Charles W. Calomiris is Henry Kaufman Professor of Financial Institutions at the Columbia University Graduate School of Business and a Professor at Columbia's School of International and Public Affairs. He is a member of the Shadow Financial Regulatory Committee, the Shadow Open Market Committee, and the Financial Economists Roundtable, and a research associate of the National Bureau of Economic Research. He received a BA in economics from Yale University in 1979 and a PhD in economics from Stanford University in 1985. More >>

Abstract: The Fed was founded to reduce systemic liquidity risk related to seasonal swings in loan demand. Existing evidence on the post-Fed increase in seasonal volatility of aggregate lending and the decrease in seasonal interest rate swings suggests that it succeeded in that mission. Nevertheless, many state-chartered banks chose not to join the Fed. Some have speculated that non-members could avoid higher costs of Fed reserve requirements while still obtaining access indirectly to the Fed discount window through contacts with Fed members. We find that individual bank attributes related to the extent of banks’ ability to mitigate seasonal loan demand variation predict banks’ decisions to join the Fed. Consistent with the notion that banks could obtain indirect access to the discount window through interbank transfers, we find that a bank’s position within the interbank network (as a user or provider of liquidity) predicts the timing of its entry into the Fed system and the effect of Fed membership on its lending behavior. We also find that indirect access to the Fed was not as good as direct access; after the founding of the Fed, Fed member banks saw a greater increase in lending than non-member banks.