Did the Founding of the Federal Reserve Affect the Vulnerability of the Interbank System to Contagion Risk?
Year: 2018
Type: article
Abstract: The Federal Reserve System was established to supplant the private interbank system, which was widely seen as a source of instability. We examine how the Fed's presence affected the interbank system's resilience to solvency and liquidity shocks and whether those shocks might have been contagious. The interbank system became more resilient to solvency shocks but less resilient to liquidity shocks as banks sharply reduced their liquid assets after the Fed's founding. The industry's response illustrates how the introduction of a lender of last resort can alter private behavior in ways that increase the likelihood that the lender will be needed.
DOI: 10.1111/jmcb.12520
Authors: MARK CARLSON, DAVID C. WHEELOCK
Institutions: Federal Reserve, Federal Reserve Bank of St. Louis
Language: English
Subfield: Finance
Domain: Social Sciences
Open Access status: bronze
OpenAlex ID: W2465714905