The consolidation of the U.S. banking industry has greatly increased the importance of large multi-market banking organizations relative to smaller, single-market banks. An issue that has not received much attention is how multi-market banking has affected the response of local bank lending to local economic shocks. When an area is hit particularly hard by a recession, is bank lending now more likely to decline in the area, exacerbating the downturn? Or is bank lending now more likely to remain unchanged, moderating the downturn? The answer is important to local communities because it affects the volatility of their output and employment. But it is also important to the national economy, because the distribution of credit across markets can affect overall productivity and growth.

Keeton uses new data to examine the impact on local lending of the slowdowns in some local economies during the 2001 recession and recovery. The basic approach is to see whether these slowdowns had a different effect on lending by single-market banks than on lending by multi-market banks. He finds substantial support for the view that the shift to multi-market banking has reduced the overall sensitivity of bank lending to local economic shocks. He also finds some evidence that this effect may be due to a lesser ability of multi-market banks to identify and respond to changes in local economic conditions.

Do U.S. Consumers Really Benefit from Payment Card Rewards? (PDF 526K)

By Fumiko Hayashi

Payment card rewards programs have become increasingly popular in the United States. But do consumers really benefit from rewards? In the United States, rewards are paid for primarily by the fees charged to merchants, and merchants may pass on the fees to consumers as higher retail prices. Further, some regulators and analysts claim that rewards may send consumers distorted price signals, which in turn may lead consumers to choose payment methods that are less efficient to society.

Card networks and merchants have taken opposing sides in the rewards debate. Card networks claim their fee structures, including rewards, are crucial to achieving the right balance between merchant acceptance and consumer usage of their cards. Rewards can also reduce the total costs to society by inducing more consumers to switch from costly payment methods, such as checks, to less costly payment cards. Merchants benefit as well, they claim, because rewards card users make higher-value transactions than other consumers. Finally, more generous rewards are even more beneficial to consumers because they receive more as they make more card transactions.

Merchants, on the other hand, claim they pay for the rewards through their fees to card issuers. They argue that competitive pressures and customer expectations prevent them from rejecting cards even though the fees outweigh their benefits. They reject the idea that accepting rewards cards is profitable despite the higher fees. Instead, they argue that customers with rewards cards spend more than those without rewards cards simply because their incomes are higher?not because they receive more rewards. Finally, they argue that more generous rewards actually harm consumers, because higher fees to merchants lead to higher prices for goods and services.

Hayashi seeks to provide insight into these issues by considering whether current rewards programs benefit consumers and society. While definitive answers await further data, the analysis in this article suggests that the currently provided payment card rewards programs, especially credit card rewards programs, are not likely to be efficient. Further, rewards may potentially be too generous, lowering overall consumer welfare.

Recession Catches Rural America (PDF 623K)

By Jason Henderson and Maria Akers

As the recession intensified in 2008, rural economies held firm. Through the first half of the year, strong commodity prices supported robust farm incomes and contributed to relatively stronger gains on Main Street. Moreover, the housing correction was less intense than in urban areas, and the financial crisis was less severe than on Wall Street.

While these factors shielded the rural economy from the worst of the recession, rural America was not immune. The foundations of rural economic strength in 2008--high commodity prices, robust export activity, and rising ethanol demand--were crumbling. Consequently, the booming farm economy began to slow, and, following national trends, the nonfarm economy continued to falter.

Henderson and Akers review the state of the rural economy and explore how the recession could affect the rural economy in 2009. They suggest that a rural rebound will rest on whether the fiscal and monetary stimulus packages spark demand for rural goods and services.

Developing a Liquid Market for Inflation-Indexed Government Securities: Lessons from Earlier Experiences (PDF 352K)

By Pu Shen

After a slow start in the 1980s, inflation-indexed government securities have gradually become more common in developed countries. A number of potential benefits arise with a government conducting part of its borrowing through inflation-indexed securities. Chief among them are better risk sharing for the economy, reduced government borrowing costs, less incentive for a deeply indebted government to inflate away its debt, and a new source of information about investors? inflation expectations. Many developed countries in coming decades will face the need to borrow more to finance the retirement of baby boomers. In the near future, a useful tool for these governments may be inflation-indexed securities.

The experience of the countries that have already experimented with inflation-indexed government securities suggests that, to achieve the full benefits of these securities, liquid markets are essential. But, for inflation-indexed securities, liquid markets do not come easily.

Shen reviews the experiences of a few countries that have issued inflation-indexed securities and draws some common lessons about promoting market liquidity. She explains why market liquidity is essential and explores some lessons from a number of countries about developing market liquidity.