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127 posts on "Financial Institutions"

February 05, 2016

Crisis Chronicles: The Long Depression and the Panic of 1873



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It always seemed to come down to railroads in the 1800s. Railroads fueled much of the economic growth in the United States at that time, but they required that a great deal of upfront capital be devoted to risky projects. The panics of 1837 and 1857 can both be pinned on railroad investments that went awry, creating enough doubt about the banking system to cause pervasive bank runs. The fatal spark for the Panic of 1873 was also tied to railroad investments—a major bank financing a railroad venture announced that it would suspend withdrawals. As other banks started failing, consumers and businesses pulled back and America entered what is recorded as the country’s longest depression.

Continue reading "Crisis Chronicles: The Long Depression and the Panic of 1873" »

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

December 07, 2015

Dealer Positioning and Expected Returns



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Securities broker-dealers (dealers) trade securities on behalf of their customers and themselves. Recently, analysts have pointed to the decline in U.S. dealers’ corporate bond inventories as evidence that dealers’ market making capacity is impaired. However, historically such inventories also reflect dealers’ risk management and proprietary trading activities. In this post, we take a long-term perspective on the evolution of dealers’ inventories of corporate bonds, Treasuries, and other debt securities and relate those inventories to expected returns in fixed-income markets in an effort to better understand the drivers of dealer positioning.


Continue reading "Dealer Positioning and Expected Returns" »

Posted by Blog Author at 7:00 AM in Financial Institutions, Financial Markets | Permalink | Comments (2)

November 30, 2015

U.S. Banks’ Changing Footprint at Home and Abroad



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Some banks are quite simple, while others are part of complex multi-layered organizations with affiliates in many industries scattered all around the world. The latter organizations are formally called bank holding companies (BHCs). In this post, we investigate changes in BHC geography, especially the rising share of BHC affiliates in tax havens and financial secrecy jurisdictions. We examine what has happened since 2000, including the period after the 2010 Dodd-Frank Act, which focused attention on the size and complexity of large BHCs. Our analysis complements a growing body of work on large and complex BHCs and their global affiliates, including this blog series based on papers from the Economic Policy Review.


Continue reading "U.S. Banks’ Changing Footprint at Home and Abroad" »

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

October 15, 2015

Evaluating the Rescue of Fannie Mae and Freddie Mac



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In September 2008, the U.S. government engineered a dramatic rescue of Fannie Mae and Freddie Mac, placing the two firms into conservatorship and committing billions of taxpayer dollars to stabilize their financial position. While these actions were characterized at the time as a temporary “time out,” seven years later the firms remain in conservatorship and their ultimate fate is uncertain. In this post, we evaluate the success of the 2008 rescue on several key dimensions, drawing from our recent research article in the Journal of Economic Perspectives.

Continue reading "Evaluating the Rescue of Fannie Mae and Freddie Mac" »

Posted by Blog Author at 7:00 AM in Financial Institutions, Housing | Permalink | Comments (5)

October 14, 2015

Dealers’ Positions and the Auction Cycle



The aftermath of the financial crisis and changes in technology and regulation have spurred a spirited discussion of dealers’ evolving role in financial markets. One such role is to buy securities at auction and sell them off to investors over time. We assess this function using data on primary dealers’ positions in benchmark Treasury securities, released by the New York Fed since April 2013 and described in this earlier Liberty Street Economics post.

Continue reading "Dealers’ Positions and the Auction Cycle" »

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

October 08, 2015

Redemption Risk of Bond Mutual Funds and Dealer Positioning



Fifth in a six-part series
Market participants have recently voiced concerns that bond markets seem to become illiquid precisely when they want to sell bonds. Some possible reasons for a decline in corporate bond market liquidity in times of stress include the increasing share of corporate bond ownership by mutual funds and the reduced share of corporate bond ownership by dealers. In this post, we examine the potential effects of outflows from bond mutual funds and the role of dealers’ positioning in corporate bonds.

Continue reading "Redemption Risk of Bond Mutual Funds and Dealer Positioning" »

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

October 07, 2015

Changes in the Returns to Market Making



Fourth in a six-part series

Since the financial crisis, major U.S. banking institutions have increased their capital ratios in response to tighter capital requirements. Some market analysts have asserted that the higher capital and liquidity requirements are driving up the costs of market making and reducing market liquidity. If regulations were, in fact, increasing the cost of market making, one would expect to see a rise in the expected returns to that activity. In this post, we estimate market-making returns in equity and corporate bond markets to assess the impact of regulations.


Continue reading "Changes in the Returns to Market Making" »

Posted by Blog Author at 7:00 AM in Financial Institutions, Financial Markets | Permalink | Comments (4)

October 05, 2015

Has U.S. Corporate Bond Market Liquidity Deteriorated?



First in a six-part series
Commentators have argued that market liquidity has deteriorated in recent years as regulatory changes have reduced banks’ ability and willingness to make markets. In the corporate debt market, dealer positions, which are considered essential to good liquidity, have indeed declined, even as issuance and outstanding debt have increased. But is there evidence of reduced market liquidity? In previous posts, we discussed these issues in the context of the U.S. Treasury securities market. In this post, we focus on the U.S. corporate bond market, reviewing both price- and quantity-based liquidity measures, including trading volume, trade size, bid-ask spreads, and price impact.

Continue reading "Has U.S. Corporate Bond Market Liquidity Deteriorated?" »

Posted by Blog Author at 11:02 AM in Financial Institutions, Financial Markets | Permalink | Comments (4)

September 30, 2015

Natural Experiment Sheds Light on the Market Effects of Herding



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Pension funds are expected to behave in a patient, countercyclical manner, making the most of low valuations over the business cycle to achieve high returns. Such behavior provides liquidity and stability to the financial system. However, this belief has come under question. A large theoretical literature has emerged which looks at how short-term considerations affecting these institutional investors might arise from relative performance concerns or from the influence of other incentives introduced by market and regulatory monitoring. Such considerations might incentivize fund managers to mimic others and herd toward common assets. Given the sizable wealth under management by these investors, such herding behavior can potentially have large effects on asset prices both in the short and long run.

Continue reading "Natural Experiment Sheds Light on the Market Effects of Herding" »

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

September 28, 2015

Same Name, New Businesses: Evolution in the Bank Holding Company



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When we think of banks, we typically have in mind our local bank branch that stores deposits and issues mortgages or business loans. Prima facie there is nothing wrong with this image. After all, there are still almost 6,000 unique commercial banks in the United States that specialize in deposit-taking and loan-making; when we include thrifts and credit unions, this number more than doubles. What we typically forget, however, is that most commercial banks are subsidiaries of larger bank holding companies (BHCs), and in fact nearly all commercial bank assets fall under such BHCs. This post presents a first in-depth analysis of the evolving organizational structure of U.S. bank holding companies over the last twenty-five years. We present a unique new database that details BHC structure at a level previously unavailable in any systematic way.

Continue reading "Same Name, New Businesses: Evolution in the Bank Holding Company" »

Posted by Blog Author at 7:00 AM in Financial Institutions | Permalink | Comments (3)
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