Working Paper: NBER ID: w10951
Authors: Charles W. Calomiris; Joseph R. Mason
Abstract: The puzzle of underissuance of national bank notes disappears when one disaggregates data, takes account of regulatory limits, and considers differences in opportunity costs. Banks with poor lending opportunities maximized their issuance. Other banks chose to limit issuance. Redemption costs do not explain cross-sectional variation in issuance and the observed relationship between note issuance and excess reserves is inconsistent with the redemption risk hypothesis of underissuance. National banks did not enter primarily to issue national bank notes, and a "pure arbitrage" strategy of chartering a national bank only to issue national bank notes would not have been profitable. Indeed, new entrants issued less while banks exiting were often maximum issuers. Economies of scope \nbetween note issuing and deposit banking included shared overhead costs and the ability to reduce costs of mandatory minimum reserve and capital requirements.
Keywords: No keywords provided
JEL Codes: E5; E42; G21; G28; N11; N21
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Regulatory constraints on note issuance (E42) | Varying levels of note issuance (E42) |
| Opportunity costs of lending (F34) | Decision to issue notes (H63) |
| Regulatory constraints on note issuance (E42) | Notes issued by banks (G21) |
| Profitability of lending opportunities (G21) | Propensity to issue notes (E51) |
| Excess reserves (E51) | Note issuance (H63) |
| Regulatory limits and opportunity costs (L51) | Patterns of note issuance (E42) |