The Subsidy Provided by the Federal Safety Net: Theory, Measurement and Containment

Posted: 2 Apr 1998

See all articles by Myron L. Kwast

Myron L. Kwast

Federal Reserve Board - Division of Research & Statistics

S. Wayne Passmore

Board of Governors of the Federal Reserve - Household and Real Estate Finance Section

Date Written: December 23, 1997

Abstract

This paper presents an intuitive and analytical model of how the federal safety net affects banks' cost of funds. Emphasis is place 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.

JEL Classification: G21, G28

Suggested Citation

Kwast, Myron L. and Passmore, Stuart Wayne, The Subsidy Provided by the Federal Safety Net: Theory, Measurement and Containment (December 23, 1997). Board of Governors of the Federal Reserve System Finance and Economics Discussion Series, FEDS Paper Number: 97-58. Available at SSRN: https://ssrn.com/abstract=65852

Myron L. Kwast (Contact Author)

Federal Reserve Board - Division of Research & Statistics

20th and Constitution Avenue NW
Washington, DC 20551
United States
202-452-2909 (Phone)
202-452-3819 (Fax)

Stuart Wayne Passmore

Board of Governors of the Federal Reserve - Household and Real Estate Finance Section ( email )

Washington, DC 20551
United States
202-452-6432 (Phone)
202-452-3819 (Fax)

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