New York Fed researchers recently published an in-depth study of the behavior and economics of large and complex banks. In an effort to inform public debate on the “too-big-to-fail” question, the authors look broadly at the costs and benefits of bank size, the sources and measurement of bank complexity, and strategies for preventing disorderly failures. Check out the posts in a Liberty Street Economics blog series, which link through to the more detailed Economic Policy Review papers:
Introducing a Series on Large and Complex Banks outlines the key themes and findings of the project.
Do Big Banks Have Lower Operating Costs? sheds light on large firms’ operational cost advantages, including specific sources of scale economies in areas like compensation, corporate overhead, and information technology.
Evidence from the Bond Market on Banks’ “Too-Big-to-Fail” Subsidy finds that the largest firms pay less than smaller peers to borrow in the bond market, with the gap proving wider for banks than nonbank financial and nonfinancial firms, suggesting a unique advantage for the biggest banks.
Do “Too-Big-to-Fail” Banks Take On More Risk? examines how changes in the perceived likelihood of government support affect bank lending policies.
The Growth of Murky Finance looks at the historical growth of the entire financial sector, including banks and shadow banks, relative to the rest of the economy.
Evolution in Bank Complexity studies the acquisition patterns of banks and other financial firms over the last thirty years and considers the implications of a more complex industry configuration for supervision and resolution.
Measuring Global Bank Complexity considers metrics to help define the organizational, business, and geographic diversity of global banks.
Mixing and Matching Collateral in Dealer Banks investigates dealer banks’ complex sources of financing, which are highly efficient in normal times, but vulnerable to financial market stress.
Resolution of Failed Banks outlines the private and social costs associated with bank failure and critiques the methods that are widely used to resolve banks.
The Failure Resolution of Lehman Brothers provides a detailed postmortem of the investment bank’s bankruptcy, raising questions about the efficacy of the traditional Chapter 11 bankruptcy process for resolving large financial firms.
Why Bail-in? looks at bail-in-able long-term debt as a powerful new option for reducing the cost and instability of large bank failures.
Why Large Bank Failures Are So Messy and What to Do about It? considers strategies for resolving a large bank without triggering a run on its funding.
Parting Reflections on the Series on Large and Complex Banks summarizes the analysis and discusses how findings might shape a course of action for dealing with the “too-big-to-fail” problem.
Find the related Economic Policy Review volume here: