Just as Social Security reform is grabbing the political spotlight, the Federal Reserve Bank of San Francisco has prepared a primer on the retirement system and the stock market.
Investing Social Security funds in stocks is not a long-term solution to the retirement system's financing problems, writes Kevin Lansing, an economist at the San Francisco Fed. Even if 70% of Social Security funds were invested in stocks, it would only delay the system's default by a decade, he writes.
The solution, he says, is to eliminate Social Security's pay-as-you-go system, which means a worker's withholdings are immediately used to pay a retiree's benefits. Instead, the government should invest a worker's withholdings to pay that specific individual's benefits.
The dilemma, he writes, is how to finance the switch. Lawmakers either would have to boost taxes or lower benefits to allow Social Security to build up assets for current workers while simultaneously paying benefits to retirees.
For a copy of "Can the Stock Market Save Social Security?" call 415-974- 2163 or visit www.frbsf.org.
Community banks that undertake mergers often become more profitable and operate more efficiently, according to Joe Van Walleghem and Paul Willis of the Federal Reserve Bank of Kansas City.
The researchers conducted a case study of 19 community banks. They find community banks cut costs by consolidating back-office operations, rather than by closing branches. They also are able to make bigger loans and use personnel more efficiently, they write.
For a copy of "An Overview and Analysis of Community Bank Mergers," call 816-881-2000 or visit www.kc.frb.org.
The banking crisis of the late 1980s and early 1990s was caused by government rules that shielded banks and thrifts from competition, according to a new book.
David S. Holland, a bank consultant and former Federal Deposit Insurance Corp. employee, argues that rules limiting competition let the banking system develop excess capacity. This made it tough to earn a sufficient profit by just sticking to traditional banking products.
Fraud, tax policy changes, deregulation, inadequate supervision, and excessive lending all contributed to, but did not cause, the banking crisis, he writes.
For a copy of "When Regulation Was Too Successful-The Sixth Decade of Deposit Insurance," call Greenwood Publishing Group at 203-226-3571 or visit www.greenwood.com.
Many of the systems used to value corporate bonds, derivative contracts, and other defaultable securities are inadequate and a new generation of models are required, writes Saikat Nandi, an economist at the Federal Reserve Bank of Atlanta.
Mr. Nandi analyzes the strengths and weaknesses of six models used to value bonds and swaps. These vary from the 1974 Merton model to the 1998 Lando model.
All the models contain serious drawbacks, he writes. For instance, the models ignore many of the features of bankruptcy, such as renegotiating borrowing terms and rescheduling debt.
For a copy of "Valuation Models for Default Securities," call 404-521- 8020 or visit www.frbatlanta.org. Research Scan runs on the second and last Fridays of the month. Submissions should be sent to American Banker, 1325 G St. NW, suite 900, Washington, D.C. 20005.