Banking companies can earn higher profits if they focus more on loan underwriting and fee income and less on cost-cutting, according to a recent study by an economist at the Office of the Comptroller of the Currency.

"Persistent positive abnormal profits appear to be driven by revenue generation, not cost control," OCC economist Karin Pafford Roland wrote in an agency working paper. "This result lends support to the argument that expansion of banking powers via insurance sales, proprietary mutual fund management, etc., will improve the profitability of bank holding companies."

Ms. Roland studied the 1986-1992 earnings of 237 large bank holding companies. One-third had "abnormal" profits, which means they performed better than expected. These banks had actively sought opportunities to lend money and earn fees. Banks that emphasized cost-cutting over revenue generation were less profitable over the long haul, she found.

For a copy of "Profit Persistence in Large U.S. Banking Companies," call 202-874-5250.

Is there a better way to measure market risk than traditional value-at- risk models? A group of U.S. and European researchers, including Cornell University Prof. David C. Heath, claims to have built a better mousetrap.

Their model's four algebraic constraints take into account offsetting risks, enabling banks to hold capital only against their net exposures. For a copy of "Characterization of Market Risk," call 607-255-9125.


Emerging markets may not be as profitable as some financial analysts believe, according to a study by University of California at Irvine Prof. Philippe Jorion and Yale University Prof. William N. Goetzmann.

The researchers found that stocks in emerging markets initially surged in value but quickly settled down and eventually returned less than securities traded on more established stock exchanges. For a copy of "Re- emerging Markets," call 714-824-5245.


Private economists are no match for the Federal Reserve Board, according to a study by the National Bureau of Economic Research.

Research associates Christina and David Romer found that the Fed consistently outperforms private-sector forecasters. They credited the Fed's early access to economic data and its large staff of researchers. For a copy of "Federal Reserve Forecasts Would Be Valuable to Commercial Forecasters," call 617-868-3900.


Policymakers interested in the effect smart cards will have on the economy should look back to the era of free banking, between 1837 and 1867, when banks issued currency with little government interference.

Gerald P. Dwyer Jr., a Clemson University economics professor, wrote in the December issue of the Federal Reserve Bank of Atlanta's Economic Review that consumers should learn from history that they must pay attention to the issuer's reputation and to the assets backing the currency.

He noted that some bankers during that era had defrauded depositors by failing to back their notes. But he said the industry had largely cleaned up its act by the time Congress taxed free banking out of business, beginning in 1865. For a copy of "Wildcat Banking, Banking Panics, and Free Banking in the United States," call 404-521-8020.

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