Working Paper: NBER ID: w21684
Authors: Charles W. Calomiris; Matthew Jaremski; Haelim Park; Gary Richardson
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.
Keywords: liquidity risk; bank networks; Federal Reserve membership
JEL Codes: G21; G28; N22
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Seasonal loan demand (J23) | Join Federal Reserve (E52) |
| Join Federal Reserve (E52) | Increase in lending (G21) |
| Position in interbank network (G21) | Timing of entry into Federal Reserve (E52) |
| Liquidity provider (D16) | Decrease in cyclical lending behavior (E32) |
| Mitigate liquidity risk (G33) | Expand lending activities (G21) |
| Direct access to discount window (E52) | Greater increases in lending (G21) |
| Indirect access through correspondent banks (F65) | Less increase in lending (G21) |
| Bank size (G21) | Net benefits from joining Federal Reserve (E58) |