The Journal of Finance

Maturity Intermediation and Intertemporal Lending Policies of Financial Intermediaries

Published: 09/01/1987   |   DOI: 10.1111/j.1540-6261.1987.tb03925.x

GEORGE EMIR MORGAN, STEPHEN D. SMITH

This paper considers the maturity intermediation and intertemporal lending decisions of risk‐averse financial intermediaries. In particular, the maturity mismatch problem and the fixed‐versus‐variable‐rate lending decision are modeled when the major source of risk involves uncertain future interest rates. The results imply that the strategy of matching the maturity of assets and liabilities is not generally optimal or even minimum risk. This is due primarily to the “built‐in” hedge that the intermediary has as a result of rolling over short‐term loans while continuing to finance long‐term loans. Intertemporal dependencies between loan demand and costs (or both) also have an effect on the optimal degree of maturity mismatching and provide one rationale for making loans at rates below current marginal cost.

Changes in the Cost of Intermediation: The Case of Savings and Loans

Published: 09/01/1990   |   DOI: 10.1111/j.1540-6261.1990.tb02443.x

RICHARD L. B. LE COMPTE, STEPHEN D. SMITH

The minimum cost output configuration for a firm may change as the result of a variety of factors, including changes in market structure. In this paper we test this structural change hypothesis with savings and loan data. We find support for the hypothesis that separable, constant returns to scale production functions characterize the average savings and loan in our sample in 1983. This is in contrast to the cost complementarities found in 1978. We argue that this result may be the result of regulatory changes that allowed savings and loans to alter their production mix to fully capture the benefits of joint production.

A Note on Quantity versus Price Risk and the Theory of Financial Intermediation

Published: 12/01/1987   |   DOI: 10.1111/j.1540-6261.1987.tb04372.x

STEPHEN D. SMITH, DEBORAH WRIGHT GREGORY, KATHLEEN A. WEISS

Optimal Futures Positions for Large Banking Firms

Published: 03/01/1988   |   DOI: 10.1111/j.1540-6261.1988.tb02596.x

GEORGE EMIR MORGAN, DILIP K. SHOME, STEPHEN D. SMITH

In this paper, we extend earlier work on hedging models so that uncertainty about both deposit supply and loan demand is incorporated as well as random rates of return on loans and CD's. Our model suggests that the optimal forward position is the sum of three ratios that should be estimated simultaneously. Using bank‐specific data, the optimal hedge ratios are estimated in both the pre‐deregulation and deregulation subperiods. Our results show that previous studies of bank hedging with interest rate futures have greatly overstated (a) the volume of short futures positions that banks should take and (b) the degree of homogeneity of optimal hedge ratios across the banking system. Similarly, deregulation has not uniformly affected the interest rate risk borne by different institutions.

The Purchasing Power of Money and Nominal Interest Rates: A Re‐Examination

Published: 12/01/1988   |   DOI: 10.1111/j.1540-6261.1988.tb03959.x

DILIP K. SHOME, STEPHEN D. SMITH, JOHN M. PINKERTON

While it has been known for some time that, under uncertainty, the original version of the Fisher hypothesis is not precisely correct, empirical researchers have largely ignored this fact. Such an omission has possibly resulted in erroneous conclusions concerning other hypotheses; most notably the impact of prices on the real economy. This paper clarifies some of the previous interpretations of the existing empirical literature and provides a theoretical version of the relation between prices and interest rates. Empirical tests based on both the Livingston survey data and data from time‐series forecasting models provide support for the Fisher effect and the hypothesis that only covariance risk is priced in the Treasury bill market.