Working Paper

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


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;

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Bibliographic Information

Provider: Board of Governors of the Federal Reserve System (U.S.)

Part of Series: Finance and Economics Discussion Series

Number: 1997-58

Pages: 44 pages