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Discussion: Implications of Recent Banking Developments for Financial Stability

Published online by Cambridge University Press:  19 October 2009

Richard C. Aspinwall
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Extract

The business of banking has changed profoundly over the past 15 years, and some of these changes have come to entail serious problems during periods of severe stress in financial markets. In part, banking changes have contributed to financial instability (actual and potential), and in part banking instability has reflected economic pressures. Recognizing the complexity of these influences, the need to anticipate problems–to keep “good” banks from going “bad,” as well as to keep “bad” banks from failing–is particularly urgent, especially since the economic environment in the years just ahead appears likely to be at least as unsettled as that of the recent past.

Type
Discussants
Information
Journal of Financial and Quantitative Analysis , Volume 10 , Issue 4 , November 1975 , pp. 611 - 613
Copyright
Copyright © School of Business Administration, University of Washington 1975

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References

1 The financial position of corporate nonfinancial business has also deteriorated in recent years. For example: (1) financial assets as a percentage of total liabilities have fallen from 80 percent to 63 percent since 1950; (2) short term debt as a percentage of total credit market debt has risen from 20 percent to 26 percent in the past ten years; (3) the ratio of cash flow to total liabilities has declined from the 14–16 percent range maintained until the mid-1960s to 11 percent in the early 1970s and about 9–1/2 percent in 1974; (4) internally generated funds as a percentage of fixed investment has dropped from 90–110 percent in the mid-1960s to only 70 percent in 1974; (5) net worth relative to total liabilities has fallen from 1.7 to 1.1 times.

2 For interesting work in developing an anticipatory framework for problem banks, using year-end balance sheet and income data, see Sinkey, Joseph F. Jr., “Multivariate Statistical Analysis of the Characteristics of Problem Banks,” Journal of Finance (March 1975)CrossRefGoogle Scholar.