The Fall and Rise of Banking Safety Net Subsidies
نویسندگان
چکیده
Financial safety nets are intended to reduce the likelihood and severity of financial crises that have macroeconomic externalities. While safety nets are intended to confer benefits on the macroeconomy, their design and implementation may confer disproportionate benefits on identifiable sectors, such as banks and depositors. In this study, we distinguish between safety net benefits and subsidies. Regardless of whether privately or publicly provided, risk-sharing financial services routinely provide benefits without subsidies. Subsidies arise here when the government misprices the financial services that it provides. We show how these government subsidies are typically shared by banks and their customers and typically lead to resource misallocation. We also discuss how existing estimates correspond to the benefits and subsidies associated with safety nets. Analysts have long pointed to the ‘traditional triad” (deposit insurance, the discount window, and the electronic payments system) as the major sources of safety net subsidies to banking. We argue that the value of safety net subsidies to banking has shifted by notable amounts and in different directions over the past two decades. Significant financial sector reforms since the 1980s, such as FIRREA and FDICIA, were designed to reduce safety net subsidies by introducing risk-based deposit insurance premiums, restricting discount window borrowing to solvent institutions, and instituting fees for Fedwire daylight overdrafts. We further argue that safety net subsidies to banking rose in the latter 1990s and seem poised to rise further early in the first decade after 2000. We provide four examples of developments that have already raised the subsidy in recent years and five examples of developments that may well raise it further in the near future.
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