The Subsidy Provided by the Federal Safety Net: Theory, Measurement, and Containment

Myron L. Kwast and Wayne Passmore

No 1997-58, Finance and Economics Discussion Series from Board of Governors of the Federal Reserve System (U.S.)

Abstract: This paper presents an intuitive and analytical model of how the federal safety net affects banks' cost of funds. Emphasis is placed on distinguishing between fixed and marginal costs in banking and on the implications of the model for measuring the subsidy. Empirical results strongly suggest that the safety net has benefitted banks and that over recent years bank holding companies have tended to move activities into a bank or a bank subsidiary. We conclude that limiting extension of the safety net subsidy should be a serious concern when designing strategies for expanding bank activities.

Keywords: Banks; safety net; deposit insurance; powers (search for similar items in EconPapers)
Pages: 44 pages
Date: 2019-12-10
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Citations: View citations in EconPapers (2)

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http://www.federalreserve.gov/pubs/feds/1997/199758/199758pap.pdf (application/pdf)

Related works:
Working Paper: The subsidy provided by the federal safety net: theory, measurement, and containment (1998)
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedgfe:1997-58

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