the purchase or renovation of residential property, and the Home Mortgage Discloser Act (HMDA). The latter requires financial institutions to disclose to the public the amount and location of their home mortgage and home improvement loans. HMDA was designed to eliminate "redlining," in which some lenders would mark out areas of a community as unsuitable for mortgage loans because of low income, high crime rates, or other negative factors. Not only was the low supposed to increase home mortgage loans to low- and moderate-income neighborhoods, but it was also intended to encourage the public to divert its funds away from those institutions practicing redlining. Unfortunately, this law reveals information about the supply of mortgage credit but not the demand. Also, nondeposit mortgage lenders are exempted from its provisions even though they are often significant factors in the local real estate market.
Both HMDA and the Fair Housing Act require nondiscriminatory advertising by lenders. No longer can a consumer lending institution direct its advertisements solely to high-income neighborhoods to the exclusion of other potential customers. When loans to purchase, construct, improve, repair, or maintain a dwelling are advertised, the lender must state that such loans will be made without regard to race, color, religion, sex, or national origin. On written advertising, an "equal housing" symbol must be attached. Clearly, then, in advertising the availability of credit, in accepting and evaluating loan applications, and in the actual granting of credit, the principles of civil rights and nondiscrimination apply. Lenders are free to choose who will receive credit, but that decision must be made within the framework of the nation's social goals.
Both HMDA and the Fair Housing Act require nondiscriminatory advertising by lenders. No longer can a consumer lending institution direct its advertisements solely to high-income neighborhoods to the exclusion of other potential customers. When loans to purchase, construct, improve, repair, or maintain a dwelling are advertised, the lender must state that such loans will be made without regard to race, color, religion, sex, or national origin. On written advertising, an "equal housing" symbol must be attached. Clearly, then, in advertising the availability of credit, in accepting and evaluating loan applications, and in the actual granting of credit, the principles of civil rights and nondiscrimination apply. Lenders are free to choose who will receive credit, but that decision must be made within the framework of the nation's social goals.
Equal Credit Opportunity Act
The Equal Credit Opportunity Act of 1974 forbids discrimination against credit applicants on the basis of age, sex, marital statues, race, color, religion, national origin receipt of public assistance or good-faith exercise of rights under the federal consumer credit protection laws. Major beneficiaries of this law are women, who no longer can be denied credit solely on the basis of their sex, age, family plans, or the fact that they are not wage earners. Women may receive credit under their own signature, based on their own personal credit record and earnings, without having the husband's joint signature. Credit applications must be notified of the approval or denial of their loan request within 30 days of filling a completed application. The reasons for denial of a loan application must be set forth in writing, and the lender may not request information on the borrower's race, color, religion, national origin, or sex, except in the case of residential mortgage loans.
Community Reinvestment Act
one of the most important and controversial pieces of financial legislation in recent years is the Community Reinvestment Act, singed into law by President Jimmy Carter on October12,1977. Under its terms financial institutions are required to make an " affirmative effort" to meet the credit needs of low- and middle-income customers, including households, small businesses, farms, and ranches. Moreover, the regulatory authorities are required to consider the performance of lending institution in meeting these community credit needs when processing applications for merges, new branch offices, corporate charters, and holding company acquisitions by these same lending institutions.
Each commercial and savings banks must define its own local "trade territory" and describe the services that it offers or is planning to offer in that local area. Once a year each institution must prepare an updated map which delineates the trade territory served, without deliberately excluding low- or moderate-income neighborhoods. The lending institution's board of directors must adopt a CRA Statement, which specifies that lender's trade territory and lists the principal types of credit offered in that territory. A notice must be posted in the lobby, alerting customers to their rights and where the institution's CRA Statement may be found. Customers are entitled to make written comments concerning the lender's performance in meeting local credit needs. These comments must be retained on the premises for at least two years and be available for public inspection. The basic purpose of the Community Reinvestment Act is to avoid "gerrymandering" out low-income neighborhoods and other areas that the lender may consider undesirable.
Each commercial and savings banks must define its own local "trade territory" and describe the services that it offers or is planning to offer in that local area. Once a year each institution must prepare an updated map which delineates the trade territory served, without deliberately excluding low- or moderate-income neighborhoods. The lending institution's board of directors must adopt a CRA Statement, which specifies that lender's trade territory and lists the principal types of credit offered in that territory. A notice must be posted in the lobby, alerting customers to their rights and where the institution's CRA Statement may be found. Customers are entitled to make written comments concerning the lender's performance in meeting local credit needs. These comments must be retained on the premises for at least two years and be available for public inspection. The basic purpose of the Community Reinvestment Act is to avoid "gerrymandering" out low-income neighborhoods and other areas that the lender may consider undesirable.
Sunday, September 27, 2009
Recent Trends in Original Maturities of Bonds
There is a trend today toward shorter original maturities for corporate bonds due to inflation, rapid changes in technology, and heavy borrowing demands from other sectors of the economy. During the 1950s and 60s corporations usually found a ready market for 20-to 30-year bonds. Such long-term debt contracts were extremely desirable from the borrowing company's standpoint because they locked in relatively low interest costs for many years and made financial planning much simpler. Today, with inflation and other factors frequently sending market interest rates soaring to records levels, bonds and notes with 3- to 15-year maturities are becoming commonplace.
Some financial analysts expect to see a substantial number of corporate bonds issued in the future whose interest rates are indexed to commodity prices (especially silver and gold) or to the price of energy. These commodity-indexed bonds are designed to provide the investor a hedge against inflation and, as result, carry substantially lower coupon rates than conventional bonds. Another recent innovation is the issuance of zero-coupon bonds which carry no fixed rate of return but offer the investor the prospect of significant capital gains. Those bonds still issued with fixed interest rates may carry "openers" which call for periodic adjustments in the principal amount of the loan as interest rates change. In brief, the trend in corporate bonds today is toward shorter maturities and more flexible rate of return for the investor.
Some financial analysts expect to see a substantial number of corporate bonds issued in the future whose interest rates are indexed to commodity prices (especially silver and gold) or to the price of energy. These commodity-indexed bonds are designed to provide the investor a hedge against inflation and, as result, carry substantially lower coupon rates than conventional bonds. Another recent innovation is the issuance of zero-coupon bonds which carry no fixed rate of return but offer the investor the prospect of significant capital gains. Those bonds still issued with fixed interest rates may carry "openers" which call for periodic adjustments in the principal amount of the loan as interest rates change. In brief, the trend in corporate bonds today is toward shorter maturities and more flexible rate of return for the investor.
Special drawing rights
Several nations peg their currency's exchange rate to a basket of currencies assembled by the international monetary fund, known as the special drawing right (SDR). The SDR is an official international monetary reserve unit designed to settle international claims arising from transactions between the IMF, governments of member nations, central banks, and various international agencies. SDRs are really "book entries" on the ledgers of the IMF and are sometimes referred to as "paper gold" periodically, that organization will issue new SDRs and credit them to the international reserve accounts of member nations. To spend its SDRs, a nation simply requests the IMF to transfer some amount of SDRs from its own reserve account to the reserve account of another nation, usually one whose currency is widely accepted in the international markets. In return, the country asking for the transfer gets deposit balances denominated in the currency of the nation receiving the SDRs. These deposit balances may then be used to make international payments.
The value of SDRs today is based upon a basket of currencies representing the five IMF member nations with the largest volume of exports during the 1975-79 periods. These five countries are the United Stated, The Federal Republic of Germany, France, Japan, and the United Kingdom. In determining the current value of SDRs the currency of each of these five nations is weighted according to the value of their exports and currency holdings. In 1981 the weights applied to these five currencies in the SDR basket were: U.S. dollars, 42 percent; German marks, 19 percent: French francs, 13 percent; Japanese yen, 13 percent; and British pound sterling, 13 percent. Countries that peg their currency's value to the value of SDR basket include Burma, Guinea, Kenya, Vietnam, Zaire, and Zambia.
The value of SDRs today is based upon a basket of currencies representing the five IMF member nations with the largest volume of exports during the 1975-79 periods. These five countries are the United Stated, The Federal Republic of Germany, France, Japan, and the United Kingdom. In determining the current value of SDRs the currency of each of these five nations is weighted according to the value of their exports and currency holdings. In 1981 the weights applied to these five currencies in the SDR basket were: U.S. dollars, 42 percent; German marks, 19 percent: French francs, 13 percent; Japanese yen, 13 percent; and British pound sterling, 13 percent. Countries that peg their currency's value to the value of SDR basket include Burma, Guinea, Kenya, Vietnam, Zaire, and Zambia.
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