From the Federal Reserve Bank of New York's Liberty Street Economics blog:
First in a two-part series
Banks play a crucial role in the economy by channeling funds from savers to borrowers. The ability of banks to accomplish this intermediation has become an important element in understanding the causes and consequences of business cycles. In a recent staff report, I investigate how a positive deposit windfall translates into investments by banks. This post, the first of two, shows how the development of new energy resources has led to deposit inflows to banks and how that can be used to estimate banks’ investment decisions over the recent business cycle. The second post will look at factors that might explain the business cycle patterns observed below.
“Fracking” Money
Over the last decade, the use of unconventional methods like horizontal drilling and hydraulic fracturing (“fracking”) have dramatically increased recoverable domestic oil and gas resources. The dollar value of potential production is significant. In 2011, the Energy Information Administration estimated that major shale formations contained $3.5 trillion dollars of gas at prevailing prices. Similarly, the U.S. Geological Survey has estimated that the Bakken shale alone contains over $250 billion dollars of oil. However, in order to extract these resources drillers must first lease mineral rights from local landowners. Typically, these leases pay landowners 10 to 25 percent of the production from the well, so the lease payments from these formations could exceed $750 billion.
But what does this have to do with banks?
As these resources are developed, a portion of these payments wind up in local bank branches as landowners need to store their newfound wealth. These deposit inflows provide us with a “natural experiment,” as funds find their way into banks that are not otherwise seeking additional financing. I can then observe how banks adjust their balance sheets in response to these incremental funds.
As a first step, I use drilling and production data from ten states to estimate the royalties paid to landowners. Based on these royalty payments, I identify 126 counties that are exposed to significant unconventional energy development. The darker gradations below highlight those counties with the highest potential royalty payments. Details of this procedure can be found in an associated data primer.
In order to understand the relative importance of these payments, I compare them with the deposits held in the county. The payments made in these counties are quite significant relative to the deposit base, with estimated payments averaging 40 percent of the deposits held in the county. Even if a small fraction of these payments end up in banks, they can have a meaningful impact on deposits....MORE
