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The subsidy provided by the federal safety net: theory and measurement

  • Myron L. Kwast
  • Wayne Passmore
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    Views about the value to depository institutions of the federal safety net differ widely. Resolution of the issue is important because defining the appropriate relationship between the federal safety net and financial institutions is central to the design of efficient financial modernization strategies. A model is presented of how the safety net subsidy affects the size of the banking system and the behavior of banks. The model suggests that banks should have lower capital ratios than similar nonbank financial firms. Evidence is presented that supports this prediction, and that banks have organized themselves in ways that take maximum advantage of safety net benefits.

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    Article provided by Federal Reserve Bank of San Francisco in its journal Proceedings.

    Volume (Year): (1998)
    Issue (Month): Sep ()
    Pages:

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    Handle: RePEc:fip:fedfpr:y:1998:i:sep:x:3
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