Abstract: Utilizing proprietary data encompassing all failed bank auction participants, this study examines the impact Shared-Loss Agreements (SLAs) have on acquiring entities. Over the three years post-acquisition, SLA acquirers exhibit lower performance compared to non-SLA acquirers and auction losers. This divergence in long-term returns remains unexplained by acquirers' reduced downside risk or winner's curse in competitive bidding. Instead, SLA acquirers experience unanticipated earnings shocks and deliver negative surprises. Although early SLA acquirers initially outperform late ones, this trend reverses over time, challenging initial market expectations. The study suggests potential unforeseen consequences of SLAs that merit consideration in shaping financial policies.
Discussant: Corey Garriott, U.S. Department of the Treasury
Richard Stanton, University of California-Berkeley
Nancy Wallace, University of California-Berkeley
Abstract: The deposit business differs at large versus small banks. We provide a parsimonious model and extensive empirical evidence supporting the idea that much of the variation in deposit-pricing behavior between large and small banks reflects differences in preferences and technologies. Large banks offer superior liquidity services but lower deposit rates, and locate where customers value their services. In addition to receiving a lower level of deposit rates on average, customers of large banks exhibit lower demand elasticities with respect to deposit rate spreads. As a result, despite the fact that the locations of large-bank branches have demographics typically associated with greater financial sophistication, large-bank customers earn lower average deposit rates. Our explanation for deposit pricing behavior challenges the idea that deposit pricing is mainly driven by pricing power derived from the large observed degree of concentration in the banking industry.
Abstract: What quantity of reserves should the Fed supply to support effective monetary policy implementation and an efficient interbank payment system? To answer this question, I construct a model linking interbank intraday payment timing with monetary policy implementation. I show that a low reserve supply causes banks to delay payments to each other and strategically hoard reserves, which in turn disincentivizes banks from providing liquidity to short-term funding markets, driving up the spreads between overnight risk-free market rates and the central bank deposit rate, impeding monetary policy implementation. As reserve balances get sufficiently low, even small reductions in reserves can have large impacts on these spreads, mirroring the events observed in September 2019. I quantify my model using a 2019 data sample. My fitted model captures the funding rate spikes of September 16-18, 2019 as an out-of-sample event. The model also provides a counterfactual analysis of the sufficient reserve level that could have prevented the September 2019 repo spike, offering insights into the current discussions about the appropriate size of the Federal Reserve’s balance sheet and quantitative tightening (QT).
