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Bank Franchise as a Stabilizing Force

Author

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  • Simon H. Kwan
  • Zinnia Martinez

Abstract

The banking shock of 2023 stemmed from banks’ exposure to interest rate risk by gathering short-term funds to invest in long-term assets. When interest rates rose rapidly during the monetary tightening cycle, banks incurred significant capital losses on their long-term assets, some of which were unrealized on their financial statements. However, bank franchise value—the present value of all future excess profits—which is also unrecognized, could hedge against the losses and provide some stability. Moreover, the potential loss of franchise value could discourage risk-taking, further stabilizing the banking system.

Suggested Citation

  • Simon H. Kwan & Zinnia Martinez, 2024. "Bank Franchise as a Stabilizing Force," FRBSF Economic Letter, Federal Reserve Bank of San Francisco, vol. 2024(20), pages 1-6, August.
    • Handle: RePEc:fip:fedfel:98628
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    References listed on IDEAS

    as
    1. Itamar Drechsler & Alexi Savov & Philipp Schnabl, 2021. "Banking on Deposits: Maturity Transformation without Interest Rate Risk," Journal of Finance, American Finance Association, vol. 76(3), pages 1091-1143, June.
    2. Rebecca Demsetz & Marc R. Saidenberg & Philip E. Strahan, 1996. "Banks with something to lose: the disciplinary role of franchise value," Economic Policy Review, Federal Reserve Bank of New York, vol. 2(Oct), pages 1-14.
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