Boards of directors have abdicated to government regulators responsibility for overseeing senior management, according to a study by Federal Reserve Bank of Dallas economist Stephen Prowse.
Mr. Prowse finds that only 1.7% of bank holding companies were the victims of hostile takeover attempts, compared with 7.8% of manufacturing firms. The low number of hostile takeovers means the market is not disciplining underperforming corporate managers, he concludes.
That means directors must actively police management, he says. But he finds directors are unusually docile, ousting bank management in just 10% of the 234 holding companies surveyed, compared with a 20% rate for manufacturing firms.
The result: Regulators are forced to step in and discipline poor managers.
Mr. Prowse recommends two changes to make management more responsive to stockholders. First, he said regulators should tear down some of the regulatory barriers to mergers. This will make it easier for hostile takeovers to occur.
Second, he said regulators should push for a financial modernization law that encourages investors to buy large chunks of bank stock because investors with large stakes are more likely to monitor management activities.
For a copy of "Corporate Control in Commercial Banks" call 214-922-5230.
A new paper challenges the conventional wisdom that mortgage defaults occur when people decide their house is worth less than they owe.
Peter J. Elmer, a senior economist at the Federal Deposit Insurance Corp., said the theory doesn't hold because defaults are primarily due to insolvency.
Credit scoring systems, divorce rates, job losses, credit card default rates, and bankruptcy levels all may portend future mortgage default rates, he finds.
For a copy of "A Choice-Theoretic Model of Mortgage Default" call 202- 898-7366.
Automating loan underwriting will benefit consumers but hurt companies that securitize mortgages, according to a study by two Federal Reserve Board economists.
Wayne Passmore and Roger Sparks write that automated underwriting systems allow banks to separate the best borrowers from those more likely to default. As a result, banks keep the best credits on their books while selling poor credits to the secondary market agencies, which lose money on higher default rates.
Still, they write, consumers will benefit because automation reduces the cost of originating loans.
For a copy of "The Effect of Automated Underwriting on the Profitability of Mortgage Securitization" call 202-452-3245.
The central bank can increase consumer spending in the short run but cannot increase real economic growth, concludes Federal Reserve Bank of Cleveland economist Owen F. Humpage.
Mr. Humage writes that increasing the money supply will spur consumption because the public will not immediately recognize the higher prices of goods and services. But in the long run, the public will react to inflation by reducing its investment in capital stock and productivity-enhancing innovations. That will hurt long-term growth, he says.
For a copy of "Monetary Policy and Real Economic Growth" call 216-579- 3079.
