The Savings and Loan Industry: Current Problems and Possible Solutions

By Walter J. Woerheide | Go to book overview

CONCLUSION

The purpose of this chapter has been twofold. The first was to make a strong case that interest rate futures contracts and interest rate options can be extremely beneficial to savings and loans in helping them reduce their interest rate risk exposure. The second was to demonstrate that although we know such instruments are beneficial, we can not give any quantitative dimensions to the value of their contribution.

The reader will recall the indication that duration values could not be computed for futures contracts. It was further demonstrated in the mortgage and MMC short hedge examples that it would not be possible to compute the duration statistic for combinations of futures positions and mortgages or MMCs. So this results in the awkward position of saying that interest rate futures and options are beneficial, but we are not sure how beneficial.

The topic of the next chapter, consumer lending authority, will lead us to the opposite conclusion. That is, we can measure fairly precisely the effect of consumer loans upon the duration mismatch of SLAs, but it appears that the consumer lending authority is not going to be particularly beneficial to the industry in reducing its interest rate risk exposure.


NOTES
1.
The GNMA is an agency which guarantees the payment of interest and principal on the mortgages underlying the certificates it guarantees. For a more detailed description of these certificates, see David S. Kidwell and Richard Peterson, Financial Institutions, Markets, and Money, Dryden Press, Hinsdale, Ill., 1981, pp. 494-95.
2.
In fact, the CD GNMA contract is nearly "dead." This contract calls for delivery of actual GNMA certificates with coupon rates at or below what is referred to as "the current GNMA production rate." The production rate is 50 basis points below whatever the current FHA/VA ceiling rate is.
3.
Understanding the Delivery Process, The Board of Trade of the City of Chicago, 1980, p. 18.
4.
GNMA 8s are certificates supported by mortgages, all of which have 8 percent coupon rates.
5.
A cash transaction can either be a spot transaction or a forward transaction. As noted in the text, a spot transaction is a payment of cash for immediate delivery, but a forward transaction is an agreement to pay cash for a future delivery.
6.
A thorough discussion of the categories of buyers and sellers would show that there are really several categories and that the categories' distinctions are dubious. However, for explanatory purposes we will assume that there are only two categories and that these are well defined.
7.
This description of a short hedge is also referred to as a cash hedge. See Charles T. Frankle and Andrew J. Senchack Jr., "Economic Considerations in the Use of Interest Rate Futures," The Journal of Futures Markets, Spring 1982, p. 107.
8.
Another name for this activity is anticipatory hedging. See Frankle and Senchack, "Economic Considerations," p. 107.

-121-

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The Savings and Loan Industry: Current Problems and Possible Solutions
Table of contents

Table of contents

  • Title Page iii
  • Contents vii
  • Tables ix
  • Acknowledgments xi
  • Introduction xiii
  • Note xv
  • Abbreviations xvii
  • 1 - History of the Federal Home Loan Bank System 3
  • Notes 23
  • 2 - The Determinants of Profitability for Savings and Loans 28
  • 3 - Measuring the Interest Rate Risk Exposure of Savings and Loans 49
  • Notes 67
  • 4 - Alternative Mortgage Instruments 70
  • Notes 97
  • 5 - Financial Futures and Forward Commitments 104
  • Notes 121
  • 6 - Consumer Lending 124
  • Notes 135
  • 7 - The Elimination of Interest Rate Ceilings 138
  • Notes 148
  • 8 - The Introduction of Now Accounts 152
  • Notes 160
  • 9 - Mergers and Conversions 163
  • SUMMARY AND CONCLUSIONS 184
  • 10 - The Future 189
  • Notes 195
  • Bibliography 197
  • Index 211
  • About the Author 217
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