The Federal Reserve Bank of New York works to promote sound and well-functioning financial systems and markets through its provision of industry and payment services, advancement of infrastructure reform in key markets and training and educational support to international institutions.
The New York Fed engages with individuals, households and businesses in the Second District and maintains an active dialogue in the region. The Bank gathers and shares regional economic intelligence to inform our community and policy makers, and promotes sound financial and economic decisions through community development and education programs.
Better understanding of financial intermediation is critical to the efforts of the New York Fed to promote financial stability and economic growth. In pursuit of this mission, the New York Fed recently hosted the thirteenth annual Federal Reserve Bank of New York–New York University Stern School of Business Conference on Financial Intermediation. At this conference, a range of authors were invited to discuss their research in this area. In this post, we present some of the discussion and findings from the conference.
Several academic papers have documented investors’ willingness to pay a premium to hold money-like assets and focused on its implications for financial stability. In a New York Fed staff report, we estimate such premium using a quasi-natural experiment, the recent reform of the money market fund (MMF) industry by the Securities and Exchange Commission (SEC).
Andreas Fuster, Matthew Plosser, and James Vickery
The adoption of new technologies is transforming the mortgage industry. For instance, borrowers can now obtain a mortgage entirely online, and lenders use increasingly sophisticated methods to verify borrower income and assets. In a recent staff report, we present evidence suggesting that technology is reducing frictions in mortgage lending, such as reducing the time it takes to originate a mortgage, and increasing the elasticity of mortgage supply. These benefits do not seem to come at the cost of less careful screening of borrowers.
The global financial crisis, and the ensuing Dodd-Frank Act, identified size and complexity as determinants of banks’ systemic importance, increasing the potential risks to financial stability. While it’s known that big banks haven’t shrunk, the question that remains is: have they simplified? In this post, we show that while the largest U.S. bank holding companies (BHCs) have somewhat simplified their organizational structures, they remain very complex. The industries spanned by entities within the BHCs have shifted more than they have declined, and the countries in which some large BHCs have entities still include numerous “secrecy” or tax-haven locations.
Nicola Cetorelli, Gerard Dages, Paul Licari, and Afshin Taber
The Committee on the Global Financial System, made up of senior officials from central banks around the world and chaired by New York Fed President William Dudley, recently released a report on “Structural Changes in Banking after the Crisis.” The report includes findings from a wide-ranging study documenting the significant structural adjustments in banking systems around the world in response to regulatory, technological, and market changes after the crisis, while also assessing their implications for financial stability, credit provision, and capital markets activity. It includes a new banking database spanning over twenty-one countries from 2000 to 2016 that could serve as a valuable reference for further analysis. Overall, the study concludes that the changed regulatory and market environment since the crisis has led banks to alter their business models and balance sheets in ways that make them more resilient but also less profitable, while continuing their role as intermediaries providing financial services to the real economy.
Donald P. Morgan, Maxim Pinkovskiy, and Davy Perlman
Editor's note: The original version of this post misstated the share of the population that is unbanked for several states. The table, interactive chart, and related text have been corrected. These changes did not alter our conclusion that across states, the share of the population that is unbanked is not positively correlated with the share living in banking deserts.
Unbanked households are often imagined to live in urban neighborhoods devoid of banks, but is that really the case? Our map of U.S. banking deserts reveals that most are not in urban areas, where financial exclusion may be endemic, but in actual deserts—largely in the sparsely populated, rural West. Across states, we find that the share of the population in a banking desert is unrelated to the share that is unbanked. If distance from a bank is not what causes financial exclusion, then motivating banks to locate closer to the unbanked may not promote financial inclusion.
Editor's note: In the original version of this blog post, a computational error was reflected in the chart “Distribution of Premiums Paid on ‘Excess Capacity’ Repos” and related text. Both have been corrected. (October 23, 2017, 12:37 p.m.)
In a previous post, we showed that dealers sometimes enter into tri-party repo contracts to acquire excess funding capacity, and that this strategy is most prevalent for the agency mortgage-backed securities (MBS) and equity asset classes. In this post, we examine the maturity of the repos used to pursue this strategy and estimate the associated costs. We find that repos that generate excess funding capacity for equities and corporate debt have longer maturities than the average repo involving either of these asset classes. Furthermore, the premiums dealers pay to maintain excess funding capacity can be substantial, particularly for equities.
Security dealers sometimes enter into tri-party repo contracts to fund one class of securities with the expectation they will wind up settling the contract with higher quality securities. This strategy is costly to dealers because they could have borrowed funds at lower rates had they agreed to use the higher-quality securities at the outset. So why do dealers do this? Why obtain or arrange excess funding for the initial asset class? In this post, we discuss possible rationales for an excess funding strategy and measure the extent of excess funding capacity in the tri-party repo market. In a second post, we examine the maturities of repos used to generate excess funding capacity and estimate the costs of this strategy.
Anyone who has a savings account, has taken out a mortgage, or has been part of a business seeking new capital has relied on the smooth functioning of the institutions and markets that collectively perform financial intermediation. Because financial intermediation is so critical to the functioning of a modern economy, it is important to understand its inner workings—its fundamental features, recent innovations, lines of transmission to real economic activity, its imperfections, and its interactions with regulatory policies. As part of an ongoing effort to foster such an understanding, the New York Fed recently hosted the twelfth annual Federal Reserve Bank of New York–New York University Stern School of Business Conference on Financial Intermediation. In this post, we explore some of the discussions and findings from the May 5 conference, which focused on recent advances in the study of financial intermediation.
The global financial crisis has put financial stability risks—and the potential role of macroprudential policies in addressing them—at the forefront of policy debates. The challenge for macroeconomists is to develop new models that are consistent with the data while being able to capture the highly nonlinear nature of crisis episodes. In this post, we evaluate the impact of a macroprudential policy that has the government tilt incentives for banks to encourage them to build up their equity positions. The government has a role since individual banks do not internalize the systemic benefit of having more bank equity. Our model allows for an evaluation of the tradeoff between the size of such incentives and the probability of a future financial crisis.
Liberty Street Economics features insight and analysis from New York Fed economists working at the intersection of research and policy. Launched in 2011, the blog takes its name from the Bank’s headquarters at 33 Liberty Street in Manhattan’s Financial District.
The editors are Michael Fleming, Andrew Haughwout, Thomas Klitgaard, and Asani Sarkar, all economists in the Bank’s Research Group.
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.
Economic Research Tracker
Liberty Street Economics is now available on the iPhone® and iPad® and can be customized by economic research topic or economist.
We encourage your comments and queries on our posts and will publish them (below the post) subject to the following guidelines:
Please be brief: Comments are limited to 1500 characters.
Please be quick: Comments submitted after COB on Friday will not be published until Monday morning.
Please be aware: Comments submitted shortly before or during the FOMC blackout may not be published until after the blackout.
Please be on-topic and patient: Comments are moderated and will not appear until they have been reviewed to ensure that they are substantive and clearly related to the topic of the post. We reserve the right not to post any comment, and will not post comments that are abusive, harassing, obscene, or commercial in nature. No notice will be given regarding whether a submission will or will not be posted.
The LSE editors ask authors submitting a post to the blog to confirm that they have no conflicts of interest as defined by the American Economic Association in its Disclosure Policy. If an author has sources of financial support or other interests that could be perceived as influencing the research presented in the post, we disclose that fact in a statement prepared by the author and appended to the author information at the end of the post. If the author has no such interests to disclose, no statement is provided. Note, however, that we do indicate in all cases if a data vendor or other party has a right to review a post.