Research Solutions to the Financial Problems of Depository Institutions

This book provides a practical analysis of the typical investments and funding sources of depository institutions. With a particular emphasis on mortgage-related investments (ARMs, CMOs, IOs, and POs), state-of-the-art valuation models are included that incorporate both call and default risk. Equity funding issues are also analyzed in detail. In addition, the author summarizes the history of the depository institution crisis, discusses the future outlook, and suggests a creative solution to the deposit insurance crisis that permits government deposit insurance without risk or cost to taxpayers.

After proposing a system of private deposit insurance backed by minimal market-to-market collateral requirements, the author focuses on micro topics. In particular, the book includes a comprehensive evaluation of default risk data, precise equations for valuing complex mortgage securities, a theoretical model for making hedging and capital adequacy decisions (including an econometric model for estimating the return on the market portfolio and market risk premiums), and a practical discounted cash flow valuation model for analyzing depository institution stock (that incorporates financial statement items and footnotes as well as mortgage prepayments and the term structure of interest rates). The work represents an excellent handbook for financial institution executives, consultants, regulators, investors, and students.

J. AUSTIN MURPHY is an Associate Professor of Finance at Oakland University. He worked as a research scholar at the Federal Home Loan Bank Board in its final year before it was merged into the Treasury Department (1988-89) and at the Free University of Berlin in its final year before being merged into the Germany (1989-90). He has written over 40 academic articles that have been published in such journals as the Journal of Banking and Finance, Journal of Economics and Business, Journal of Futures Markets, Southern Economic Journal, the Financial Review, and the American Business Review.