The Subsidy Provided by the Federal Safety Net: Theory, Measurement and Containment
Posted: 2 Apr 1998
Date Written: December 23, 1997
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: Suggested Citation