Date: April 5, 2019
From: Bill Nelson
Subject: New BPI research on Banking Deserts and on LIBOR
I normally stick to monetary policy with this group, but BPI has recently published a couple of research notes – on banking deserts and on LIBOR – I thought you would find interesting. Free disposal.
Francisco Covas, Head of Research, just published a research note “Some Facts about Bank Branches and LMI Customers,” which can be found here. By combining the Summary of Deposits dataset from the FDIC with Census data, Francisco’s analyzed the level and trends of “banking deserts” as well as the availability of banking services to LMI and minority communities.
The results challenge many of the current views on these issues. In particular analysis of the data shows:
- The share of the U.S. population living in a banking desert – defined as a census tract without access to a branch– is quite low and has been about unchanged in the post-crisis period.
- LMI consumers are particularly well served by branches, with 99 percent of residents living in low-income areas and 96 percent of residents living in LMI areas covered by a branch. – In fact, residents living in LMI geographic areas are more likely to be served by a branch than residents living in middle- or high-income areas.
- Large banks serve considerably more low-income consumers than small banks. Large banks (those with total assets over $50 billion) serve 96 percent of the population living in low-income areas and 89 percent of the residents living in LMI areas. Indeed, the four largest U.S. banks serve 87 percent of low-income consumers, the same percentage as those served by all small banks combined. – Moreover, large banks grew their deposits in low-income, LMI and minority communities two times faster than small banks in the post-crisis period.
- More generally, the rate of “unbanked” households is currently at an all-time low, and the reduction in the number of branches has had very little impact on the access of the LMI population to banking services.
A few days ago, I published a note, “Why is LIBOR Being Replaced Rather Than Reformed?,” that can be found here. LIBOR was created in the 1960s to be a reference rate for bank loan rates that would be sensitive to bank funding costs. In the wake of the LIBOR manipulation scandals that broke in 2012, reform efforts concluded that there should be multiple reference rates, including rates that are sensitive to bank credit risk premiums so that banks can hedge their funding costs, and that ideally LIBOR should be reformed rather than replaced because of the much easier transition. Currently, however, we are on a path to replace LIBOR with SOFR, a benchmark based on repo rates that is not sensitive to bank credit risk premiums.
The note discusses the history of how we got from a plan to reform LIBOR to a plan with no bank-credit-sensitive benchmark. In a nutshell, the paucity of term unsecured bank borrowings make it hard to develop a transactions-based LIBOR, and the prospect of more banks dropping out of the panel has focused efforts on ensuring that there is at least one replacement available and plans in place for an orderly transition.
There remains significant demand, however, for a reformed LIBOR or similar benchmark for bank loan rates that would enable banks to charge interest rates that provide a natural hedge to their funding costs, allowing the banks to lend at lower rates. The note concludes with a discussion of some potential alternatives.
Disclaimer: The views expressed in this post are those of the author(s) and do not necessarily reflect the position of the Bank Policy Institute or its membership, and are not intended to be, and should not be construed as, legal advice of any kind.