Do Financial Policymakers Use Financial Theory?

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Do Financial Policymakers Use Financial Theory?

Burgess and Larsen (1995) conducted an investigative study to find possible ways to reduce financial risks using the market merger. In pursuit of these, they purposed to utilize the active depository institutions between 1980 and 1970. Their focus was mainly on depository institutions like Bank Holding Companies (BHCs) and Loans and Savings associations (S&Ls). Notably, this is because the law had suppressed the policies that support the merger activity. The activity could be beneficial since it would provide loaning solutions to the S&Ls and BHCs. It is important to note that the law suppressed this policy by permitting the Federal Savings and Loans Insurance Corporation (FSLIC) and Federal Deposit Insurance Corporation (FDIC) to arrange acquisitions of failing or closed depository institutions. The anti-trust law limited these acquisitions so that they could control the competition effects.

The hypothesis of this research was tested by observing the unusual monthly returns related to the Garn-St. Germain Act. This act was formed in 1982 to cater to S&Ls portfolio. Afterward, they used the monthly return information to predict the effective portfolio of S&Ls. Burgess and Larsen (1995) also used five-year periods to weigh the performance portfolios of both S&Ls and BHCs. The primary data sources included the CRSP Daily master file, the Industrial Compustat file(IC), and the IC research file. The IC research and CRSP files contained information on all the traded companies over the past five years.

A principal finding of this study is that BHCs recognized a potential risk for reduction after diversifying with savings and loan associations. Through this, it considered merging with the S&Ls and formed laws that could now permit mergers. Again, S&Ls entered the MV efficiency portfolios between 1978 and 1982 (Larson & Burgess, 1995). Since the law did not allow for the emergence of S&Ls, they practiced new patterns of lending money. As a result, financial institutions are strained more than the maturity gap and interest rate challenge. However, the authors found that BHCs did not experience the same losses because they were more experienced in the real estate and commercial loans market. Generally, the information gathered in the article outlines that the law should have permitted merger activity between financial institutions. From these findings, the authors suggested that the deregulation law should have considered long-term benefits to risk reduction by allowing merger activities.

Future researchers should concentrate on reconciling the different principles between financial policy and fundamental financial policy. In particular, they can evaluate financial policies regarding returns, risks, and performance (Baranovskyi et al., 2019). A significant question that can guide future researchers is whether financial policies affect the efficiency of financial institutions. The articles findings did not identify the benefits of the merger activity. Knowledge about financial policy needs to be extended since the researchers did not extend how financial institutions behave when they undergo merger activity. Also, people need to know what alternatives S&Ls should consider being accepted by the financial policy (Baranovskyi et al., 2019). Future researchers need to delve into the general effects of the merge activity. Does it increase the experience and knowledge of real estate and commercial lending? Does it improve the synergy of the individuals at the management level?

An identifiable strength of the article is its reliable nature. An individual reading the article can easily understand the intention of the authors. Again, the data methodology used by the authors is clearly stated. Therefore, the reader of this piece may not hover around trying to find how the data was found. The research is also reliable because the authors have used several visualizations to enhance the readers understanding. Using these visualizations, the readers can interpret the data while seeking minimal help. Additionally, the strength of the article is identified in its clarity. First, the articles topic is clearly defined and non-ambiguous. Through the topic alone, an individual can understand what the article entails. Next is the implicit argument that is put forth. The authors have implied what they expressed throughout the paper. In other words, the hypothesis has been tested and analyzed using the data visualizations like statistical figures. Another strength is the viable information relayed by the researchers. The conclusions are drawn from a wide range of sources. The authors derive their information from two depository institutions that were functional for ten years.

The only weakness of the article is the biased nature of the information. The writers were biased in their research design since they considered the most likely impact of the study they conducted. The researchers realized this during the study design process and analysis. The publication of the article is also another concern. The authors do not have a clear publisher of the work meaning the work might have been accessed unclearly.

References

Baranovskyi, O. I., Kuzheliev, M. O., Zherlitsyn, D. M., Sokyrko, O. S., & Nechyporenko, A. V. (2019). Econometric models of monetary policy effectiveness in Ukraine. Financial and credit activity problems of theory and practice, 3(30), 226-235.

Larsen Jr, G. A., & Burgess, R. C. (1995). Do financial policymakers use financial theory: the case of S&L and BHC merger regulation. Journal of Applied Business Research (JABR), 11(2), 91-100.

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