Research Solutions to the Financial Problems of Depository Institutions

by Austin Murphy

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.

Hardcover

First published August 24, 1992

About the author

Austin Murphy received his Ph.D. in Finance from the University of Georgia in 1984. He has been a Professor of Finance at Oakland University for the last 16 years, teaching investments and international finance. He has authored over 50 academic journal articles and four books (and has also created very powerful software that performs complex, state-of-the-art investment analysis). Being fluent in German, he was serving as a visiting Fulbright scholar in Berlin, Germany in 1989-90 and was thereby able to experience and participate in the most incredible revolution of our time.