The Federal Reserve Bank of New York works to promote sound and well-functioning financial systems and markets through its provision of industry and payment services, advancement of infrastructure reform in key markets and training and educational support to international institutions.
The New York Fed engages with individuals, households and businesses in the Second District and maintains an active dialogue in the region. The Bank gathers and shares regional economic intelligence to inform our community and policy makers, and promotes sound financial and economic decisions through community development and education programs.
Supervisors monitor banks to assess the banks’ compliance with rules and regulations but also to ensure that they engage in safe and sound practices (see our earlier post What Do Banking Supervisors Do?). Much of the work that bank supervisors do is behind the scenes and therefore difficult for outsiders to measure. In particular, it is difficult to know what impact, if any, supervisors have on the behavior of banks. In this post, we describe a new Staff Report in which we attempt to measure the impact that supervision has on bank performance. Does more attention by supervisors lead to lower risk at banks and, if so, at what cost to profitability or growth?
Last month the New York Fed held a conference on supervising large, complex financial institutions. The event featured presentations of empirical and theoretical research by economists here, commentary by academic researchers, and panel discussions with policymakers and senior supervisors. The conference was motivated by the recognition that supervision is distinct from regulation, but that the difference between them is often not well understood. The discussion focused on defining objectives for supervising the large, complex financial companies that figure so prominently in our financial system and ways of measuring how effectively supervision achieves these goals. This post summarizes the key themes from the conference and introduces the more in-depth posts that will follow in this blog series.
U.S. Bank Holding Companies (BHCs) currently control about 3,000 subsidiaries that provide community housing services—such as building low-income housing units, maintaining shelters, and providing housing services to the elderly and disabled. This aspect of U.S. BHC activity is intriguing because it departs from the traditional deposit-taking and loan-making operations typically associated with banks. But perhaps most importantly, the sheer number of these subsidiaries makes one think about the organizational complexity of U.S. BHCs. This is an issue that has generated much discussion in recent years. In this post we describe the emergence and growth of community housing subsidiaries and discuss to what extent they contribute to the complexity of their parent organizations.
Editors’ Note: The original version of this post slightly overestimated the fraction of people of all types (low income, minority, etc.) who live in banking deserts. This version reports the correct figures. None of the substantive conclusions were affected. (Updated July 12, 2016)
U.S. banks have shuttered nearly 5,000 branches since the financial crisis, raising concerns that more low-income and minority neighborhoods may be devolving into “banking deserts” with inadequate, or no, mainstream financial services. We investigate this issue and also ask whether such neighborhoods are particularly exposed to branch closings—a development that, according to recent research, could reduce credit access, even with other branches present, by destroying “soft” information about borrowers that influences lenders’ credit decisions. Our findings are mixed, suggesting that further study of these concerns is warranted.
Some banks are quite simple, while others are part of complex multi-layered organizations with affiliates in many industries scattered all around the world. The latter organizations are formally called bank holding companies (BHCs). In this post, we investigate changes in BHC geography, especially the rising share of BHC affiliates in tax havens and financial secrecy jurisdictions. We examine what has happened since 2000, including the period after the 2010 Dodd-Frank Act, which focused attention on the size and complexity of large BHCs. Our analysis complements a growing body of work on large and complex BHCs and their global affiliates, including this blog series based on papers from the Economic Policy Review.
Sometimes the world loses its bearings and the best alternative is a timeout. Such was the case during the Panic of 1857, which started when a prestigious bank in New York City collapsed, making all banks suddenly suspect. Banks, fearing a run on their gold reserves, started calling in loans from commercial firms and brokers, leading to asset sales at fire-sale prices and bankruptcies. By mid-October, banks in Philadelphia and New York suspended convertibility, meaning they would not allow gold to be withdrawn from their vaults even while all other banking services continued. Suspension then swept the nation as part of a defensive strategy, supported by local business interests, to prevent the Panic from spreading. While the suspensions appeared successful and few banks ended up failing, President Buchanan was outraged by what he viewed as yet another corrupt banking practice. He proposed making suspension a “death sentence” for banks as a draconian incentive to encourage safer banking practices. In this edition of Crisis Chronicles, we describe the Panic of 1857 and explain why businesses pushed for national suspension to save themselves.
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.
Liberty Street Economics features insight and analysis from economists working at the intersection of research and policy. The editors are Michael Fleming, Andrew Haughwout, Thomas Klitgaard, and Donald Morgan.
The views expressed are those of the authors, and do not necessarily reflect the position of the New York Fed or the Federal Reserve System.
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