Liberty Street Economics
July 01, 2015

What Do Bond Markets Think about “Too-Big-to-Fail” Since Dodd-Frank?



Too-Big-to-Fail Since Dodd-Frank

Second in a two-part series
In our previous post, we concluded that, in rating agencies’ views, there is no clear consensus on whether the Dodd-Frank Act has eliminated “too-big-to-fail” in the United States. Today, we discuss whether bond market participants share these views.

As we discussed in our post on Monday, the Dodd-Frank Act includes provisions to address whether banks remain “too big to fail.” Title II of the Act creates an orderly liquidation mechanism for the Federal Deposit Insurance Corporation (FDIC) to resolve failed systemically important financial institutions (SIFIs). In December 2013, the FDIC outlined a “single point of entry” (SPOE) strategy for resolving failing SIFIs that, in principle, should obviate bailouts. Under the SPOE, the FDIC will be appointed receiver of the top-tier parent holding company, and losses of a subsidiary bank will be assigned to shareholders and unsecured creditors of the holding company (in a “bail-in” arrangement). The company may be restructured by shrinking businesses, breaking it into smaller entities, liquidating assets, or closing operations to ensure that the resulting entities can be resolved in bankruptcy. Crucially, during this process, the healthy subsidiaries of the company, including any banks, will maintain normal operation, thus avoiding the need for bailouts to prevent systemic instability.

June 29, 2015

What Do Rating Agencies Think about “Too-Big-to-Fail” Since Dodd-Frank?



Too-Big-to-Fail Since Dodd-Frank

First in a two-part series

Did the Dodd-Frank Act end ‘‘too-big-to-fail’’ (TBTF)? In this series of two posts, we look at this question through the lens of rating agencies and financial markets. Today we begin by discussing rating agencies’ views on this topic.

Posted by Blog Author at 7:00 AM in Financial Institutions | Permalink | Comments ( 0 )

June 26, 2015

From the Vault: Gauging Treasury Market Liquidity



Recent news and market analysis has featured a spate of warnings about diminished liquidity in the U.S. Treasury market and reminders of how quickly markets can seize. It’s a topic we’ve addressed on our blog with an investigation of the bond market sell-off of 2013.

Posted by Blog Author at 7:00 AM in Financial Markets | Permalink | Comments ( 1 )

June 24, 2015

Falling Oil Prices and Global Saving



oil_rig_at-night

The rise in oil prices from near $30 per barrel in 2000 to around $110 per barrel in mid-2014 was a dramatic reallocation of global income to oil producers. So what did oil producers do with this bounty? Trade data show that they spent about half of the increase in total export revenues on imports and the other half to buy foreign assets. The drop in oil prices will unwind this process. Oil-importing countries will gain from lower oil bills, but they will also see a decline in their exports to oil-producing countries and in purchases of their assets by investors in these countries. Indeed, one can make the case that the drop in oil prices, by itself, is putting upward pressure on interest rates as income shifts away from countries that have had a relatively high propensity to save.

June 22, 2015

Just Released: U.S. Economy in a Snapshot



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The Research Function at the New York Fed would like to announce the publication of U.S. Economy in a Snapshot. This new monthly packet combines charts and summary points and is fashioned to be a tight, yet comprehensive, overview of current economic and financial developments. The packet features section headers that present discussions on a broad range of topics, including labor and financial markets, the behavior of consumers and firms, as well as survey responses and the global economy.

Posted by Blog Author at 10:00 AM in Macroecon | Permalink | Comments ( 0 )

Becoming a Large Bank? It’s Not Easy



LSE_2015_becoming-large-bank_de_450_art

Size is usually seen as the leading indication of the costs that a bank failure would impose on society. As a result, the Dodd-Frank Act of 2010 requires banks to have adequate capital and liquidity to mitigate default risk and imposes additional requirements on larger banks to enhance their safety. In this post, we show that it is highly uncommon for banks to reach sizes at which they are considered systemically important.

June 08, 2015

The Myth of First-Quarter Residual Seasonality



Residual Seasonality

The current policy debate is influenced by the possibility that the first-quarter GDP data were affected by “residual seasonality.” That is, the statistical procedures used by the Bureau of Economic Analysis (BEA) did not fully smooth out seasonal variation in economic activity. If this is indeed the case, then the weak readings of the economy in the first quarter give an inaccurate picture of the state of the economy. In this post, we argue that unusually adverse winter weather, rather than imperfect seasonal adjustment by the BEA, was an important factor behind the weak first-quarter GDP data.

Posted by Blog Author at 7:02 AM in Macroecon , Monetary Policy | Permalink | Comments ( 2 )

Is Cheaper Oil Good News or Bad News for U.S. Economy?



LSE_2015_oil-supply-shocks_groen_450_art

Oil prices have declined substantially since the summer of 2014. If these price declines reflect demand shocks, then this would suggest a slowdown in global economic activity. Alternatively, if the declines are driven by supply shocks, then the drop in prices might indicate a forthcoming boost in spending as firms and households benefit from lower energy costs. In this post, we use correlations of oil price changes with a broad array of financial variables to confirm that this recent fall in oil prices has been mostly the result of increased global oil supply. We then use a model to assess how this supply shock will affect U.S. economic conditions in 2015.

June 05, 2015

Crisis Chronicles: Railway Mania, the Hungry Forties, and the Commercial Crisis of 1847



Editor’s note: This post was updated on June 15 to clarify details regarding suspension of the Bank Act.

LSE_2015_crisis-railroad_morgan_450_art

Money was plentiful in the United Kingdom in 1842, and with low yields on government bonds and railway shares paying handsome dividends, the desire to speculate spread—as one observer put it, “the contagion passed to all, and from the clerk to the capitalist the fever reigned uncontrollable and uncontrolled” (Francis’s History of the Bank of England). And so began railway mania. Just as that bubble began to burst, a massive harvest failure in England and Ireland led to surging food imports, which drained gold reserves from the Bank of England. Constrained by the Bank Charter Act, the Bank responded by tightening policy. When food prices fell in the spring of 1847 on the prospects for a successful harvest, commodity speculators were caught short and a crisis, one of the worst in British history (Bordo), ensued. In this edition of Crisis Chronicles, we cover the Commercial Crisis of 1847.

Posted by Blog Author at 7:00 AM in Crisis Chronicles | Permalink | Comments ( 5 )

June 03, 2015

Does Business Training Work?



LSE_2015_business-training_450_art

Leaders of both developing and advanced economies believe that encouraging the development of small businesses will lead to job creation and economic growth. As such, many governments and nongovernmental organizations (NGO) promote the use of business training programs to help grow small businesses. For example, an  international business literacy program called Start and Improve Your Business has been introduced in more than one hundred countries and reached more than 4.5 million potential and existing entrepreneurs between 2003 and 2010 according to the International Labour Organization. Similar programs have been undertaken also in the United States. The Small Business Administration, among many other programs, supports a network of Small Business Development Centers that provide free and low-cost business consulting and training. In this post, we show that the expected benefits of these interventions may vary widely between developed and developing economies.

Posted by Blog Author at 7:00 AM in Labor Economics | Permalink | Comments ( 0 )

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Liberty Street Economics features insight and analysis from economists working at the intersection of research and policy.

The views expressed are those of the authors, and do not necessarily reflect the position of the New York Fed or the Federal Reserve System.

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