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Second Quarter 2001
Federal Reserve Bank of Dallas
| Economic and Financial
Review was published from 1999 until 2001. |
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Can the Stock Market Tell Bank Supervisors
Anything They Don't Already Know?
Jeffery W. Gunther, Mark E. Levonian,
and Robert R. Moore
This article provides evidence consistent
with recent policy proposals calling for a greater role for market forces
in promoting a safe and sound financial system. The authors' empirical
results indicate a measure of expected default probability distilled from
equity prices helps predict the financial condition of individual banking
organizations, as reflected in their supervisory ratings. Moreover, the
stock market data have predictive power over and above the information
in the quarterly financial statements available to supervisors between
inspections. These findings suggest financial markets can provide useful
information to supplement supervisory assessments, particularly between
inspections, and point to the value of additional research to further
clarify the information content of market prices and quantities.
The Democratization of America's
Capital Markets
John V. Duca
In this article, John Duca shows how
financial innovations have benefited the United States by increasing the
availability of financing for new firms and improving Americans' access
to financial investments. Two dramatic examples are the explosive growth
of venture capital financing and the doubling of stock ownership rates
since the early 1980s. This democratization of America's capital markets
stems from technological improvements that have cut the transaction and
information costs of investing and from a series of deregulatory steps
aimed at improving the availability of capital.
The Transition to Consumption Taxation,
Part 2: The Impact on Existing Financial Assets
Alan D. Viard
Replacing the income tax with a consumption
tax is likely to reduce the total value of the capital stock. Alan D.
Viard reviews how this decline is divided between bondholders and stockholders
and the effect on household borrowers and lenders. He explains that the
results depend on whether monetary policy accommodates the tax through
a higher price level. Without accommodation, the decline in the value
of capital is largely borne by stockholders and there is little reallocation
of wealth between household borrowers and lenders. If the tax is fully
accommodated, bondholders bear heavier burdens than stockholders and household
borrowers gain at the expense of household lenders.
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