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Economic Review

Economic Review
March/April 1995, Volume 80, Number 2

Private Sector Responses to the Panic of 1907: A Comparison of New York and Chicago
Ellis W. Tallman and Jon R. Moen

The trend toward greater provision of payments services by nonbank providers raises a question for regulators: What if these nonbank institutions suffer unfavorable balances or experience a run? The authors of this article look to the Panic of 1907 as an example of how private market participants, in the absence of government institutions, react to a crisis in their industry. They suggest that New York's and Chicago's contrasting experiences during the panic may provide useful lessons for both regulators and market participants.

The article compares responses to the panic by bank intermediaries in the two cities through clearinghouses. The apparent isolation of trusts from the New York Clearinghouse left the clearinghouse with inadequate knowledge of their condition and hindered prompt action. In Chicago, the clearinghouse had timely information on most intermediaries in the city, including the trusts, and therefore was positioned to react quickly.

The distinct nature of the Panic of 1907 and the differences between private market regulation through clearinghouses and the current framework of public regulation limit recommendations for today's financial world. Nonetheless, the historical experience provides a precedent for the development and growth of payments services offered by nonbank providers, which should not be ignored as key players in the payments system. The key lesson from history is that such ignorance can be expensive.

Using Eurodollar Futures Options: Gauging the Market's View of Interest Rate Movements
Peter A. Abken

Investors and analysts frequently use financial market prices in their attempts to divine market expectations--a difficult exercise because of the myriad influences on financial market prices. This article focuses on shifts in market outlook regarding the direction of interest rate movements since 1988 as well as market reaction to specific events influencing interest rate changes in the short run--namely, Federal Reserve monetary policy and its periodic Federal Open Market Committee meetings.

The discussion examines the Eurodollar futures options traded at the Chicago Mercantile Exchange and explains how to infer the implied skewness of interest rates--a measure that gauges the direction and magnitude of their movements--from these options. In particular, this article shows how the skewness of the distribution of a short-term interest rate, LIBOR, can be inferred from market prices.

The basic conclusion of this article is that a marked shift in market outlook on interest rate movements occurred in late 1992. The analysis finds that during 1993 and 1994, skewness was manifest by a premium in the prices of Eurodollar futures puts, which offer protection against rising interest rates, compared with those of Eurodollar futures calls. The findings also indicate, though, that the Eurodollar futures options prices are too noisy to detect changes in the markets' view of future short-term interest rate movements following FOMC meetings.

FYI--Examining Small Business Lending in Bank Antitrust Analysis
W. Scott Frame

The U.S. banking industry has entered an unprecedented period of consolidation and reorganization. This bank merger wave has sparked public policy debate about the desirability of such combinations, particularly in regard to evaluating antitrust considerations.

More than thirty years ago, legal precedent established the relevant antitrust product market for banking as the cluster of banking products and services. Many are questioning whether a move away from this aggregate approach toward a more traditional product-based antitrust analysis would better reflect today's market realities in which the presence of numerous nonbank competitors competing over wider geographic areas often reduces concentration concerns. At the same time, the market for small business loans has particularly interested both bank regulators and the Justice Department because of the lack of nonbank competitors and the local nature of these loans.

The author of this article provides an overview of recent developments in banking antitrust analysis, particularly in the area of small business lending. In discussing the potential costs and benefits to disaggregating the product market for purposes of antitrust analysis, he concludes that while doing so is theoretically appealing, disaggregating the product market for banking (and examining small business lending) suffers from several measurement problems resulting from a lack of reliable data.

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