Loan Rates Cut, HikedAt About Same Speed
Contrary to popular belief, banks reduce loan interest rates just as quickly as they raise them, according to two Federal Reserve Bank of St. Louis economists.
Michael J. Dueker and Daniel L. Thornton write that past studies looked at the spread between bond rates and interest rates. Using this model, researchers concluded that banks do not reduce rates in response to economic events as fast as they raise them.
These models are flawed because they assume the degree that interest rates fluctuate is constant, the economists write. Interest rates instead go through periods of volatility and relatively stability. After accounting for this, the researchers found no distinct difference between the speed at which banks raised rates and cut them.
For a copy of "Do Bank Loans Exhibit a Countercyclical Mark-Up?" call 314-1444-8591 or visit www.stls.frb.org/research.
Consumers would be hurt, not helped, by legislation requiring lenders to cancel private mortgage insurance automatically once borrowers have 25% equity in their homes.
Stanley D. Longhoffer, an economist at the Federal Reserve Bank of Cleveland, writes that measures pending in both houses of Congress would produce higher monthly premiums.
This would reduce the amount of money consumers have available for monthly mortgage payments, which means some low-income families would no longer be able to afford a home.
Mr. Longhoffer says a better approach would be to allow the market to decide when to terminate mortgage insurance requirements. This would ensure that high-risk borrowers pay more in premiums than lower-risk mortgagees.
For a copy of "PMI Reform: Good Intentions Gone Awry," call 216-579-3079 or visit www.clev.frb.org.
Though processing checks electronically rather than shipping slips of paper around the country would save $1.4 billion a year, the market does not appear ready to adopt the new technology. That's the conclusion of Joanna Stavins, an economist at the Federal Reserve Bank of Boston. Ms. Stavins writes that the start-up costs to create an electronic check presentment system are prohibitively high, the savings from the new system would not benefit all consumers equally, and the electronic infrastructure is not yet in place to handle such a complex system.
If policymakers want an electronic check presentment system, they should have the Fed offer the service at a discount, she writes. This would encourage other players to invest in the technology and eventually to buy ease a transition to the new system, she writes.
For a copy of "A Comparison of Social Costs and Benefits of Paper Check Presentment and ECP with Truncation," call 617-973-3394.
All shareholders may benefit from insider trading, according to a study by the Federal Reserve Bank of Atlanta. Investors usually are subject to two risks: normal business cycles and management quality. Insider trading eliminates the second risk because if top officials have confidence in senior management they will buy stock, and if they lack confidence they will sell shares. By tracking senior management's stock trading, consumers can gain a good understanding of the company's true value, writes Atlanta Fed economist Jie Hu and Tulane University economist Thomas H. Noe.
For a copy of "Insider Trading, Costly Monitoring, and Managerial Incentives," call 404-521-8020.
