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Federal Reserve Bank of St. Louis working papers are preliminary materials circulated to stimulate discussion and critial comment.

Banking

Preventing Bank Runs

Diamond and Dybvig (1983) is commonly understood as providing a formal rationale for the existence of bank-run equilibria.

Labor Market Upheaval, Default Regulations, and Consumer Debt

In 2005, reforms made formal personal bankruptcy much more costly. Shortly after, the US began to experience its most severe recession in seventy years, and while personal bankruptcy rates rose, they rose only modestly given the severity of the rise in unemployment.

Understanding the Accumulation of Bank and Thrift Reserves during the U.S. Financial Crisis

The level of aggregate excess reserves held by U.S. depository institutions increased significantly at the peak of the 2007-09 financial crisis.

Too Big to Cheat: Efficiency and Investment in Partnerships

Many economic activities are organized as partnerships. These ventures are formed with capital contributions by partnership members who obtain a share of ownership in exchange.

The Lender of Last Resort: Lessons from the Fed’s First 100 Years

We review the responses of the Federal Reserve to financial crises over the past 100 years. The authors of the Federal Reserve Act in 1913 created an institution that they hoped would prevent banking panics from occurring.

Bankruptcy and Delinquency in a Model of Unsecured Debt

The two channels of default on unsecured consumer debt are (i) bankruptcy, which legally grants partial or complete removal of unsecured debt under certain circumstances, and (ii) delinquency, which is informal default via nonpayment.

Why Doesn’t Technology Flow from Rich to Poor Countries?

What determines the technology that a country adopts? While there could be many factors, the efficiency of the country’s financial system may play a significant role.

Loan Regulation and Child Labor in Rural India

We study the impact of loan regulation in rural India on child labor with an overlapping-generations model of formal and informal lending, human capital accumulation, adverse selection, and differentiated risk types.

Econometric Modeling of Exchange Rate Volatility and Jumps

This chapter reviews the rapid advances in foreign exchange volatility modeling made in the last three decades.

Federal Reserve Lending to Troubled Banks During the Financial Crisis, 2007-10

Numerous commentaries have questioned both the legality and appropriateness of Federal Reserve lending to banks during the recent financial crisis.

Did Affordable Housing Legislation Contribute to the Subprime Securities Boom?

We use a regression discontinuity approach and present new institutional evidence to investigate whether affordable housing policies influenced the market for securitized subprime mortgages.

Basel Accord and Financial Intermediation: The Impact of Policy

This paper studies loan activity in a context where banks must follow Basel Accord-type rules and acquire financing from households. Loan activity typically decreases when entrepreneurs’ investment returns decline, and we study which type of policy could revigorate an economy in a trough.

Credit Scoring and Loan Default

This paper introduces a measure of credit score performance that abstracts from the influence of "situational factors." Using this measure, we study the role and effectiveness of credit scoring that underlied subprime securities during the mortgage boom of 2000-2006.

The Effect of Neighborhood Spillovers on Mortgage Selection

In this paper we analyze how spillovers in mortgage adoption affect mortgage product choice across neighborhoods and across borrowers of different racial or ethnic groups.

Differences in Subprime Loan Pricing Across Races and Neighborhoods

We investigate whether race and ethnicity influenced subprime loan pricing during 2005, the peak of the subprime mortgage expansion

Did Doubling Reserve Requirements Cause the Recession of 1937-1938? A Microeconomic Approach

In 1936-37, the Federal Reserve doubled the reserve requirements imposed on member banks. Ever since, the question of whether the doubling of reserve requirements increased reserve demand and produced a contraction of money and credit, and thereby helped to cause the recession of 1937-1938, has been a matter of controversy.

The Promise and Performance of the Federal Reserve as Lender of Last Resort 1914-1933

This paper examines the origins and early performance of the Federal Reserve as lender of last resort. The Fed was established to overcome the problems of the National Banking era, in particular an “inelastic” currency and the absence of an effective lender of last resort.

Financing Development: The Role of Information Costs

To address how technological progress in financial intermediation affects the economy, a costly state verification framework is embedded into the standard growth model. The framework has two novel ingredients.

Quantifying the Impact of Financial Development on Economic Development

How important is financial development for economic development? A costly state verification model of financial intermediation is presented to address this question.

The IT Revolution and the Unsecured Credit Market

The information technology (IT) revolution coincided with the transformation of the U.S. unsecured credit market.

Does the Structure of Banking Markets Affect Economic Growth? Evidence from U.S. State Banking Markets

This paper examines the impacts of banking market structure and regulation on economic growth using new data on banking market concentration and manufacturing industry-level growth rates for U.S. states during 1899-1929—a period when the manufacturing sector was expanding rapidly and restrictive branching laws segmented the U.S. banking system geographically.

Do Large Banks have Lower Costs? New Estimates of Returns to Scale for U.S. Banks

The number of commercial banks in the United States has fallen by more than 50 percent since 1984. This consolidation of the U.S. banking industry and the accompanying large increase in average (and median) bank size have prompted concerns about the effects of consolidation and increasing bank size on market competition and on the number of banks that regulators deem “too–big–to–fail.”

U.S. Commercial Bank Lending through 2008:Q4: New Evidence from Gross Credit Flows

What was hiding behind the aggregate commercial bank loans through the end of 2008? We use balance sheet data for every insured U.S. commercial bank from 1999:Q1 to 2008:Q4 to construct credit expansion and credit contraction series and provide new evidence on changes in lending.

The Evolution of Cost-Productivity and Efficiency Among U.S. Credit Unions

Advances in information-processing technology have significantly eroded the advantages of small scale and proximity to customers that traditionally enabled community banks and other small-scale lenders to thrive.

Are Credit Unions Too Small?

U.S. credit unions serve 93 million members, hold 10 percent of U.S. savings deposits, and make 13.2 percent of all non-revolving consumer loans. Since 1985, the share of U.S. depository institution assets held by credit unions has nearly doubled, and the average (inflation-adjusted) size of credit unions has increased over 600 percent.

The Loan Structure and Housing Tenure Decisions in an Equilibrium Model of Mortgage Choice

The objective of this paper is to understand how loan structure affects (i) the borrower’s selection of a mortgage contract and (ii) the aggregate economy. We develop a quantitative equilibrium theory of mortgage choice where households can choose from a menu of long-term (nominal) mortgage loans.

The Dynamic Interaction of Trading Flows, Macroeconomic Announcements and the CAD/USD Exchange Rate: Evidence from Disaggregated Data

We explore the relationship between disaggregated trading flows, the Canada/U.S. dollar (CAD/USD) market and U.S. macroeconomic announcements with a novel data set of unprecedented breadth and length. <a href="http://research.stlouisfed.org/econ/cneely/Data_Appendix_The_Dynamic_Interaction.pdf">Data Appendix</a>.

Lending to Uncreditworthy Borrowers

We study optimal lending behavior under adverse selection in environments with hetero- geneous borrowers— specifically, where the borrower’s reservation payoffs (outside options) increase with quality (creditworthiness).

Affiliated Mutual Funds and Analyst Optimism

Prior studies have shown that investment banking affiliations place pressure on analysts to produce optimistic recommendations on the investment bank’s stock-clients.

Handicapping Currency Design: Counterfeit Deterrence and Visual Accessibility in the United States and Abroad

Despite the increasing use of electronic payments, currency retains an important role in the payment system of every country. In this article, the authors compare and contrast tradeoffs among currency design features, including those primarily intended to deter counterfeiting and ones to improve usability by the visually impaired.


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