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| Working Papers – 2024 |
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Agricultural Lending, Insurance, and Implications of Climate Change FDIC Center for Financial Research Working Paper No. 2024-05 This Version: November 2024 Abstract We examine the role that insurance plays in mitigating the effect of climate events on bank loan outcomes in the context of agricultural finance. We find that the relationship between county-level deviations in crop yields to local banks’ agricultural loans past due are larger after accounting for county-level crop indemnifications. We estimate that a one standard deviation increase in county-level crop indemnifications is associated with a decrease in agricultural loans past due by 6 basis points (bps), about one fifth of the time series variation in average agricultural loans past due. We then consider a climate scenario pathway from the Climate Impact Lab for possible future losses. Under a high emissions scenario, we find increases in agricultural loans past due of approximately 17 bps nationally if insurance coverage does not increase commensurately with increased risk. We argue that the implications of climate change on agricultural lending may be exacerbated by the practice of carryover debt, in which agricultural lenders may restructure short-term production loans under stress from poor production into longer term loans often backed by farmland. Keywords: climate related financial risk, insurance, banking, agriculture, subsidies. |
Inside the Boardroom: Evidence from the Board Structure and Meeting Minutes of Community Banks FDIC Center for Financial Research Working Paper No. 2024-04 This Version: September 2024 Abstract Community banks are critical for local economies, yet research on their corporate governance has been scarce due to limited data availability. We explore a unique, proprietary dataset of board membership and meeting minutes of failed community banks to present several stylized facts regarding their board structure and meetings. Community bank boards have fewer members and a higher percentage of insiders than larger publicly traded banks, and experience little turnover during normal times. Their meetings are held monthly and span about two hours. During times of distress, community bank boards convene less often in regularly scheduled meetings in lieu of impromptu meetings, experience higher turnover, particularly among their independent directors, and their meeting tone switches from neutral to significantly negative. Board attention during distressed times shifts towards discussion of capital and examination oversight, and away from lending activities and meeting formalities. JEL Classification: G21, G34, C81. |
CEO Ownership, Risk Management, and Bank Runs at Unlimited Liability Banks During the 1890s FDIC Center for Financial Research Working Paper No. 2024-03 This Version: April 2024 Abstract Using unique data on California state banks that were subject to the unlimited liability rule, we examine the relationship between liability of bank presidents, risk management, and bank runs during the panic of 1893. During this period, bank presidents were mandated to hold bank stocks with features resembling restricted stock option and clawback provisions of today. These measures were designed to discourage excessive risk-taking by holding managers personally accountable in the event of a bank failure. We find that banks whose presidents have a greater liability exposure adopt more conservative risk management strategies and are thus less likely to experience bank runs and failures. Our study implies that regulatory policies on bank executives affect the risk management methods and the default risk of banks. JEL Codes: G21, N12, N22, D82, E32 |
Deposit Insurance and Bank Funding Stability: Evidence from the TAG Program FDIC Center for Financial Research Working Paper No. 2024-02 This Version: April 2024 Abstract We study the effects on bank funding from the unlimited deposit insurance provided by the Transaction Account Guarantee (TAG) program. We find that opting out of the program caused strong and persistent declines in noninterest-bearing deposits (NIBDs). Further, we find that weak growth in NIBDs reduced banks’ likelihood of opting out of the TAG program, suggesting that banks believed the program could bolster their NIBD funding. Our results suggest that targeted deposit insurance protections can be successful in stemming deposit outflows during periods of stress, and that such protections are valued by banks suffering deposit outflows. JEL Codes: G01, G21, G28 |
Explaining the Life Cycle of Bank-Sponsored Money Market Funds: An Application of the Regulatory Dialectic FDIC Center for Financial Research Working Paper No. 2024-01 This Version: July 2024 Abstract In this paper, we present empirical evidence of the regulatory dialectic in the prime institutional money market fund (PI-MMF) industry. The “regulatory dialectic,” developed by Kane (1977, 1981), describes how banks and regulators react to each other. For decades, a cap on commercial deposit interest rates fueled dramatic growth in bank-sponsored PI-MMFs as a form of shadow banking. We show that during the growth period, banks with more commercial deposits were more likely to enter the PI-MMF industry in an effort to keep their commercial customers in affiliated subsidiaries. However, the 2008 crisis and subsequent re-regulation of the industry halted the rapid growth of PI-MMFs. In the post-crisis regulatory regime, we find that bank-sponsored funds were more likely to exit the industry than nonbank-sponsored funds. Simultaneously, the industry shifted from PI-MMFs to government institutional MMFs as substitute products. We conjecture that the collapse of the PI-MMF can lead further to the emergence of substitute products, such as stablecoins as part of the continuing dialectical process. JEL Codes: G2, G21, G23, G28, H12, H81 |
The Center for Financial Research (CFR) Working Paper Series allows CFR staff and their coauthors to circulate preliminary research findings to stimulate discussion and critical comment. Views and opinions expressed in CFR Working Papers reflect those of the authors and do not necessarily reflect those of the FDIC or the United States. Comments and suggestions are welcome and should be directed to the authors. References should cite this research as a “FDIC CFR Working Paper” and should note that findings and conclusions in working papers may be preliminary and subject to revision.