2008 Banking Interventions Prevented Meltdown: Fed Reserve

Government interventions taken to stabilize the financial system after the 2008 financial crisis were controversial at the time because of perceived high costs to taxpayers, but the cost of bank deposit suspensions likely would have been much worse, economists said in a Federal Reserve Bank of Kansas City release.

The study was done by Qian Chen, Christoffer Koch, Gary Richardson and Padma Sharma.  Chen is an assistant professor at the Beijing Technology and Business University.  Koch is a senior economist at the Federal Reserve Bank of Dallas.  Richardson is a professor at the University of California, Irvine and an affiliate at the National Bureau of Economic Research.  Sharma is an economist at the Federal Reserve Bank of Kansas City.

“Our results suggest that interventions that prevent large deposit suspensions during recessions, such as those undertaken after 2008, are likely worth the costs,” the Federal Reserve release said.  “Effective interventions not only help avoid economic losses during recessions, but also prevent losses to output and employment several years into the future.”




They studied modern episodes of state deposit suspensions to quantify the effects of shutting down the commercial banking system on the country’s total economic activity.

They found that a 1991 suspension in Rhode Island, which was imposed during a recession, increased unemployment and reduced output for at least 10 years after the crisis.

Yet suspensions in Maryland and Ohio in 1985 and Nebraska in 1983, which occurred during economic expansions, did not have a measurable economic effect, they said.

The events in Rhode Island showed that adequate regulation and supervision of depository institutions are essential in preventing deposit suspensions, the report said.

In the wake of the global financial crisis, the Dodd-Frank Act introduced new regulations aimed at limiting excessive risk-taking and enhancing the resilience of the banking system.  Some of these measures include stress tests, capital regulations and requirements for complex financial institutions to submit “living wills” that outline their plans for orderly dissolution in the event of a crisis.

Those measures not only bolster the solvency and liquidity of the depository institutions but also provide regulators with regular snapshots of the risks in bank balance sheets, the economists said.  The current enhanced regulatory structure helps protect the banking system against a recurrence of a crisis resembling the deposit suspension in Rhode Island or the global financial crisis.

The disparate origins of Rhode Island’s crisis in the 1990s and the global financial crisis two decades later underline the importance of updating regulations in line with the growing complexity of the financial landscape, the report said.




Fed cattle trading this week was seen at $109 to $110.25 per cwt, mostly $110, on a live basis, down $1 to up $0.25 from last week.  Dressed-basis trading was done at a steady $172.

The USDA choice cutout Thursday was up $1.86 per cwt at $237.70, while select was up $0.27 at $213.89.  The choice/select spread widened to $23.81 from $22.22 with 121 loads of fabricated product and 31 loads of trimmings and grinds sold into the spot market.

The USDA reported Thursday that basis bids for corn from livestock feeding operations in the Southern Plains were unchanged at $1.10 to $1.15 per bushel over the Dec CBOT futures contract, which settled at $4.22 1/2 a bushel, down $0.03 1/4.

The CME Feeder Cattle Index for the seven days ended Wednesday was $137.51 per cwt, up $0.13.  This compares with Thursday’s Nov contract settlement of $136.77 per cwt, down $0.25.