Big banks with undervalued stock would benefit most if regulators allowed institutions to count subordinated debt as capital, according to two researchers.

Larry D. Wall of the Federal Reserve Bank of Atlanta and Pamela P. Peterson of Florida State University find that it would be too expensive for most small banks to issue debt.

By requiring equity capital, the government forces banks with both overvalued and undervalued stock to issue more shares. This disproportionately benefits banks with overvalued shares.

If the law were changed, big banks with undervalued stock prices would issue only debt, because it would be cheaper. This would force overvalued banks also to issue debt, for fear of signaling the market that their shares are overpriced. As a result, overvalued banks would lose their funding edge.

For a copy of "The Choice of Capital Instruments," call 404-521-8020 or visit www.frbatlanta.org.

The Congressional Budget Office has completed a comprehensive review of how new government regulation of interchange and surcharge fees could affect competition in the ATM market. Though it draws no conclusions, the study by Judith S. Ruud and Philip Webre discusses congressional efforts to combat surcharges and recounts the difficulties the industry would have eliminating interchange fees.

The study also shows how ATM deployments skyrocketed after surcharging became widespread.

For a copy of "Competition in ATM Markets: Are ATMs Money Machines?" visit www.cbo.gov.

Despite the severity of the Asian and Latin American financial crises, U.S. investors did not panic, according to a study by Mitchell A. Post and Kimberlee Millar of the Investment Company Institute. "Outflows from funds that invested primarily in Asia and Latin America were small relative to the magnitude of the drops in prices of shares during the crisis," they write. "Moreover, investors continued to purchase U.S. emerging markets mutual funds."

The researchers find that portfolio managers primarily conducted small sales of stocks in those regions. Some fund managers who concentrate on emerging markets used the crisis as an opportunity to buy shares at reduced prices, according to the researchers.

For a copy of "U.S. Emerging Market Equity Funds Crisis in Asian Financial Markets," call 202-326-5945 or visit www.ici.org/economy/perspective.html.

Two researchers conclude that the Federal Reserve Board's Beige Book accurately reflects the state of the country's economy. The Beige Book is issued eight times a year just before the Federal Open Market Committee meeting. Members of the committee consider the study's findings when deciding whether to adjust the target federal funds rate.

To see if the anecdotal evidence of economic activity included in the Beige Book was accurate, Nathan S. Balke of Southern Methodist University and D'Ann Peterson of Amresco first analyzed whether the studies predicted slower or faster growth. They then assigned a numerical score to these estimates, which ranged between minus-2 and 2. They compared this with the actual changes to gross domestic product during these same periods.

"The Beige Book's depiction of current economic activity mirrors that of quarterly real GDP," they conclude.

For a copy of "How Well Does the Beige Book Reflect Economic Activity? Evaluating Qualitative Information Quantitatively," call 214-922-5254. American Banker,

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