Liquidity Risk, Bank Networks, and the Value of Joining the Federal Reserve System

56 Pages Posted: 2 Nov 2015

See all articles by Charles W. Calomiris

Charles W. Calomiris

Columbia University - Columbia Business School; National Bureau of Economic Research (NBER)

Matthew Jaremski

Utah State University - Huntsman School of Business; National Bureau of Economic Research (NBER)

Haelim Anderson

Government of the United States of America – Federal Deposit Insurance Corporation

Gary Richardson

University of California at Irvine; National Bureau of Economic Research

Multiple version iconThere are 4 versions of this paper

Date Written: October 2015

Abstract

Reducing systemic liquidity risk related to seasonal swings in loan demand was one reason for the founding of the Federal Reserve System. Existing evidence on the post-Federal Reserve increase in the seasonal volatility of aggregate lending and the decrease in seasonal interest rate swings suggests that it succeeded in that mission. Nevertheless, less than 8 percent of state-chartered banks joined the Federal Reserve in its first decade. Some have speculated that nonmembers could avoid higher costs of the Federal Reserve’s reserve requirements while still obtaining access indirectly to the Federal Reserve discount window through contacts with Federal Reserve members. We find that individual bank attributes related to the extent of banks’ ability to mitigate seasonal loan demand variation predict banks’ decisions to join the Federal Reserve. Consistent with the notion that banks could obtain indirect access to the discount window through interbank transfers, we find that a bank’s position within the interbank network (as a user or provider of liquidity) predicts the timing of its entry into the Federal Reserve System and the effect of Federal Reserve membership on its lending behavior. We also find that indirect access to the Federal Reserve was not as good as direct access. Federal Reserve member banks saw a greater increase in lending than nonmember banks.

Suggested Citation

Calomiris, Charles W. and Jaremski, Matthew and Anderson, Haelim and Richardson, Gary, Liquidity Risk, Bank Networks, and the Value of Joining the Federal Reserve System (October 2015). NBER Working Paper No. w21684, Available at SSRN: https://ssrn.com/abstract=2684968

Charles W. Calomiris (Contact Author)

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Matthew Jaremski

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Haelim Anderson

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