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The 2011 FDIC assessment on banks managed liabilities: interest rate and balance-sheet responses

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Author Info

  • Lawrence L Kreicher
  • Robert N McCauley
  • Patrick McGuire

Abstract

The global financial crisis led to discussion of corrective bank taxes to promote financial stability. This paper interprets the widening of the FDIC assessment base from deposits to assets less equity for US-chartered banks in April 2011 as such a corrective or Pigovian tax. In terms of yields, banks shifted its cost to wholesale funders, benefiting floating-rate borrowers, while the linkage between onshore and offshore dollar money markets weakened. In terms of quantities, US-chartered banks shifted funding to more stable deposits. At the same time, the US branches of non-US banks, which were unaffected by the widened assessment base, increased US assets, funding their take-up of most of the Fed's reserve injection of $600 billion offshore. Thus, a new internationally uncoordinated policy had the expected effect on US banks' funding structure, but also redistributed dollar intermediation to non-US banks that continue to rely on wholesale funding. The implication for global financial stability is at best ambiguous.

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Bibliographic Info

Paper provided by Bank for International Settlements in its series BIS Working Papers with number 413.

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Length: 32 pages
Date of creation: May 2013
Date of revision:
Handle: RePEc:bis:biswps:413

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Related research

Keywords: Deposit insurance; reserve balances; money markets; federal funds; repo; eurodollars; wholesale funding; flow of funds; large-scale asset purchases; Dodd-Frank;

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  1. Morten L. Bech & Elizabeth Klee, 2010. "The mechanics of a graceful exit: interest on reserves and segmentation in the federal funds market," Finance and Economics Discussion Series 2010-07, Board of Governors of the Federal Reserve System (U.S.).
  2. Leonardo Bartolini & Spence Hilton & Alessandro Prati, 2005. "Money market integration," Staff Reports 227, Federal Reserve Bank of New York.
  3. Antoine Martin & James McAndrews & David Skeie, 2011. "A note on bank lending in times of large bank reserves," Staff Reports 497, Federal Reserve Bank of New York.
  4. Ricardo Correa & Horacio Sapriza & Andrei Zlate, 2012. "Liquidity shocks, dollar funding costs, and the bank lending channel during the European sovereign crisis," International Finance Discussion Papers 1059, Board of Governors of the Federal Reserve System (U.S.).
  5. Hein, Scott E. & Koch, Timothy W. & Nounamo, Chrislain, 2012. "Moving FDIC insurance to an asset-based assessment system: Evidence from the special assessment of 2009," Journal of Economics and Business, Elsevier, vol. 64(1), pages 24-36.
  6. Demiralp, Selva & Preslopsky, Brian & Whitesell, William, 2006. "Overnight interbank loan markets," Journal of Economics and Business, Elsevier, vol. 58(1), pages 67-83.
  7. Lee, Young-Sook, 2003. "The Federal funds market and the overnight Eurodollar market," Journal of Banking & Finance, Elsevier, vol. 27(4), pages 749-771, April.
  8. Robert N. McCauley & Rama Seth, 1992. "Foreign bank credit to U.S. corporations: the implications of offshore loans," Quarterly Review, Federal Reserve Bank of New York, issue Spr, pages 52-65.
  9. Naohiko Baba & Robert N McCauley & Srichander Ramaswamy, 2009. "US dollar money market funds and non-US banks," BIS Quarterly Review, Bank for International Settlements, March.
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