How large has the federal financial safety net become?
Malysheva, Nadezhda ; Walter, John R.
In 2002, Walter and Weinberg examined the federal financial safety
net as it stood at the end of 1999 (Walter and Weinberg 2002). At the
time, the authors estimated that approximately 45 percent of all
financial firm liabilities were protected by the safety net. As one
would expect in this article, the current estimate indicates that the
size of the net has grown, as the financial market turmoil that began in
2007 led federal government agencies to expand the range of institutions
and the types of liabilities protected by the safety net.
1. THE SAFETY NET: ITS DEFINITION, COSTS, AND BENEFITS
Walter and Weinberg defined the federal financial safety net as
consisting of all explicit or implicit government guarantees of private
financial liabilities. Private financial liabilities are those owed by
one private market participant to another. As used by Walter and
Weinberg, the phrase government guarantee means a federal government
commitment to protect lenders from losses due to a borrower's
default (Walter and Weinberg 2002). (1) Following this definition, we
include in our estimate of the safety net, insured bank and thrift
deposits, certain other banking company liabilities, some
government-sponsored enterprise (GSE) liabilities, selected private
employer pension liabilities, as well as a subset of the liabilities of
other financial firms. The details of why we chose to include these
liabilities are provided below.
Effect of a Safety Net on Economic Efficiency
Government actions in the form of subsidies, taxes, or regulations
change market outcomes, and in competitive markets such changes distort
allocations and can reduce economic efficiency. Does the financial
safety net cause distortions? As discussed in Walter and Weinberg, in
principle, the government could design guarantees that mimic market
outcomes. Typically, however, government intervention arises from a
desire to alter market outcomes. In the case of guarantees, this means
either expanding coverage or underpricing relative to private market
guarantees. Underpricing means that the guarantor collects fees that are
less than the expected value of its obligations. This underpricing
subsidizes risk taking.
Underpriced guarantees tend to shift resources away from activities
that are not covered toward those that are. In that way, a government
guarantee is similar to a direct subsidy paid to those engaged in a
particular activity. A guarantee is different, however, in the way it
affects attitudes toward risk. By assigning to the government part of
the risk in the activities being financed, the safety net reduces market
participants' willingness to control risk. Overprovision of
guarantees, while not necessarily drawing resources into an activity,
does shift risk preferences in a way similar to underpricing. In short,
guarantees lead to expanded risk taking.
Our calculation of the size of the safety net does not represent a
measure of the size of the distortions to the allocation of resources
and risk taking. Such a measure would require knowledge of the extent of
underpricing or overprovision of government guarantees. Those would be
difficult to measure, especially the latter, since government provision
often preempts private market activity. We nevertheless believe that the
extent of distortions is directly related to the size of the safety net.
Other things being equal, the greater the share of private liabilities
protected by the government safety net, the more likely it is that
government guarantees are extending beyond the level of protection that
would be provided in a private market.
Why Have a Safety Net?
If the safety net is distortionary, why have one? Proponents of the
financial safety net, especially as it applies to banks, often argue
that private risk-sharing arrangements tend to disregard the systemic
consequences of large losses borne by an individual or a small group of
institutions. The idea here is that such losses might spill over and
generate further losses caused, for example, by a contagious loss of
investor confidence. Under such a view, government protection for
certain investors could prevent widespread financial panic or distress.
While the potential systemic consequences of a large financial failure
are difficult to assess, when faced with the possibility of widespread
failures of financial firms, policymakers are likely to conclude that
preventing such failures by protecting creditors of financial firms
(providing safety net protection) is prudent.
Similarly, some observers maintain that the safety net protections
can lower the costs of, and therefore encourage, certain highly
beneficial financial arrangements. For example, Diamond and Dybvig
(1983) argue that banks' performance of the maturity transformation
function is highly beneficial to the economy but is more costly without
government-provided deposit insurance. Banks perform maturity
transformation by gathering money from numerous short-term depositors
(those bank customers whose deposits mature soon after
deposited--especially checking deposits, which are available, meaning
that they mature, immediately after being deposited) to fund long-term
loans to businesses and individuals. Without deposit insurance, which
only the government has sufficient resources to provide, bank runs are
likely to occur. A bank run happens when many depositors attempt to
withdraw their funds simultaneously. Since banks make long-term loans,
they cannot recover sufficient money from borrowers to meet a run and,
therefore, fail. To protect themselves from runs, banks can undertake
costly private measures, but Diamond and Dybvig argue that government
deposit insurance is likely to be less expensive and therefore
preferable to such measures.
2. LEGISLATIVE AND REGULATORY CHANGES THAT EXPANDED THE SAFETY NET
As shown in Table 1, we estimated the proportion of financial firm
liabilities protected as of the end of 2009. By the end of 2009, a
number of government programs had been established to address turmoil in
financial markets. Employing methods similar to those used by Walter and
Weinberg when they measured the size of the safety net for the end of
1999, we find that as of the end of 2009 about 59 percent of financial
firm liabilities were protected by the federal safety net.
Table 1 Estimated Federal Financial Safety Net
Financial Firms Explicitly Implicitly Guaranteed
Guaranteed Liabilities
Liabilities
Banking and Savings Firms 6,536 7,276
(Includes BHCs) 40.2% 44.8%
Credit Unions 725
88.7%
Government-Sponsored Enterprises
Fannie Mae 3,345
Freddie Mac 2,333
Farm Credit System 188
Federal Home Loan Banks 973
Total 6,838
100%
Private Employer Pension Funds 2,799
85.5%
Other Financial Firms 748
4.9%
Total for Financial Firms 10,059 14,862
23.8% 35.1%
Financial Firms Explicitly and Total Liabilities
Implicitly
Guaranteed
Liabilities
Banking and Savings Firms 13,812 16,249
(Includes BHCs) 85.0%
Credit Unions 725 817
88.7%
Government-Sponsored Enterprises
Fannie Mae 3,345 3,345
Freddie Mac 2,333 2,333
Farm Credit System 188 188
Federal Home Loan Banks 973 973
Total 6,838 6,838
100%
Private Employer Pension Funds 2,799 3,273
85.5%
Other Financial Firms 748 15,158
4.9%
Total for Financial Firms 24,921 42,335
58.9%
Notes: Data from December 2009, in billions of dollars. Figures
may notsum exactly due to rounding. The figures in the column
"Explicitly and Implicitly Guaranteed Liabilities" are the sum
of the numbers in the first two columns, "Explicitly Guaranteed
Liabilities" and "Implicitly Guaranteed Liabilities." See
Appendix for table legend.
One of the most important reasons for the increase from 1999 to
2009 is the enlarged portion of banking firm liabilities that market
participants are likely to consider protected: banking and savings firm
liabilities with an implicit backing. In 1999, implicitly guaranteed
liabilities of banks and savings institutions amounted to about 13
percent of all of these firms' liabilities (15.9 percent for
commercial banks and 4.2 percent for savings institutions), or $820
billion; in 2009, about 45 percent of banking and savings firm
liabilities were implicitly guaranteed, by our estimate, amounting to
$7.3 billion. (2)
How did Walter and Weinberg determine which institutions to include
as having an implicit guarantee and which liabilities issued by these
institutions might be covered? As the authors noted, the critical
question is whether market participants believe that a given institution
will be protected, even though official policy may not state explicitly
that all of these liabilities are protected. As of 1999, Walter and
Weinberg argued that market participants were likely to assume that
certain holders of liabilities in the largest 21 banking companies and
the two largest thrift companies would be protected in the event that
these firms became troubled. These 21 banking companies and two thrifts
all had assets (in 1999 dollars) of more than $50 billion, which was
greater than the smallest of the 11 institutions identified by the
Comptroller of the Currency in 1984 as potentially too big to fail
(Walter and Weinberg 2002, p. 381). The liabilities that Walter and
Weinberg assumed the market would be highly likely to view as protected
were deposits of more than $100,000 (deposits of less than $100,000 are
included in the "Explicitly Guaranteed Liabilities" column in
the tables), federal funds loans made to the 21 banks and two thrifts,
and repo transactions with these banks and thrifts. Though we intend to
use a similar methodology for estimating the size of implicit guarantees
for banking companies in 2009, events during the recent financial crisis
required some adjustments.
Support for Stress-Tested Financial Companies
Given that the government had responded aggressively to problems in
financial firms during the financial turmoil of 2008-2009, our challenge
is to decide which institutions have implicit guarantees. Here we
maintain that market participants were very likely to assume that the
liabilities of the financial firms that were stress tested early in 2009
(participants in the Supervisory Capital Assessment Program--SCAP) had a
strong likelihood of receiving federal backing if they suffered
financial distress. Indeed, the announcement of the stress tests in
February 2009 came with a promise of government-provided capital for
stress-tested institutions that were shown to be in need of additional
capital:
Under [the Treasury's Capital Assistance Program] CAP,
federal banking supervisors will conduct forward-looking
assessments [SCAP stress tests] to evaluate the capital
needs of the major U.S. Banking institutions under a more
challenging economic environment. Should that assessment
indicate that an additional capital buffer is warranted, banks
will have an opportunity to turn first to private sources of
capital. In light of the current challenging market environment,
the Treasury is making government capital available immediately
through the CAP to eligible banking institutions to provide
this buffer. (FinancialStability.gov 2009)
Additionally, a number of these firms did, in fact, receive
government aid in the form of capital injections in 2008 and early 2009
through the Treasury's Capital Purchase Program or in response to
the stress tests (FinancialStability.gov 2010, pp. 21, 27, 67-80). This
aid, both the aid promised under the CAP and aid received through the
Capital Purchase Program, reduced the likelihood that all
liabilityholders of the protected firms would suffer losses, so here we
include all liabilities of the stress-tested banking institutions in our
safety net calculation.
While some observers in 2009 may have viewed the likely passage of
financial reform legislation as diminishing federal backing, we
nevertheless count the liabilities of the stress-tested firms.
Legislation that was intended to limit the chance that financial
institutions would receive federal aid was being considered in the U.S.
Congress during 2009. If market participants were convinced that such
legislation would forestall any opportunity for the creditors of the
largest financial institutions to be protected by the federal
government, then our calculation might appropriately exclude the
liabilities of stress-tested banking institutions. In fact, most of the
legislative proposals included language that called for the closure of
troubled financial firms with losses to equityholders and at least some
creditors (though at least one leading proposal contained protections
for creditors of financial firms if the failure of such a firm might
create a systemic risk). (3) Nevertheless, legislative proposals
contained provisions meant to establish a mechanism that could clearly
identify "systemically important" financial firms. Such
mechanisms seem likely to encourage market participant expectations of
federal aid to the creditors of the largest (i.e., systemically
important) firms. Given the ambiguous effect of the reform proposals on
the probability of federal aid to the largest banking firms, and the
clear protections provided for troubled firms and for their creditors
during the financial turmoil, we retain their liabilities in our
estimate of liabilities protected by the safety net, in keeping with
Walter and Weinberg (2002). (In a later section we remove the
liabilities of stress-tested institutions and re-estimate the size of
the safety net--see Table 2.)
Table 2 Estimated Federal Financial Safety Net, Narrowly Defined
Financial Firms Explicitly Implicitly Guaranteed
Guaranteed Liabilities
Liabilities
Banking and Savings Firms 5,392
(Includes BHCs) 33.2%
Credit Unions 725
88.7%
Government-Sponsored Enterprises
Fannie Mae 3,345
Freddie Mac 2,333
Farm Credit System 188
Federal Home Loan Banks 973
Total 6,838
100%
Private Employer Pension Funds 2,799
85.5%
Other Financial Firms
Total for Financial Firms 8,915 6,838
21.1% 16.2%
Financial Firms Explicitly and Total Liabilities
Implicitly
Guaranteed
Liabilities
Banking and Savings Firms 5,392 16,249
(Includes BHCs) 33.2%
Credit Unions 725 817
88.7%
Government-Sponsored Enterprises
Fannie Mae 3,345 3,345
Freddie Mac 2,333 2,333
Farm Credit System 188 188
Federal Home Loan Banks 973 973
Total 6,838 6,838
100%
Private Employer Pension Funds 2,799 3,273
85.5%
Other Financial Firms 15,158
Total for Financial Firms 15,753 42,335
37.2%
Notes: Data from December 2009, in billions of dollars. Figures
may not sum exactly due to rounding. The figures in the column
"Explicitly and Implicitly Guaranteed Liabilities" are the sum of
the numbers in the first two columns, "Explicitly Guaranteed
Liabilities" and "Implicitly Guaranteed Liabilities." See
Appendix for table legend.
As indicated earlier, the total liabilities of the 19 stress-tested
bank holding companies, less their liabilities that were explicitly
covered by deposit insurance, summed to $7.3 trillion ("Implicitly
Guaranteed Liabilities" column in the tables). This sum equals
about 45 percent of all banking and savings firm liabilities.
Increased Ceiling on Insured Deposits
Several Federal Deposit Insurance Corporation (FDIC) programs
expanded the explicit portion of the safety net for banks and thrifts
("Explicitly Guaranteed Liabilities" column in the tables)
beyond the long-standing $100,000 coverage for deposits (which are also
included in the "Explicitly Guaranteed Liabilities" column in
the tables).4 For example, in October 2008 the Emergency Economic
Stabilization Act of 2008 temporarily increased FDIC deposit insurance
coverage from $100,000 to $250,000, until December 31, 2009. In May
2009, the $250,000 cap was extended to December 31, 2010, by the Helping
Families Save Their Homes Act. In July 2010, legislation made permanent
the $250,000 coverage limit (Federal Deposit Insurance Corporation
2010a).
Transaction Account Guarantee Program
Further, in October 2008 the FDIC implemented a program to insure
uninsured deposits (those deposits in accounts containing more than
$250,000) in noninterest-bearing transactions accounts for those insured
banks and thrifts wishing to participate. The program is temporary. At
first it covered such transactions accounts until December 31, 2009.
Later the FDIC extended the program's coverage until June 30, 2010,
and then extended it again until December 31, 2010, with a pre-announced
option to extend it an additional 12 months (Federal Deposit Insurance
Corporation 2010a). (5) This program, the Transaction Account Guarantee
Program (TAGP), added $834 billion to our "Explicitly Guaranteed
Liabilities" column in the tables for banking and savings firms
(Federal Deposit Insurance Corporation 2009c).
Debt Guarantee Program
Last, in October 2008 the FDIC offered, to banking and savings
institutions wishing to participate, the option to receive FDIC
insurance coverage for senior unsecured debt issued by such
institutions. This Debt Guarantee Program (DGP) at first covered debt
issued by June 30, 2009, and maturing by June 30, 2010. The DGP was
later extended to cover debt issued by October 31, 2009, and maturing by
December 31, 2012. As of December 31, 2009, the program was insuring
$309 billion in debt (Federal Deposit Insurance Corporation 2009b).
3. OTHER COMPONENTS OF THE SAFETY NET
As in 1999, we include for 2009 the liabilities of
government-sponsored enterprises (direct GSE liabilities plus the dollar
amount of mortgage-backed security guarantees) in the "Implicitly
Guaranteed Liabilities" column in the tables. Earlier we noted that
government guarantees can often modify market prices. Though our article
has made no attempt to measure the size of guarantees' effect on
market prices, in the case of the GSEs' implicit guarantee, the
size of the effect on market prices has been estimated by Passmore
(2005) and others. (6) Passmore (2005) estimates that the average
homeowner saved between 3 and 11 basis points on his or her mortgage
because of the implicit guarantee. The subsidy lowers the GSEs'
borrowing costs, and some of this saved borrowing cost is passed on to
homeowners by the GSE in the form of lowered mortgage interest rates.
Passmore calculates that about half of the guarantee's benefit
flows to the shareholders of the GSEs. While the Treasury made clear its
support for Fannie Mae and Freddie Mac once these two financial firms
were placed in conservatorship in September 2008, the support was not as
strongly stated as that given to insured deposits, so we leave these
liabilities in the implicit column in the tables. (7)
We estimate the amount of private pensions explicitly guaranteed in
2009 by the Pension Benefit Guarantee Corporation (PBGC) based on the
latest private pension data available, which are data for 2007 (Pension
Benefit Guarantee Corporation 2010, pp. 83, 105). Our admittedly rough
2009 figure is derived by simply adjusting the 2007 figure by twice the
average annual growth rate of private pension liabilities for the
previous 10 years (1997-2007).
We also count all of the liabilities of American International
Group (AIG) as implicitly guaranteed in the "Other Financial
Firms" row in the tables. (8) We count their liabilities as such
because of the aid provided them by the Federal Reserve and the U.S.
Treasury following AIG's financial problems in September 2008.
Because there were no clear signals about whether aid might be
forthcoming for other large, nonbank financial firms (beyond the stress
test firms), we did not include the liabilities of any firms other than
AIG in the "Other Financial Firms" row in tables.
4. ALTERNATIVE ESTIMATES OF THE SIZE OF THE SAFETY NET
As has been noted, Table 1 is based on several assumptions similar
to those made by Walter and Weinberg in 2002. For example, we assumed
that all liabilities of stress-tested bank holding companies would be
protected, not just the liabilities representing FDIC-insured bank
deposits. What would be the size of the safety net if these assumptions
were changed?
Contrary to our assumption about the likely protection of
liabilityholders of stress-tested companies, one can imagine
circumstances under which such liabilityholders might be left
unprotected. If one of these companies were to fail at a time when
financial markets were broadly healthy, policymakers could more easily
allow the company to be handled as a bankruptcy so that no government
funds are employed to protect liabilityholders (of course, the holders
of FDIC-insured deposits would still be covered given that such deposits
are protected regardless of the circumstances surrounding the failure).
In times of general financial market strength, the failure of a large
holding company could perhaps be absorbed without worries of a cascade
of additional failures. And at such times, if the firm were handled
through the Dodd-Frank Act's orderly liquidation process, it is
possible that neither the government nor other financial firms would
provide funds to protect liabilityholders. (9)
While investors might expect large financial firm failures to
typically occur in times of widespread financial weakness, and therefore
anticipate that their investments would be protected, some large firms
have failed in times of financial market health. One such example was
London-based Barings Bank, which failed when financial markets were
broadly strong in 1995. Its failure was because of the huge trading
losses generated by one unchecked Barings trader who took large,
unauthorized futures positions. Given that there are circumstances under
which the holders of stress-tested company liabilities might be left
unprotected, dropping the assumption of their coverage and recalculating
our estimate of implicitly guaranteed liabilities seems worthwhile.
Large financial firms that are not bank holding companies might receive
no protection in such instances, so we also drop liabilities of AIG from
those liabilities with implicit backing.
Also, we included in our explicitly insured deposits category those
deposits covered by the FDIC's temporary guarantee programs, since
these programs were in place in 2009. But under the debt guarantee
program no new debt issues were covered after October 31, 2009 (Federal
Deposit Insurance Corporation 2010b). The TAGP was set to expire as of
the end of 2010, though the Dodd-Frank Act extended it to December 31,
2012. In the case of future financial firm failures, such programs may
not be in place, and might not be reinstated. Therefore, re-estimating
our measure of the size of the safety net without considering these
deposits as protected also seems worthwhile.
Table 2 contains our estimate of the size of the safety net without
including the liabilities of the stress-tested bank holding companies,
AIG, and the FDIC temporary insurance program deposits. These changes
mean that, compared to Table 1, the proportion of liabilities receiving
explicit and implicit guarantees falls to 37.2 percent.
Additionally, while we assume that the liabilityholders of the
housing and farm credit GSEs will be protected from loss, as were such
holders of Fannie Mae and Freddie Mac debt during the 2007-2009
financial crisis, under some circumstances such holders might be left
unprotected. As in the case of the stress-tested companies, if a GSE
were to fail during a period in which financial markets were healthy,
policymakers might leave debtholders unprotected. Therefore, it is
possible that one might want to exclude the liabilities of the GSEs from
the calculation of the safety net. If the $6.8 trillion in liabilities
of the GSEs were removed (which are the only implicitly guaranteed
liabilities in Table 2), then our measure of the safety net would shrink
to 21 percent of total liabilities in Table 2, the amount of explicit
liabilities shown in Table 2.
Some readers might contend that one category of liabilities, which
we have excluded from our safety net estimate, could legitimately be
added: money market mutual fund liabilities. In the creation of our
tables, and in Walter and Weinberg (2002), mutual fund liabilities are
excluded because the principal value of mutual fund investments,
including money market mutual fund investments, can decline, without the
mutual fund defaulting, if the entity in which the funds are invested
defaults. As a result, these investments are akin to equity and unlike
private liabilities--the focus of our estimates--which typically must
pay back full principal (or else be in default). For example, an
investor in a money market mutual fund, which in turn invested in
financial firm commercial paper, could lose principal if the commercial
paper was not repaid, but the mutual fund can continue to operate (i.e.,
not default). (10) This view of money market mutual fund investments as
equity must be tempered, however, by events in 2008. Specifically, the
Treasury stepped in and protected investors in mutual funds from losses,
thereby treating investments in the funds like other guaranteed
liabilities, in which losses are prevented by government assistance or
guarantees. As a result, one might argue that our estimates of the
fraction of total liabilities carrying a government guarantee--both the
numerator and denominator--should include money market mutual funds. If
one adds the amount of such fund balances outstanding at the end of 2009
($3.3 trillion [Investment Company Institute 2010]) to our estimates in
the column "Explicitly and Implicitly Guaranteed Liabilities"
in Table 1, the proportion would increase to 67 percent. The Table 2
figure would increase to 45 percent.
5. CONCLUSION
Recent government actions by legislators and financial regulators
expanded the federal financial safety net. Such actions include
augmentation of deposit insurance, debt guarantees for banking
companies, aid to stress-tested financial firms, and, perhaps, various
regulatory reform legislative proposals. As discussed in Walter and
Weinberg (2002), this expansion has likely encouraged a view that
liabilityholders will be protected by the federal government in times of
financial difficulty in the future. As a result of this expectation of
government protection, liabilityholders will exercise less oversight
over financial firm risk taking then they would without this
expectation, financial firms will undertake more risk, and financial
market decisions will be distorted and inefficient.
APPENDIX A: LEGEND TO TABLE 1
* Banking and Savings Firms (11)
- Explicitly Guaranteed Liabilities
* FDIC-insured deposits of all commercial banks and savings
institutions including transaction accounts covered by the FDIC's
TAGP, plus debt guaranteed by the FDIC's DGP
- Implicitly Guaranteed Liabilities
* Total liabilities of the 19 stress-tested institutions, less
FDIC-insured deposits and accounts covered by TAGP and debt covered by
DGP for the 19 stress-tested institutions
* Credit Unions
- Explicitly Guaranteed Liabilities
* National Credit Union Administration-insured shares and deposits
* Government Sponsored Enterprises
- Implicitly Guaranteed Liabilities of:
* Fannie Mae
* Total liabilities
* Fannie Mae mortgage-backed securities held by third parties
* Other guarantees
* Freddie Mac
* Total liabilities
* Freddie Mac participation certificates and structured securities
held by third parties
* Farm Credit System
* Total liabilities
* Farmer Mac guarantees
* Federal Home Loan Banks
* Total liabilities
* Private Employer Pension Funds
- Explicitly Guaranteed Liabilities
* Pension liabilities backed by the PBGC
* Other Financial Firms
- Explicitly Guaranteed Liabilities
* Total liabilities of AIG, less FDIC-insured deposits of AIG
Federal Savings Bank
APPENDIX B: DATA APPENDIX TO TABLE 1
Banking and Savings Firms--Explicitly Guaranteed Liabilities:
"Estimated FDIC-insured deposits" of commercial banks,
savings institutions, and U.S. branches of foreign banks (Federal
Deposit Insurance Corporation 2009a), plus "Amount Guaranteed"
in the Transaction Account Guarantee Program (Federal Deposit Insurance
Corporation 2009c), plus "Debt Outstanding" in the Debt
Guarantee Program (Federal Deposit Insurance Corporation 2009b).
Banking and Savings Firms--Implicitly Guaranteed Liabilities:
Total liabilities of the 19 stress-tested institutions found in the
Y9C (quarterly bank holding company financial reports), less 1) the
explicitly guaranteed deposits of the banks and savings institutions
owned by these 19 firms, and 2) the FDIC-insured debt (insured under the
DGP) of each of these institutions. The estimated FDIC-insured deposits
and the guaranteed amount in noninterest-bearing transaction accounts
for each bank can be found on the FDIC's website in the
"Institution Directory" (www2.fdic.gov/idasp). The amount of
DGP debt of each firm can be found on the firms' 10Ks.
Banking and Savings Firms--Total Liabilities:
Total liabilities from the following sources: For large
(consolidated assets of over $500 million) bank holding companies,
Consolidated Financial Statements for Bank Holding Companies (FR Y9C);
for small (consolidated assets less than $500 million) bank holding
companies, Parent Company Only Financial Statements for Small Bank
Holding Companies (FR Y9SP)--from which consolidated total liabilities
can be derived; for banks not owned by a bank holding company,
Consolidated Reports of Condition and Income for a Bank (FFIEC 031 and
FFIEC 041); and for all thrift liabilities, Thrift Financial Reports.
Credit Unions--Explicitly Guaranteed Liabilities:
Total insured shares at the $250,000 limit (National Credit Union
Administration 2009).
Credit Unions--Total Liabilities:
Board of Governors (2010), Table L.115--Credit Unions, "Total
liabilities."
Government-Sponsored Enterprises:
Fannie Mae:
Total liabilities, plus Fannie Mae MBS held by third parties, plus
other guarantees found in the Fannie Mae 10K, "Item 6. Selected
Financial Data" (p. 70).
Freddie Mac:
10K report of Freddie Mac, "Total liabilities"
("Consolidated Balance Sheets," p. 209), plus "Total PCs
and Structured Securities issued" ("Item 6. Selected Financial
Data," p. 57), less "Total Freddie Mac PCs and Structured
Securities held" in Freddie Mac portfolio (Table 28, p. 104).
Farm Credit System:
Farm Credit System (2010), "Total liabilities"
("Combined Statement of Condition Data," p. 3), plus
"Farmer Mac guarantees" (p. 12).
Federal Home Loan Banks:
Federal Home Loan Banks (2010), "Total liabilities"
("Combined Statement of Condition," p. 194).
Private Employer Pension Funds--Explicitly Guaranteed Liabilities:
Liabilities of all pension funds insured by the PBGC (which insures
only defined benefit plans) were $2,559 billion in 2007, the latest date
for which data are reported (Pension Benefit Guarantee Corporation 2010,
pp. 83, 105). This figure is inflated by twice (because 2007-2009
involves two years of growth) the average annual growth rate of
PBGC-insured pension liabilities from 1997-2007 to obtain our estimate
of all liabilities in pension funds insured by the PBGC as of December
31, 2009 ($2,946 billion). Since PBGC covers pensions only up to a
specified maximum payment per year, a portion of beneficiaries'
pensions in guaranteed plans--those with pensions paying above this
maximum--are not insured. According to the PBGC, this portion is
estimated to be 4-5 percent (Pension Benefit Guarantee Corporation 2007,
p. 24; Pension Benefit Guarantee Corporation 1997, footnote to Table
B-5). To arrive at the guaranteed portion of PBGC guaranteed pension
fund liabilities, we multiplied total 2009 fund liabilities ($2,946
billion) by 0.95 to yield $2,799 billion.
Private Employer Pension Funds--Total Liabilities:
There appears to be no data on the total liabilities of all private
employer-defined benefit pension funds. Therefore, we estimate our total
liability figure based on PBGC data. To derive our figure, we begin with
our previously determined estimate of all private pension fund
liabilities that are included in PBGC ($2,946) and then divide it by 0.9
to arrive at our total liability figure of $3,273 billion. The PBGC
insures only about two-thirds of private sector single-employer-defined
benefit plans, but almost all multi-employer plans (Pension Benefit
Guarantee Corporation 2009, p. 5). Among the types of defined benefit
plans PBGC does not insure are small (fewer than 25 employees) plans
maintained by small professional service employers like doctors,
lawyers, and accountants. Since the PBGC excludes only the smaller
single-employer plans, and includes most multi-employer plans, we assume
that it covers well more than 66 percent (i.e., two-thirds) of all
liabilities, setting our estimate at 90 percent.
Other Financial Firms--Implicitly Guaranteed Liabilities:
"Total liabilities of AIG" found in its 10K report, less
"estimated insured deposits" of AIG Federal Savings Bank found
on the FDIC's website in the "Institution Directory"
(http://www2.fdic.gov/idasp).
Other Financial Firms--Total Liabilities:
Board of Governors (2010), Tables L.116--Property-Casualty
Insurance Companies; L.117--Life Insurance Companies; L.126--Issuers of
Asset-Backed Securities; L. 127--Finance Companies; L.128--Real Estate
Investment Trusts; L.129--Security Brokers and Dealers; L.131--Funding
Corporations, less taxes payable whenever a figure for taxes was
reported on these tables.
REFERENCES
Board of Governors of the Federal Reserve System. 2010. Level
Tables in Federal Reserve statistical release Z. 1, "Flow of Funds
Accounts of the United States."
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(1) In addition to estimating the proportion of financial firm
liabilities backed by the federal government, Walter and Weinberg also
estimated the proportion of nonfinancial firm and household liabilities
with such backing.
(2) An explanation of the factors underlying the large increase is
provided below.
(3) See H.R. 4173 as of December 2, 2009. p. 370, available at:
http://www.house.gov/apps/list/press/financialsvcs_dem/pressefpa_121109.shtml.
(4) Since April 2006, deposits in certain retirement accounts at
banks and thrifts have been protected by the FDIC up to $250,000
(Federal Deposit Insurance Corporation 2006). Deposits in such accounts,
up to the $250,000 ceiling, are included in the "Explicitly
Guaranteed Liabilities" column of our tables.
(5) The Dodd-Frank Wall Street Reform and Consumer Protection Act
extended coverage for noninterest-bearing transaction accounts through
December 31, 2012 (Federal Deposit Insurance Corporation 2010c).
(6) Beyond Passmore, the Congressional Budget Office (2001) also
developed estimates of the GSRs' guarantee on mortgage interest
rates.
(7) We treat Fannie Mae and Freddie Mac as private entities and
therefore include their liabilities in our table, consistent with the
way Waiter and Weinberg treated these entities, even though the status
of Fannie Mae and Freddie Mac as privately owned firms is more ambiguous
now than in 1999.
(8) The insured deposit liabilities of AIG's savings bank are
not included in the "Other Financial Firms" row since these
liabilities were included in the "Banking and Savings Firms"
row. While AIG owns a savings bank, it is not classified as a bank
holding company (and does not file a bank holding company report [Y9C]
with federal regulators), so we do not include it in the Banking and
Savings Firms row.
(9) The Orderly Liquidation Authority section of the Dodd-Frank
Wall Street Reform and Consumer Protection Act of 2010 contains
provisions that allow funds gathered from assessments on the largest
financial firms to be used to protect liabilityholders.
(10) Money market mutual funds are loath to pay back less than full
principal ("break the buck" in mutual fund parlance), and few
have done so over time. Instead, the money market mutual fund's
parent typically injects funds to allow the fund to pay back full
principal. This behavior by mutual fund parent companies indicates that
parent companies and investors may well view money market mutual fund
investments more as liabilities than equity, regardless of the fact that
money market mutual funds can break the buck without defaulting.
(11) See Section 4 for a description of the differences between
Table 1 and Table 2 estimates.
The authors would like to thank Jason Annis, Marc Chumney, Tim
Pudner, and Deanna West for providing data and valuable advice, as well
as Huberto Ennis, Robert Hetzel, Sabrina Pellerin, and John Weinberg for
their insightful comments on an earlier draft. The views expressed in
this article are those of the authors and do not necessarily reflect
those of the Federal Reserve Bank of Richmond or the Federal Reserve
System. E-mail:
[email protected].
