Federal Deposit Insurance Corporation Research Articles

Unbanked and impoverished? Exploring banking and poverty interactions over time

AbstractIn 2019, the Federal Deposit Insurance Corporation (FDIC) reported that 7.1 million households in the United States (5.4%) were unbanked and lacked a checking or savings account). Using three leading household surveys, this paper documents how the interaction between bank access and poverty has evolved over time. We present a historical time series of unbanked rates, showing high‐unbanked rates for those in poverty even with increases in financial access over time. In the 1980s, 49.6% of households in poverty were unbanked while 22.8% were unbanked in 2019. Unbanked rates were even higher for Black and Hispanic households that were in poverty. In the 1980s, these groups had unbanked rates of 73.6% and 66.5% which declined to 38.4% and 31.8% in 2019, respectively. To explain differences in banking rates by race, we use binary Kitagawa‐Oaxaca‐Blinder decompositions. Socio‐demographic characteristics explain less than half the difference in unbanked rates for Blacks and around half for Hispanics.

A Comparative Machine Learning Survival Models Analysis for Predicting Time to Bank Failure in the US (2001-2023)

<p style="text-align:justify"><span style="font-size:10.5pt"><span style="font-family:等线"><span dir="ltr" lang="EN-US" style="font-family:"Cambria",serif"><span style="color:black">This study investigates the likelihood of time to bank failures in the US between 2001 and April 2023, based on data collected from the Federal Deposit Insurance Corporation's report on "Bank Failures in Brief - Summary 2001 through 2023". The dataset includes 564 instances of bank failures and several variables that may be related to the likelihood of such events, such as asset amount, deposit amount, ADR, deposit level, asset level, inflation rate, short-term interest rates, bank reserves, and GDP growth rate. We explore the efficacy of machine learning survival models in predicting bank failures and compare the performance of different models. Our findings shed light on the factors that may influence the probability of bank failures with a time perspective and provide insights for improving risk management practices in the banking industry.</span></span></span></span></p>

The Effect of Job Loss on Bank Account Ownership

AbstractWe estimate the effect of job loss on households’ bank account ownership using novel data: Federal Deposit Insurance Corporation (FDIC)‐sponsored biennial supplements to the Current Population Survey (CPS), linked to respondents’ work history in surrounding months constructed from the Basic Monthly CPS. Leveraging differences in the timing of unemployment spells across households, we show that job loss leads to a large decrease in the likelihood of having an account among the lower‐income, renter households we study. Job loss also leads to increased use of other products and services that might substitute for a bank account, including prepaid cards, check cashing, and money orders.

A Commentary on the Silicon Valley Bank Debacle

SUMMARY KPMG issued its audit report for the parent company of Silicon Valley Bank (SVB), SVB Financial Group, on February 24, 2023, and the bank’s assets were taken over by Federal Deposit Insurance Corporation regulators on March 10. Although depositors began fleeing SVB in February, deposits declined by 13 percent during the preceding fiscal year. SVB invested substantially in long-term government bonds, whose value plummeted due to significant Federal Reserve interest rate increases, and the classification of the securities prevented their conversion to cash to meet depositor demands. Alongside explaining management and regulatory failings that led to SVB’s collapse, this paper formulates an argument of possible alternative actions the auditor could have pursued during the audit or upon release of its audit report. Due to inaction, KPMG may hinder its ability to defend against current litigation.

Prepaid cards and the unbanked in the U.S.: financial innovations and financial inclusion

PurposeFinancial inclusion is measured by the number of people who use the formal financial system and banks in particular. Limited access to formal banking services and the existence of unbanked households is a main policy concern. The authors evaluate how the use of prepaid (reloadable) debit cards by unbanked households affects financial inclusion and specifically the potential for these households to participate in the formal financial system and open a bank account.Design/methodology/approachThe authors apply matching models to analyze survey data from the Federal Deposit Insurance Corporation National Survey of the Unbanked and Underbanked Households from 2009 to 2019 and evaluate how prepaid cards use affects plans to open a bank account.FindingsUnbanked households who use prepaid cards are 5% less likely to open a bank account compared to the matched nonusers of prepaid cards. In addition, prepaid card users are 12% more likely to use nonbanks to transfer money/transact online and 18% more likely to have obtained loans from alternative financial services providers compared to the matched unbanked nonusers of prepaid debit cards.Originality/valueNo previous work has estimated the causal impact of use of prepaid cards on financial inclusion.

Struggle to survive: case of flood risk on US community banks

PurposeThe survivorship of firms under extreme weather poses an essential question about the local economy's health. Over 90% of agricultural banks are categorized as community banks, which are important financial institutions promoting local growth. While previous studies suggest that climate change and weather shocks adversely impact community banks' resiliency, studies on whether these institutions engage in risk-reducing management strategies have been limited. In this study, the authors examine strategic choices of local community banks when facing flood events which include (1) safety net increase, (2) portfolio diversification, and (3) branch opening. These strategic choices are the coping mechanisms banks can take to survive while affecting the local competitive lending market.Design/methodology/approachThe authors use panel-fixed effect regressions based on the storm data from National Oceanic and Atmospheric Administration (NOAA)'s National Weather Service (NWS) and the call reports from the Federal Deposit Insurance Corporation (FDIC). The authors focus on community banks' account variable characteristics and the number of offices to examine whether community banks take an active role in managing flood risk.FindingsResults suggest that community banks do employ the selected strategic choices to a certain degree, as it is found that there is an increase in the core capital that absorbs shocks and portfolio diversification. However, the magnitudes of these activities are rather small and not large enough to fully mitigate the climate risk. Also, the authors do not find any evidence of branch expansion associated with local floods.Originality/valueThis study contributes to the literature by examining different strategic choices of community banks in the face of natural uncertainty. Even though concerns of climate risk have been raised in the regulatory setting, a lack of guidance or assessment tools could contribute to the passive action of these community banks, even though climate risks can have a significant economic impact. Thus, the evidence documented from this study calls for further guidelines and the importance of highlighting climate risks on community banks so that they can actively engage in risk-reducing strategies.

Shifting incentives: the impact of the Tax Cuts and Jobs Act on S bank conversions

PurposeThis paper investigates the significant increase in S corporation banks converting to C corporations following the 2017 Tax Cuts and Jobs Act (TCJA) and the shift in motivations behind these conversions.Design/methodology/approachThe paper uses bank-level panel data from Federal Deposit Insurance Corporation (FDIC) Call Reports to analyze the determinants of S bank conversions after the TCJA, comparing post-TCJA conversion trends with pre-TCJA trends utilizing an ordinary least squares (OLS) and logistics model.FindingsThe study finds that post-TCJA conversions are primarily driven by financially stable banks seeking improved tax conditions and relaxed shareholder restrictions as C corporations. This contrasts with pre-TCJA conversions, which were predominantly driven by financially distressed S corporation banks seeking new equity capital to maintain solvency.Research limitations/implicationsThe findings necessitate a comprehensive reconsideration of the Subchapter S status' sustained relevance for smaller institutions, especially in light of the comparative benefits now offered by the C corporation status post-TCJA. The results underscore the importance of ongoing academic investigation to deepen the understanding of the evolving fiscal landscape's effects on community banks, thereby contributing to the knowledge of the resilience and health of the US economy.Practical implicationsThis research nudges policymakers and regulators to contemplate the ongoing relevance and advantages of the S corporation status. Given the substantial benefits conferred by the C corporation status in the post-TCJA environment, this study suggests that retaining the S corporation status may not offer the same appeal for smaller community banks as it once did.Originality/valueThis paper contributes to the broader understanding of the impact of tax policy on businesses' organizational choices, particularly in the banking industry and emphasizes the need for a comprehensive review of the S corporation status to assess its ongoing applicability in fostering small and community-focused financial institutions in light of the evolved corporate tax landscape.

LESSONS FOR THE INDIAN BANKING INDUSTRY FROM THE BANK FAILURES IN THE UNITED STATES

ABSTRACT The Indian banking industry is mature and efficient. However, it has witnessed nearly 38,000 instances of fraud involving a total amount of $22 billion in the last five years. The $1 billion fraud using the Society for Worldwide International Funds Transfer (SWIFT) platform in Punjab National Bank emphasizes the importance of internal control within the bank and the regulator’s failure in supervision. The amalgamation of the Lakshmi Vilas Bank (LVB) with the DBS Bank, Singapore was necessitated by large continuous losses in three consecutive years leading to erosion of equity. The liquidity stress faced by the Infrastructure Leasing & Financial Services (IL&FS) and Dewan Housing Finance Ltd. (DHFL) indicated the unsustainable market funding conditions for the non-bank financial corporations (NBFC). The Reserve Bank of India initiated the Corporate Insolvency Resolution Process (CIRP) in order to finalize the resolution of Dewan Housing Finance Corporation Limited (DHFL) after noticing misuse of customer funds. Despite 3,518 bank failures from 1980 to the present day, the banking industry in the United States is strong with assets valued at $24 trillion and deposits of $20 trillion thanks to the robust functions of the Federal Deposit Insurance Corporation (FDIC). Its coverage of 4,817 banks is a model for the Indian Banking industry that is plagued with the myth of benefits of nationalization, mounting non-performing assets, and instances of frauds. This paper offers empirical evidence of the strength of the US banking leading to suggestions of policy reforms for its counterpart in India. Keywords bank failure, deposit insurance, regulation, nationalization

Bank failure prediction: corporate governance and financial indicators

This paper reiterates the importance of corporate governance in banks. Failure prediction studies have mainly relied on using financial ratios as predictors. The most suitable financial predictors for banks are financial ratios following the CAMEL rating system. Also, corporate governance has been proven to be an important aspect of banks, especially after the financial crisis. Given its importance, the novelty of this paper is to test the ability of corporate governance to increase the accuracy and extend the time-horizon of bank failure prediction in the US market. Using discriminant analysis, we predict the failure of banks insured by the Federal Deposit Insurance Corporation from 2010 to 2018. Using financial and non-financial predictors, we find that combining CAMEL ratios with corporate governance variables not only increases the accuracy of prediction but also extends the time horizon to three years before failure. We also show that bank earnings is a more significant predictor than capital structure and asset quality. The results further reveal that CEO compensation, voting rights and institutional ownership are significant predictors. These results are robust when using logit regression and out-of-sample examination. This study shows that corporate governance plays a key role in the success or failure of banks. The regulatory implication of this paper is that more attention needs to be directed to corporate governance and earnings aspects of banks rather than focusing on capital structure.

Bridging the gap from the current deposit insurance fund to a fund target

We use ruin theory, as developed in actuarial science, to study the impact of deposit insurer choices for insurance pricing, funding (capitalization), resolving bank failures and managing investments on the probability of insurer insolvency. We use a risk aggregation model (copula) to combine multiple insurer revenue and expense streams to determine the optimum (target) deposit insurance fund level. Next, we apply ruin theory to different strategies for achieving the target fund through simulated revenue and expense streams and show how these strategies affect the probability of deposit insurer insolvency. For our empirical estimates we use the U.S. Federal Deposit Insurance Corporation’s annual revenues and expenses as a case study. Our results suggest that ruin theory can provide insights about how deposit insurer’s choices for pricing deposit insurance, funding, resolving bank failures and managing investments affect the risk of insurer insolvency. Further, our analysis demonstrates the interactions of key insurance operations on insurer risk, with the implication that deposit insurers should manage these operations jointly rather than independently, as characterized by deposit insurance laws and the academic literature.

Auctions of failed banks: an analysis of losing bidders

Between 2007 and 2013, the Federal Deposit Insurance Corporation (FDIC) used purchase and assumption (P&A) as a resolution method to auction 492 failed institutions to healthy banks. While existing studies reveal positive value effects on winning bidders of these auctions, this study finds that losing bidders experience negative abnormal stock returns. Furthermore, the losing bidders’ stockholders react negatively to a worsening market condition and an increased probability of failure. The returns, nevertheless, are related to the market power gains and distorted competitive condition post-auction. These results raise concerns that this type of intervention potentially gives rise to anticompetitive behavior among participating banks of FDIC auctions.

Information management in times of crisis

How does information management and control affect bank stability? Following a national bank holiday in 1933, NY state bank regulators suspended the publication of balance sheets of state-charter banks for two years, whereas the national-charter bank regulator did not. This divergence in policies is used to examine how the suspension of bank-specific information affected depositors and the portfolio of assets held by banks. State-charter banks benefited, experiencing less deposit outflows than national-charter banks in 1933. Further, the behavior of bank deposits across both types of banks converged in 1934 after the introduction of the Federal Deposit Insurance Corporation.

The Paycheck Protection Program: Minority vs. Non-Minority Bank Response

We are the first to empirically analyze whether the "Guidance on Accessing Capital for Minority, Underserved, Veteran and Women-Owned Business Concerns" (Guidance) program was successful. The program was implemented to promote the Paycheck Protection Program (PPP) loans provided by Minority Depository Institutions (MDIs) in the second round compared to the first round of PPP. Using both loan-level data from the Small Business Administration (SBA) and balance-sheet-level data from the Federal Deposit Insurance Corporation (FDIC), we obtain compelling empirical evidence indicating that MDIs issued relatively more PPP loans (scaled by institution assets) than non-MDIs in the second round. This finding is evidence that the goal of dedicated access for MDIs under the Guidance program was successful. It also enhances the understanding of the PPP lending program and the impact of the Federal Reserve PPP Liquidity Facility (PPPLF) in terms of the role played by MDIs.

A Futuristic View of Using XBRL Technology in Non-Financial Sustainability Reporting: The Case of the FDIC

The rapid use and development of information and communication technology capabilities in the public sector has revolutionized the mechanism that government agencies use to collect, process, and disseminate data. Electronic government is one of the strategic initiatives that many government agencies have considered adopting to offer efficient web-based services and operations. Although there have been efforts to examine the implementation process of technological innovations in financial and business reporting, many government agencies are about to face a bigger challenge in developing or adopting current technologies to assess their usefulness for non-financial sustainability reporting. The Extensible Business Reporting Language, XBRL, has been adopted by the U.S. Federal Deposit Insurance Corporation (FDIC) to process financial data in the quarterly call reports filed by banks. Using Rogers’ well-established theory of innovation adoption process, this paper discusses the FDIC’s XBRL implementation process and investigates the roles and experiences of the agency’s stakeholders. A case study research methodology, supported by semi-structured interviews, is used to explore each phase of the implementation process. The findings reveal that the process was facilitated by stakeholder engagement, technical support, and the agency’s strategic decision-making process. This paper contributes to the literature by examining the applications, benefits, and challenges of using XBRL technology to process non-financial sustainability data, which is still an under-researched area. Therefore, the implications for using the technology in non-financial reporting will be insightful for future regulatory adopters and their stakeholders including filer banks, software vendors, and various users of financial and non-financial information.

Propagation of Bankruptcy Risk over Scale-Free Economic Networks.

The propagation of bankruptcy-induced shocks across domestic and global economies is sometimes very dramatic; this phenomenon can be modelled as a dynamical process in economic networks. Economic networks are usually scale-free, and scale-free networks are known to be vulnerable with respect to targeted attacks, i.e., attacks directed towards the biggest nodes of the network. Here we address the following question: to what extent does the scale-free nature of economic networks and the vulnerability of the biggest nodes affect the propagation of economic shocks? We model the dynamics of bankruptcies as the propagation of financial contagion across the banking sector over a scale-free network of banks, and perform Monte-Carlo simulations based on synthetic networks. In addition, we analyze the public data regarding the bankruptcy of US banks from the Federal Deposit Insurance Corporation. The dynamics of the shock propagation is characterized in terms of the Bank Failures Diffusion Index, i.e., the average number of new bankruptcies triggered by the bankruptcy of a single bank, and in terms of the Shannon entropy of the whole network. The simulation results are in-line with the empirical findings, and indicate the important role of the biggest banks in the dynamics of economic shocks.

Large lending and banks performance. Is there any relationship? Empirical evidence from US banks

AbstractLarge lending in the banking industry has sparked concerns about banks’ efficiency performance, particularly, if it is related to their credit risk, as trade credit, provided by large, creditworthy firms. We provide evidence of a rather neglected issue regarding the impact of large lending on banks’ efficiency using cost and profit stochastic functions. A unique dataset was constructed concerning all US banks collected from the Statistics on Depository Institutions report compiled by the Federal Deposit Insurance Corporation. Our sample contains US banks tracked yearly for the period 2010–2017, creating an unbalanced panel of year observations. An econometric framework based on nested non‐neutral frontiers was developed to estimate the influence and the decomposition of large lending on the three banks’ performance aspects. Moreover, different types of frontiers aiming at the cost and profit sides have been investigated, and the associated elasticities have been calculated. We notice that large lending plays a crucial role in banks’ technical efficiency. Variations among different frontier models, type of bank and size, banks’ ownership structure, and macroeconomic conditions appear to be present. By considering all capital adequacy asset quality management earnings liquidity parameters, we notice that banks’ financial strength affects banks’ efficiency.

Deposit Insurance and Depositor Monitoring: Quasi‐Experimental Evidence from the Creation of the Federal Deposit Insurance Corporation

AbstractThe Banking Acts of 1933 and 1935 insured deposits up to $5,000 and limited interest paid by commercial banks. This essay uses a treatment‐and‐control estimation strategy to determine how those reforms influenced depositors’ reactions to information about banks’ balance sheets by comparing preferred and regular depositors at New York state banks. Before deposit insurance, regular depositors reacted more to information about banks, while preferred depositors reacted less. After, this difference diminished and almost disappeared. This change indicates insurance reduced monitoring, although depositors’ continued response to some information indicates that large, uninsured depositors continued to monitor banks, as the legislation intended.

Leverage Regulations Work and Its Impact for the Stabilisation of Financial Systems

Banks are the most leveraged institutions in the world that have produced protection for the combination of “Federal Deposit Insurance Corporation (FDIC)” and “fractional-reserve banking”. The primary purpose of this paper is to evaluate the leverage regulations work and the types of equipment that help in stabilising the financial system. Depending on the leverage ratio an individual bank can measure its total assets and core capital that help in protecting the bank from any kind of financial or economic crisis. Every individual financial sector generally follows some specific rules and regulations to maintain the financial flow. In this regard, utilising the microeconomic framework, the behaviour of banks can be understood. The researcher has selected the “secondary qualitative data collection method” to collect the data and information to lead the further study. In order to describe the collected sources in an understandable way “thematic technique” has been adopted. Preparing five themes in simple and understandable words, the paper has been made valuable for the readers. Moreover, this study paper will serve the readers with reliable and valuable information about leverage regulations work and their impact on the stabilisation of financial systems. Keywords : Financial risk, financial system, Leverage Regulations Work, policies, security, and stabilization.

Ensuring Risk-Free Digital-Banking in US-Economy: Application of Akim’s Model

Humankind today lives with technology-driven lifestyles where services are carried-out in a competitive manner in economy country-wise such as the United States. In this progression, banking services are no different. It has resulted digital-banking in US-economy where few banks do not have physical branches. Under Bank Laws, Federal Deposit Insurance Corporation (FDIC) has been protecting bank deposits. However, e-banking is characterized by evolving many factors that are often unpredictable. It faces serious pitfalls being it riskiness in digital banking – bank-led and mobile-led digitals. These weaknesses cause abuses. Customers face perceived risks. It undermines growth-trends of e-banking. Dealing with the challenges in US-economy, application of Akim’s model-Voluntary Insurance (VI)—a proposed product in today’s e-banking, can be impetus for policy-design, which can boost number of users. Welfare Analyses have guided setting insurance-price ensuring customer’s efficiency-cost so that VI becomes appealing. It can present cash-less society sooner than delaying.

Persistency of window dressing practices in the U.S. repo markets after the GFC: The unexplored role of the deposit insurance premium

AbstractWe investigate whether the regulatory improvements made in the aftermath of the global financial crisis have been effective in limiting bank downward window dressing by means of repos in the United States. We find that a strict application of the Basel III regulation wipes out incentives to engage in window dressing to bolster the level of leverage Tier 1 ratio at quarter‐end. We also show that the persistency of window dressing is related to the computation of the Federal Deposit Insurance Corporation assessment base, which motivates banks to engage in window dressing to reduce the deposit insurance premium.