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Did the Founding of the Federal Reserve Affect the Vulnerability of the Interbank System to Systemic Risk?

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Did the Founding of the Federal Reserve Affect the Vulnerability of the Interbank System to Systemic Risk?

Federal Reserve Bank of St. Louis,

5 min read
5 take-aways
Audio & text

What's inside?

Is the Federal Reserve adequately serving the purposes its founders intended for it?

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Editorial Rating

7

Qualities

  • Eye Opening
  • Background

Recommendation

As the US Federal Reserve finds itself in a damned-if-you-do-and-damned-if-you-don’t situation following the 2008 financial crisis, whereby its critics accuse it of either doing too much or doing too little, it’s illuminating to look into the history of the institution and how the presence of a lender of last resort has influenced bank soundness and liquidity in the United States. Economists Mark Carlson and David C. Wheelock weigh the question of whether the central bank has addressed the systemic deficiencies it aimed to tackle. getAbstract suggests this informative report to bankers, economists and economic historians for the perspective it provides on the Fed.

Summary

Before the 1914 creation of the Federal Reserve System, US banks handled payments among themselves and transferred money from regions with excess to those with dearth. Because banks mostly operated out of one location, they had to maintain relationships with other banks that facilitated this movement of capital. Smaller institutions kept deposits with correspondent banks in larger regional cities, as well as in major centers such as New York City and Chicago. These balances helped regional banks diversify their portfolios and meet reserve requirements. The banks earned interest...

About the Authors

Mark Carlson is a principal economist with the Board of Governors of the Federal Reserve System. David C. Wheelock is the deputy director of research at the Federal Reserve Bank of St. Louis.

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