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Correction: We revised the left panel of the chart “BHC Subsidiary Composition” on March 16, 2016, to update the number of “Nonfinancial” firms. This figure was understated in the original version of the chart. We regret the error.
When we think of banks, we typically have in mind our local bank branch that stores deposits and issues mortgages or business loans. Prima facie there is nothing wrong with this image. After all, there are still almost 6,000 unique commercial banks in the United States that specialize in deposit-taking and loan-making; when we include thrifts and credit unions, this number more than doubles. What we typically forget, however, is that most commercial banks are subsidiaries of larger bank holding companies (BHCs), and in fact nearly all commercial bank assets fall under such BHCs. This post presents a first in-depth analysis of the evolving organizational structure of U.S. bank holding companies over the last twenty-five years. We present a unique new database that details BHC structure at a level previously unavailable in any systematic way.
Size is usually seen as the leading indication of the costs that a bank failure would impose on society. As a result, the Dodd-Frank Act of 2010 requires banks to have adequate capital and liquidity to mitigate default risk and imposes additional requirements on larger banks to enhance their safety. In this post, we show that it is highly uncommon for banks to reach sizes at which they are considered systemically important.
It’s natural to think of banks as intermediaries that take in deposits and use them to make loans to businesses and individuals. But in fact, loans make up only 45 percent of the assets of U.S. banking organizations. What’s the rest? A large chunk, representing 24 percent of total assets, is accounted for by securities, such as U.S. Treasury and foreign government bonds, mortgage-backed securities (MBS), municipal and corporate bonds, and equities. In this post, we take a tour of bank securities portfolios, making use of charts and statistics from the Federal Reserve Bank of New York’s report on Quarterly Trends for Consolidated U.S. Banking Organizations. We also discuss reasons why securities represent such a significant part of U.S. banking firm balance sheets.
In the aftermath of the 2008 financial crisis, job transitions of personnel in banking supervision and regulation between the public and private sectors—often labeled the revolving door—have come under intense scrutiny and have been blamed by certain economists (Johnson and Kwak), legal scholars (John Coffee in the Financial Times), and policymakers (Dodd-Frank Act of 2010, Section 968) for distorting regulators’ actions in favor of banks. However, other commentators have downplayed these distortions and presented a more benign viewpoint of these worker flows—as a means for regulatory agencies to attract higher-ability and skilled workers. Because data on job transitions in banking regulatory agencies are scarce, these discussions are mostly informed by anecdotes. Our recent paper brings more rigor to this debate by contributing a first set of stylized facts based on data related to incidence and drivers of worker flows in U.S. banking regulation. Our data show clear evidence of higher worker inflows to the regulatory sector during bad economic conditions. When we study worker flows as a function of an enforcement proxy, we find evidence to be inconsistent with the often-cited “quid-pro-quo” hypothesis. We instead posit an alternative “regulatory schooling” hypothesis that may better explain the empirical evidence.
The recent financial crisis underscored the importance of understanding how liquidity conditions for banks (or other financial institutions) influence the banks’ lending to domestic and foreign customers. Our recent research examines the domestic and international lending responses to liquidity risks across different types of large U.S. banks before, during, and after the global financial crisis. The analysis compares large global U.S. banks—that is, those that have offices in foreign countries and are able to move liquidity from affiliates across borders—with large domestic U.S. banks, which have to rely on financing raised in capital markets and from depositors to extend credit and issue loans. One key result of our study, detailed below, is that the internal liquidity management by global banks has, on average, mitigated the effects of aggregate liquidity shocks on domestic lending by these banks.
Claudia M. Buch, James Chapman, and Linda Goldberg
Over the past thirty years, the typical large bank has become a global entity with subsidiaries in many countries. In parallel, financial liberalization has increased the interconnectedness of banking systems, with domestic banking systems becoming more exposed to shocks transmitted through foreign banks. This globalization of banking propagated liquidity risk during the global financial crisis and subsequent euro area crisis. Unfortunately, little is known about how cross-border operations of global banks transmit liquidity shocks between countries. The seminal work by Peek and Rosengren (1997, 2000) provides early examples of how bank-level data can help identify the specific transmission channels. There are, however, two limitations to conducting this line of research. First, there is a lack of public data on the balance sheets of global banks. Second, it is difficult to compare the results of different research projects that use sensitive supervisory data collected by banking supervisors and central banks. Together with other scholars, we established the International Banking Research Network (IBRN) to overcome these limitations.
This post is the thirteenth in a series of thirteen Liberty Street Economics posts on Large and Complex Banks. For more on this topic, see this special issue of the Economic Policy Review.
The motivation for the Economic Policy Review series was to understand better the behavior of large and complex banks, and we have covered a lot of ground toward that end. We have examined large banks’ economies of scale, their proclivity toward risk taking, their possible funding advantages (pre-Dodd Frank), the sources and types of their complexity, and the sources and means of dealer bank financing. We have also looked at resolution issues surrounding large and complex banks, including a case study on the Lehman bankruptcy, a review of resolution methods, and two studies of the rationale for a long-term debt requirement for large and complex banks (bail-in), which could provide a source of loss absorbency in resolution. In this post, we provide our own thoughts on what the series has taught us.
James McAndrews, Donald P. Morgan, Joao Santos, and Tanju Yorulmazer
This post is the twelfth in a series of thirteen Liberty Street Economics posts on Large and Complex Banks. For more on this topic, see this special issue of the Economic Policy Review.
If the Lehman Brothers failure proved anything, it was that large, complex bank failures are messy; they destroy value and can destabilize financial markets. We certainly don’t mean to trivialize matters by calling large bank failures “messy,” as it their messiness, particularly the destabilizing aspect, that creates the “too-big-to-fail” problem. In our contribution to the Economic Policy Review volume, we venture an explanation about why large bank failures are so messy and discuss a policy that can make them less so.
Adam Kirk, James McAndrews, Parinitha Sastry, and Phillip Weed
This post is the eighth in a series of thirteen Liberty Street Economics posts on Large and Complex Banks. For more on this topic, see this special issue of the Economic Policy Review.
The failure or near-collapse of some of the largest dealer banks on Wall Street in 2008 highlighted the profound complexity of the industry. In some ways, dealer banks resemble well-understood traditional banks, which use deposits they receive from savers to make loans to businesses and households. Unlike traditional banks, however, dealer banks rely on complex and unique forms of collateralized borrowing and lending, which often involve the simultaneous exchange of cash and securities with other large and sophisticated financial institutions. During normal times, such transactions are highly efficient methods for allocating scarce resources. During times of stress, in contrast, they’ve proven to be destabilizing for the individual firms and, as recent history has shown, the financial system at large.
This post is the seventh in a series of thirteen Liberty Street Economics posts on Large and Complex Banks. For more on this topic, see this special issue of the Economic Policy Review.
Paraphrasing a famous Supreme Court opinion: “I know bank complexity when I see it.” This expression probably speaks to the truth that, if we look at a given banking organization, we ought to be able to state whether it is more or less “complex.” And yet, such an approach hardly offers any guidance if one wants to understand the intricacies of global banks and to monitor and regulate them. What should be the appropriate metrics? It seems to us that there is not a consensus just yet on what complexity might mean in the context of banking. The global dimension of a bank adds many layers, so focusing on global banks is bound to yield a more comprehensive take on the issue than examining purely domestic banking entities. Therefore, in this piece, we view complexity through the lens of the operations of global banks.
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