Thomas L. Hogan

The Political Economy of Bitcoin

The recent proliferation of bitcoin has been a boon for users but might pose problems for governments. Indeed, some governments have already taken steps to ban or discourage the use of bitcoin. In a model with endogenous matching and random consumption preferences, we find multiple monetary equilibria including one in which bitcoin coexists with regular currency. We then identify the conditions under which government transactions policy might deter the use of bitcoin. We show that such a policy becomes more difficult if some users strictly prefer bitcoin because they can avoid other users holding currency in the matching process.

Capital and Risk in Commercial Banking: A Comparison of Capital and Risk-based Capital Ratios

Recent changes in U.S. banking regulation have emphasized risk-based capital (RBC) as an indicator of bank soundness. This paper compares the RBC ratio to the standard capital ratio of equity over assets. We regress the capital and RBC ratios of bank holding companies from 1999 through 2010 against two measures of bank risk: the standard deviation of stock returns and the Z-score indicator of bank solvency. We find that the capital and RBC ratios are statistically significant predictors of both measures of risk. Comparing the capital and RBC ratios to each other, however, we find that the capital ratio is statistically significantly better than the RBC ratio as a predictor of risk, especially in the period since the recent financial crisis.

Endogenous Matching and Money with Random Consumption Preferences

Current money matching models employ either random matching or endogenous matching processes, both of which oversimplify the problem. We maintain that although most economic interactions are intentional, randomness still exists in consumption preferences. We offer an endogenous matching model of money with random consumption preferences. Our model preserves the intentionality of economic interactions while leaving scope for chance. We compare the potential monetary and nonmonetary equilibria to other endogenous matching and random matching models. We then consider the effects of government transaction policy and find that, consistent with earlier studies, government policy can prevent nonmonetary equilibria and create monetary equilibria.

Competition in Currency: The Potential for Private Money

Privately issued money can benefit consumers in many ways, particularly in the areas of value stability and product variety. Decentralized currency production can benefit consumers by reducing inflation and increasing economic stability. Unlike a central bank, competing private banks must attract customers by providing innovative products, restricting the quantity of notes issued, and limiting the riskiness of their investing activities. Although the Federal Reserve currently has a de facto monopoly on the provision of currency in the United States, this was not always the case. Throughout most of U.S. history, private banks issued their own banknotes as currency. This practice continues today in a few countries and could be reinstituted in the United States with minimal changes to the banking system. This paper examines two ways in which banks could potentially issue private money. First, U.S. banks could issue private notes redeemable for U.S. Federal Reserve notes. Considering that banks issuing private notes in Hong Kong, Scotland, and Northern Ireland earn hundreds of millions of dollars annually, it appears that U.S. banks may be missing an opportunity to earn billions of dollars in annual profits. Second, recent turmoil in the financial sector has increased demand for a stable alternative currency. Banks may be able to capture significant portions of the domestic and international currency markets with a private, commodity-based currency. Legislation clarifying the rights of private banks to issue currency could help clear the path toward a return to private money.

Evaluating Risk-Based Capital Regulation

This paper evaluates the effectiveness of risk-based capital (RBC) regulation and challenges some evidence from the well-known study by Haldane and Madouros (2012). We reconsider the evidence on the relationship between RBC ratios and failures of US banks from Haldane and Madouros (2012) and find their results are not robust to changes in the sample period or regression model. Using data on US commercial banks from 2000 through 2015 and an improved regression model, we compare banks’ RBC ratios and simple capital ratios as predictors of bank risk. We find simple capital ratios to be significantly better than complex RBC ratios as predictors of bank risk.

Risk-based capital regulation revisited: evidence from the early 2000s

Purpose - – The purpose of this study is to replicate Avery and Berger’s (1991) analysis using data from 2001 through 2011. Although risk-based capital (RBC) regulation is a key component of US banking regulation, empirical evidence of the effectiveness of these regulations has been mixed. Among the first studies of RBC regulation, Avery and Berger (1991) provide evidence from data on US banks that new RBC regulations outperformed old capital regulations from 1982 through 1989. Design/methodology/approach - – Using data from the Federal Reserve’s Call Reports, the authors compare banks’ capital ratios and RBC ratios to five measures of bank performance: income, standard deviation of income, non-performing loans, loan charge-offs and probability of failure. Findings - – Consistent with Avery and Berger (1991), the authors find banks’ risk-weighted assets to be significant predictors of their future performance and that RBC ratios outperform regular capital ratios as predictors of risk. Originality/value - – The study improves on Avery and Berger (1991) by using an updated data set from 2001 through 2011. The authors also discuss some potential limitations of this method of analysis.

The Impact of Dodd-Frank on Banks’ Noninterest Expenses

This paper examines the potential effects of the Dodd-Frank Act of 2010 on banks’ noninterest expenses. Using data on U.S. bank holding companies from 1995 through 2016, we test whether noninterest expenses increase following the passage of the Dodd-Frank Act or in relation to the number of banking regulations implemented after Dodd-Frank. We analyze subsamples of banks above and below

War, Money, & Economy: Economic Performance in the Fed and Pre-Fed Periods

10 billion in total assets and consider total noninterest expenses, salaries, non-salary expenses, and specific subcategories of non-salary expenses: legal, consulting, auditing, and data processing. Non-salary expenses for both large and small banks show a one-time increase after Dodd-Frank, while salary expenses tend to increase with regulations. The results indicate that total noninterest expenses for the banking system are higher on average by more than

A Closer Look at NGDP Targeting: Supply-Side Problems with Demand-Side Policy

50 billion per year compared to before the Dodd-Frank Act.

Alternatives to FDIC Deposit Insurance

This paper compares U.S. economic performance under the Federal Reserve to that of the pre-Fed period after accounting for wars as exogenous shocks. We identify wartime inflations by changes in U.S. military spending and by statistically significant shocks to the price level. Adjusting for wartime shocks, performance in the pre-Fed periods is mostly the same as or better than in the post-World War II period in terms of low inflation, high GDP growth, and low volatility of GDP growth. The results are consistent when comparing the pre-Fed periods to the Great Moderation.