Seeking to debunk a common industry myth, Federal Reserve Bank of Cleveland economist Joseph G. Haubrich writes that bigger banks are not necessarily safer than smaller institutions.
Economic theory states that investments are safer if they are diversified. For instance, a $100 investment in each of 100 stocks is safer than a $10,000 investment in a single stock.
The theory, however, does not hold true for banks, Mr. Haubrich writes. Banks do not become less risky as they grow bigger because any single failure becomes more harmful to the economy. Instead, banks become less likely to fail.
For a copy of "Bank Diversification: Laws and Fallacies of Large Numbers," call 216-579-2001, ext. 153, or visit www.clev.frb.org.
Even a sound economy is prone to investor panics, according to Roger Lagunoff of Georgetown University and Stacey Schreft of the Federal Reserve Bank of Kansas City.
The researchers built a model to discover how rational and irrational investors affect the stability of a country's financial system. They find that rational investors can sink an otherwise sound economy if they misread financial data and mistakenly become apprehensive about the economy's health.
Also, boom cycles last longer if investors are irrationally exuberant, which means they believe the economy is sound despite data showing otherwise. Finally, the researchers find that an economy will crash sooner if investors are primarily rationally exuberant rather than irrationally exuberant.
For a copy of "Financial Fragility and Rational and Irrational Exuberance," call 816-881-2581.
Credit unions risk losing their tax-exempt status if they continue to expand their consumer and business lending.
That is the conclusion Aruna Srinivasan and B. Frank King of the Federal Reserve Bank of Atlanta, who reviewed the history of credit unions and debated the industry's prospects.
Expanding membership eligibility will let credit unions grow larger, which produces greater economies of scale and lets the institutions offer more products, they write.
This growth, however, comes at the expense of banks, which must compete with tax-exempt institutions, and of taxpayers, who subsidize the industry, they write.
For a copy of "Credit Union Issues," call 404-521-8020 or visit www.frbatlanta.org.
The Federal Reserve Bank of Chicago has released a compendium of papers from its May conference, "Payment Systems in the Global Economy: Risks and Opportunities."
Studies include analyses of the Fed's role in the payment system, comparisons of U.S. and foreign payment systems, and examinations of electronic payment products.
The compendium also includes speeches on payment system issues by Federal Reserve Board Chairman Alan Greenspan, First Union chairman Edward E. Crutchfield, and Chicago Fed President Michael H. Moskow.
The conference also featured presentations on a host of traditional regulatory issues, including international capital movements, reform of U.S. banking laws, and deposit insurance reform.
For a copy of "Proceedings of the 34th Annual Conference of Bank Structure and Competition," call 312-322-5111. 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.