Keywords: Banks, safety net, deposit insurance, powers
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.
Full paper (1965 KB PDF)
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Last update: January 27, 1998