Resolving the puzzle of the underissuance of national bank notes
Abstract: The puzzle of underissuance of national bank notes disappears when one disaggregates data, takes account of regulatory limits, and considers differences in opportunity costs. Banks with poor lending opportunities maximized their issuance. Other banks chose to limit issuance. Redemption costs do not explain cross-sectional variation in issuance, and the observed relationship between note issuance and excess reserves is inconsistent with the redemption risk hypothesis of underissuance. National banks did not enter primarily to issue national bank notes, and a ?pure arbitrage? strategy of chartering a national bank only to issue national bank notes would not have been profitable. Indeed, new entrants issued less while banks exiting were often maximum issuers. Economies of scope between note issuing and deposit banking included shared overhead costs and the ability to reduce costs of mandatory minimum reserve and capital requirements.
File(s): File format is application/pdf https://www.philadelphiafed.org/-/media/frbp/assets/working-papers/2005/wp05-19.pdf
Provider: Federal Reserve Bank of Philadelphia
Part of Series: Working Papers
Publication Date: 2005