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Faculty News

Todd Keister testifies at congressional hearing on the Federal Reserve

Todd Keister testifies at congressional hearing on the Federal Reserve

On May 17, a subcommittee of the U.S. House of Representatives held a hearing entitled, “Interest on Reserves and the Fed’s Balance Sheet.” Among the four experts called to testify at this hearing was Rutgers economist Todd Keister.

The hearing was designed to help policy makers better understand the economic effects of the Federal Reserve’s recently authorized ability to pay interest on the reserves that commercial banks hold on deposit at the Fed. In his testimony, Professor Keister argued that paying interest on reserves “is not only essential for the implementation of monetary policy, but also sound economic policy” and “has no cost to the taxpayer.”

A transcript of Professor Keister's opening remarks at the hearing, plus his written testimony, are available online, as is a video of the hearing [his remarks start at the 41 minute mark].

Research on the Cost Consequences of Breaking Up Large Banks by Rutgers' Joseph Hughes and Cleveland Fed President Loretta Mester

Research on the Cost Consequences of Breaking Up Large Banks
by Rutgers' Joseph Hughes and Cleveland Fed President Loretta Mester

Ben Bernanke cites their work in his blog.

Ben Bernanke discussed his speech at the second symposium on Ending Too Big To Fail at the Minneapolis Fed and cited the paper of Hughes and Mester, "The Future of Large, Internationally Active Banks: Does Scale Define the Winners?"  See the link at footnote 3: http://www.brookings.edu/blogs/ben-bernanke/posts/2016/05/13-too-big-to-fail  The link in the footnote to Hughes and Mester is https://www.clevelandfed.org/our-research/president/lm003-the-future-of-large-internationally-active-banks.aspx

Hughes speaks at the Minneapolis Fed's Ending Too Big To Fail Symposium

Joseph P. Hughes, Professor of Economics, discussed the costs of breaking up big banks as a member of a panel at the Ending Too Big to Fail Symposium of the Federal Reserve Bank of Minneapolis on April 4, 2016: Listen to his speech. Read the conference program: https://www.minneapolisfed.org/publications/special-studies/endingtbtf/symposiums/april-4-ending-too-big-to-fail-symposium

Cited in Bloomberg Business and the Wall Street Journal . . .

Joseph P. Hughes, Professor of Economics, and Loretta J. Mester, President of the Federal Reserve Bank of Cleveland, cited in the Wall Street Journal,* as leaders in the field of measuring economies of scale exhibited by large banks, have recently published a much cited study that, as the Journal noted,

". . . has found economies of scale at all sizes of banks, and that bigger banks enjoy higher economies of scale – that is, they are able to provide products at lower cost than smaller banks. That is a break from earlier research that did not find economies of scale at big banks.

"Their work finds that these cost advantages don’t just come from lower-cost funding investors are willing to give big banks because they believe the government will bail them out if trouble strikes – the cost advantage big bank critics focus on. In other words, there are good business reasons for banks to be big, according to their research.” **

Bloomberg Business (March 5, 2015) entitled a feature, "The Biggest Banks Are Not Ready to Shrink," and in a subtitle, "New rules give big banks an incentive to shrink their balance sheets. But for most, massiveness remains part of the business plan." In explaining the logic of the business plan, Bloomberg noted that the Hughes-Mester findings "challenge the conventional wisdom that banks exhaust their economies of scale once they reach $100 billion in assets."

The Economist (May 14, 2013) featured an online debate on the question, "Should big banks be broken up?" between Simon Johnson (MIT) and Charles Calomiris (Columbia University).  Calomiris cited the Hughes-Mester findings on large-bank scale economies in the first posting of the debate.***

The policy implications of this work for Too Big To Fail and for regulations aimed at controlling financial system stability under the Dodd-Frank Act have been discussed in a recent speech by Federal Reserve Vice Chairman Stanley Fischer (July 2014) as well as in a recent hearing (July 2014) of the U. S. Senate Committee on Banking on the question, "What Makes a Bank Systemically Important?"

This work has also been cited by Governor Jeremy Stein of the Federal Reserve Board in April 2013 (“Regulating Large Financial Institutions”) and by Governor Jerome Powell (“Ending ‘Too Big to Fail’”) in March 2013.

  * February 18, 2014
** “Who Said Large Banks Don’t Experience Scale Economies? Evidence from a Risk-Return-Driven Cost Function,” Journal of Financial Intermediation, 2013, 22:4, 559-585.

The Wall Street Journal featured research by Hughes, Jagtiani, and Mester on the financial performance of community banks and their small business lending.

A Wall Street Journal article published on June 22, 2016, "Small-Business Lending Doesn’t Suffer as Community Banks Grow," focused on research by Joe Hughes and coauthors Julapa Jagtiani and Loretta Mester that examined the financial performance of community banks and their small business lending. The Journal describes a key finding: "As small community banks get bigger, does their small-business lending take a hit? Joseph Hughes of Rutgers University, Julapa Jagtiani of the Federal Reserve Bank of Philadelphia and Loretta Mester, president of the Federal Reserve Bank of Cleveland, find no such evidence. They find a significant positive relationship between financial performance and the ratio of small-business loans to assets at large community banks, suggesting such banks would have financial incentives to boost their share of small-business loans as they grow." The paper is available at SSRN: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2798539.

Professor Eugene White awarded NSF grant

Professor Eugene White awarded NSF grant

Economic historian Eugene White has been awarded a three year $289,000 grant from the National Science Foundation. As the recent banking crisis in the United States has reminded us, effective bank supervision is an important instrument for avoiding crises and promoting financial stability.  Professor's White's project, "The Evolution of Bank Supervision in the United States: 1863-2008," will produce the first comprehensive history of U.S. bank supervision. While there was a large, complex supervisory network in place, the agencies failed to detect and prevent excessive risk-taking and even illegal activities.  Reforming the bank supervisory structure requires a thorough understanding of the development and issues underlying the system of supervision. By providing a comprehensive statistical study of bank supervision in the United States, this project will yield some of the necessary information and should inform subsequent theoretical and empirical economic analyses that will be needed for reform.

Read more: Professor Eugene White awarded NSF grant

Bloomberg News questions Rosanne Altshuler on international tax policy . . .

Bloomberg News questions Rosanne Altshuler on international tax policy . . .

Bloomberg Business quoted Rutgers economist, Rosanne Altshuler, an expert on international taxation, in an article (March 4, 2015), "U.S. Companies Are Stashing $2.1 Trillon Overseas to Avoid Taxes."  Bloomberg noted, "The money pileup, reflecting companies’ incentives to park profits in low-tax countries, has drawn the attention of President Barack Obama and U.S. lawmakers, who see a chance to tap the funds for spending programs and to revamp the tax code."  

Professor Altshuler explained, “One of the reasons that they’re holding the hoards of cash abroad is they don’t want to pay the repatriation tax when they bring it back. . . . It’s very easy to place a patent in another country and accrue the income there. . . . “They’re very sensitive to differentials in corporate tax rates.”

Read research findings of Dr. Altshuler, Stephen Shay, and Eric Toder in "Lessons the United States Can Learn from Other Countries’ Territorial Systems for Taxing Income of Multinational Corporations" at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2557190

and Dr. Altshuler and Harry Grubert in "Fixing the System: An Analysis of Alternative Proposals for the Reform of International Tax" at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2245128.

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