Analysis of Stigma and Bank Credit Provision

Bank rescue programs are designed to provide assistance to struggling financial intermediaries during financial crises. A complicating factor is that participating banks are often stigmatized by accepting assistance from the government. This paper investigates stigma in two ways: (i) it examines how stigma changes a bank's decision to seek assistance from the rescue program, and (ii) it analyzes how stigma affects a bank's ability to operate as a financial intermediary using a joint model for bank‐level application, approval, and lending decisions. The empirical results indicate that stigma hinders the objectives of the rescue program and slows the production of credit.     

The Federal Home Loan Bank System: The Lender of Next‐to‐Last Resort?

The Federal Home Loan Bank (FHLB) System is a large cooperatively owned government‐sponsored liquidity facility that lends predominately to U.S. depository institutions. This paper documents the significant role played by the FHLB System at the outset of the recent financial crisis and provides evidence on the uses of FHLB funding by member banks and thrifts during that time. We then compare lending activity by the FHLB System and the Federal Reserve during 2007 and 2008, discuss the types of institutions seeking government‐sponsored liquidity at various times, and identify the trade‐offs faced by borrowers eligible to tap liquidity from both facilities.     

Ben Bernanke and Bagehot's Rules

Former Federal Reserve Chairman Ben Bernanke has claimed that the Fed's bank bailouts during the 2008 financial crisis were consistent with Walter Bagehot's rules for a lender of last resort. This paper demonstrates Bernanke's claims to be mistaken. First, we outline Bagehot's doctrine for a classical lender of last resort. Next, we discuss Bernanke's theory of bank bailouts and his statements regarding the Fed's role in the 2008 bank bailouts. Finally, we examine the bailouts and demonstrate that, contrary to Bernanke's claims, the Fed's actions were not consistent with Bagehot's rules for a lender of last resort.     

Dealer financial conditions and lender-of-last-resort facilities

We examine the financial conditions of dealers that participated in two of the Federal Reserve's lender-of-last-resort (LOLR) facilities—the Term Securities Lending Facility (TSLF) and the Primary Dealer Credit Facility (PDCF)—that provided liquidity against a range of assets during 2008–2009. Dealers with lower equity returns and greater leverage prior to borrowing from the facilities were more likely to participate in the programs, borrow more, and, in the case of the TSLF, at higher bidding rates. Dealers with less liquid collateral on their balance sheets before the facilities were introduced also tended to borrow more. The results suggest that both financial performance and balance sheet liquidity play a role in LOLR utilization.     

Did the Reserve Requirement Increases of 1936–37 Reduce Bank Lending? Evidence from a Quasi‐Experiment

We analyze the impact of contractionary monetary policy through increases in reserve requirements on bank lending. We compare the lending behavior of banks that were subject to the requirement increases in 1936–37, Federal Reserve member banks, to a group of banks that were not subject to the reserve increase, Federal Reserve nonmember banks. After implementing the difference‐in‐difference estimators, we find that the increases in reserve requirements did not create financing constraints for member banks and lead them to reduce lending. Therefore, the actions of the Federal Reserve concerning the required reserve ratios cannot be blamed for instigating the economic downturn of 1937–38.     

Replacing a “Disobedient” Central Bank Governor with a “Docile” One: A Novel Measure of Central Bank Independence and Its Effect on Inflation

This paper identifies two mechanisms that empirical papers on central bank independence assume to be embedded in the yardstick measure of turnover rate of central bank governor: (i) the removal of a governor who is perceived as a challenger by the government and (ii) whether his/her replacement is an ally of the government. We identify the first mechanism with premature exits of central bankers and the second by examining whether or not the incoming governor is drawn from the ranks of the executive branch of the government. We find that only premature exits and replacements with government allies increase inflation.     

Bank Mergers and Diversification: Implications for Competition Policy

This paper analyses competition and mergers among risk averse banks. We show that the correlation between the shocks to the demand for loans and the shocks to the supply of deposits induces a strategic interdependence between the two sides of the market. We characterise the role of diversification as a motive for bank mergers and analyse the consequences of mergers on loan and deposit rates. When the value of diversification is sufficiently strong, bank mergers generate an increase in the welfare of borrowers and depositors. If depositors have more correlated shocks than borrowers, bank mergers are relatively worse for depositors than for borrowers.     

Disclosure Regulation in the Commercial Banking Industry: Lessons from the National Banking Era

I exploit variation in the adoption of disclosure and supervisory regulation across U.S. states to examine their impact on the development and stability of commercial banks. The empirical results suggest that the adoption of state‐level requirements to report financial statements in local newspapers is associated with greater stability and development of commercial banks. I also examine which political constituencies influence the adoption of disclosure and supervisory regulation. I find that powerful landowners and small private banks are associated with late adoption of these regulations. These findings suggest that incumbent groups oppose disclosure rules because the passage of such rules threatens their private interests.