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Journal Article
Covered Savings Associations: A New Type of Depository Institution
The Economic Growth, Regulatory Relief, and Consumer Protection Act of 2018 allowed most federally chartered savings associations to elect to operate with the powers of a national bank, expanding their ability to engage in commercial banking activities and no longer requiring them to concentrate their activities in residential mortgage lending. This Economic Commentary describes which associations have made the election, their reasons for doing so, and how the election has changed their asset mix. Both mutual and stock savings associations have made this election, and among mutuals, large ...
Journal Article
Reciprocal Deposits: An Update
Reciprocal deposits are deposits exchanged between banks to increase deposit insurance coverage for a depositor. The recently-passed 21st Century ROAD to Housing Act significantly increased the quantity of reciprocal deposits that are not counted as brokered deposits. This Economic Commentary describes the change, how this change increases the deposit insurance limit in practice, and which banks are likely to increase their use of reciprocal deposits as a consequence.
Journal Article
Using Economic Experiments to Improve Contingent Convertible Capital Bonds
This Commentary describes experiments conducted to study alternative designs for a new type of financial security, CoCo bonds, that is being used in some European countries to manage the risk of financial crises. CoCo bonds are bank-issued debt that converts to equity when a trigger is breached. The conversion into equity serves to recapitalize a bank during financial distress, precisely when it is hardest to raise capital. The types of trigger used for all CoCos issued thus far are defined in terms of book capital. The experiments we conducted explore the effects of using triggers that are ...
Journal Article
The 1970s Origins of Too Big to Fail
In 1972, bank regulators bailed out the $1.2 billion Bank of the Commonwealth partly because they viewed it as ?too big to fail.? We describe this bailout and subsequent ones through that of Continental Illinois in 1984 and use the descriptions to draw lessons about too-big-to-fail policy. We argue that some of the same issues that motivated bailouts during this earlier period, particularly worries about banking concentration, are relevant today.
Journal Article
The Failure of the Bank of the Commonwealth: An Early Example of Interest Rate Risk
This Economic Commentary describes the collapse and subsequent bailout of the Detroit-headquartered Bank of the Commonwealth in 1972. Commonwealth failed because it invested heavily in long-duration, fixed-rate municipal securities in the mid-1960s in a bet that interest rates would decline. Instead, with the beginning of the Great Inflation of 1965–1980, rates rose. Liquidity problems then ensued, and the bank approached failure. Unable to find an acquirer because of Michigan’s banking restrictions, regulators instead bailed out the bank because of fears of contagion. This article also ...
Journal Article
Reciprocal Deposits and the Banking Turmoil of 2023
Reciprocal deposits are deposits exchanged between banks to effectively increase deposit insurance coverage. Their use grew significantly during the banking turmoil of 2023. This Economic Commentary describes what they are, their connection to brokered deposits, how their legal treatment has changed over time, and which banks use them the most. It also discusses longer-run trends in uninsured deposits.
Working Paper
Origins of Too-Big-to-Fail Policy
This paper traces the origin of the too-big-to-fail problem in banking to the bailout of the $1.2 billion Bank of the Commonwealth in 1972. It describes this bailout and those of subsequent banks through that of Continental Illinois in 1984. Motivations behind the bailouts are described with a particular emphasis on those provided by Irvine Sprague in his book Bailout. During this period, market concentration due to interstate banking restrictions is a factor in most of the bailouts, and systemic risk concerns were raised to justify the bailouts of surprisingly small banks. Sprague?s ...
Working Paper
Liquidity Requirements and the Interbank Loan Market: An Experimental Investigation
We develop a stylized interbank market environment and use it to evaluate with experimental methods the effects of liquidity requirements. Baseline and liquidity-regulated regimes are analyzed in a simple shock environment, which features a single idiosyncratic shock, and in a compound shock environment, in which the idiosyncratic shock is followed by a randomly occurring second-stage shock. Interbank trading of the illiquid asset follows each shock. In the simple shock environment, we find that liquidity regulations reduce the incidence of bankruptcies, but at a large loss of investment ...
Working Paper
Comparison of Small Bank Failures and FDIC Losses in the 1986–92 and 2007–13 Banking Crises
Failure rates of small commercial banks during the banking crisis of the late 1980s were about 7.6%, which is significantly higher than the 5.7% failure rate during the recent crisis. The higher rate is surprising because small banks had significantly increased their commercial real estate (CRE) lending by the second crisis, which is riskier than other types of lending, and economic shocks were more severe in the recent crisis. We compare failure rates in the two periods using a statistical model that allows us to decompose the effect of changes in bank characteristics and economic shocks on ...
Working Paper
Organizational Form and Thrift Risk During the US Housing Boom and Bust
We compare the performance of community-bank-sized mutual and stock thrifts during the housing boom of 2001-06 and the housing bust of 2007-13. During the housing bust, mutuals failed at a much lower rate than stock thrifts. To investigate this difference, we first estimate a probit model of thrift failure over the housing bust and show that this difference holds even when controlling for local economic shocks and differences in thrift characteristics. Furthermore, we find that a concentration in construction and land development loans is the only type of loan concentration that is predictive ...