Uncertainty, Liquidity Hoarding, and Financial Crises

Tanju Yorulmazer

One of the most interesting phenomena marking the recent financial crisis was the disruptions in the interbank market, where banks borrow and lend reserves to each other. This post draws upon my paper with Douglas Gale, “Liquidity Hoarding,” to discuss this practice by banks during times of increased uncertainty about future liquidity needs and its consequences for the efficient transfer of liquidity in the interbank market.

I Want My Money Now: The Highs and Lows of Payments in Real Time

Parinitha Sastry and David Skeie

Peel back the layers of complex financial institutions and instruments, and you're left with individuals demanding to be paid, and to be paid quickly. Payments are the electricity that powers the entire financial system. The ability to securely send and receive timely payments is a prerequisite for commerce and the smooth functioning of financial markets. Despite the seemingly straightforward nature of the subject, a preliminary exploration of payments data offers insight into how institutions react to changing economic conditions. In this post, we aim to investigate recent volatility in the amount of payments, particularly during the recent financial crisis. We focus on estimating and extracting changing levels of payments required for interbank lending, which reflect banks’ varying needs for liquidity. We find that variables capturing macroeconomic conditions and financial market stress are additional large drivers of fluctuations in payments.

Historical Echoes: I’ll Take “Happy Birthday, Fed!” for $400, Alex

Amy Farber

The Federal Reserve System is getting ready to celebrate its 100^th birthday. The quiz show Jeopardy! recently paid tribute to this milestone by having as one of its “Teen Tournament Jeopardy!” categories “Happy 100th Birthday, Federal Reserve!” Barrett Block, a high-school senior, won the game. You can play the same game the teen contestants played (scroll down to the “Double Jeopardy!” round) on a fan-created site called J! Archive. On the site, which by the way isn’t affiliated with Jeopardy!, you can travel back through the past thirty years and test your knowledge on Jeopardy! questions on specific topics like finance, economics, money, and the Federal Reserve.

A New Approach for Identifying Demand and Supply Shocks in the Oil Market

Jan Groen, Kevin McNeil, and Menno Middeldorp

An oil-price spike is often used as the textbook example of a supply shock. However, rapidly rising oil prices can also reflect a demand shock. Recognizing the difference is important for central bankers. A supply-driven increase in the price of oil can result in higher unemployment and inflation, leaving central bankers with the difficult decision to loosen policy, tighten policy, or not respond at all. A demand-driven increase reflecting global growth may support the case for tighter policy. In this post, we describe an approach for decomposing oil price changes into supply and demand shocks using financial market data.

Pick Your Poison: How Money Market Funds Reacted to Financial Stress in 2011

Neel Krishnan, Antoine Martin, and Asani Sarkar

The summer of 2011 was an unsettling period for financial markets. In the United States, Congress was unable to agree to terms for raising the debt ceiling until August, creating considerable uncertainty over whether the government would be forced to default on its debt. In Europe, the borrowing costs of some peripheral countries increased dramatically, raising questions about the health of some of the largest banks. In this post, we analyze data recently made public by the Securities and Exchange Commission (SEC) to see how the U.S. money market mutual fund (MMF) industry reacted to these stresses. We conclude that MMFs appeared to be more concerned with the European debt crisis because they increased their holdings of U.S. Treasuries and other government securities while decreasing their holdings of financial securities issued by European banks over that period.

Did Securitization Lead to Riskier Corporate Lending?

João Santos

There’s ample evidence that securitization led mortgage lenders to take more risk, thereby contributing to a large increase in mortgage delinquencies during the financial crisis. In this post, I discuss evidence from a recent research study I undertook with Vitaly Bord suggesting that securitization also led to riskier corporate lending. We show that during the boom years of securitization, corporate loans that banks securitized at loan origination underperformed similar, unsecuritized loans originated by the same banks. Additionally, we report evidence suggesting that the performance gap reflects looser underwriting standards applied by banks to loans they securitize.

Ring-Fencing and "Financial Protectionism" in International Banking

Linda Goldberg and Arun Gupta

Some market watchers and academic researchers are concerned about a “Balkanization” of banking, owing to a sharp decline in cross-border international banking activity (see chart below), and an increased home bias of financial transactions. Meanwhile, policy and regulatory efforts are under consideration that may further induce banks to shift away from international activity, including ring-fencing of domestic banking operations, other forms of "financial protectionism," and enhanced oversight and prudential measures.

Why Isn’t the Thirty-Year Fixed-Rate Mortgage at 2.6 Percent?

Andreas Fuster and David Lucca

As of mid-December, the average thirty-year fixed-rate mortgage was near its historic low of about 3.3 percent, or half its level in August 2007 when financial turmoil began. However, yield declines in the mortgage-backed-securities (MBS) market, where bundles of mortgage loans are sold to investors, have been even more dramatic. In fact, all else equal, had these declines passed through to loan rates one-for-one, the average mortgage rate would now be around 2.6 percent. In this post, we summarize some of the findings from a workshop held at the New York Fed in early December aimed at better understanding the drivers behind the increased wedge between mortgage loan and MBS rates.

Why (or Why Not) Keep Paying Interest on Excess Reserves?

Gara Afonso

In the fall of 2008, the Fed added new policy tools to its portfolio of techniques for implementing monetary policy. In particular, since October 9, 2008, depository institutions in the United States have been paid interest on the balances they hold overnight at Federal Reserve Banks (see Federal Reserve Board announcement). Several other central banks, such as the European Central Bank (ECB) and the central banks of Canada, England, and Australia, have somewhat similar deposit facilities allowing banks to earn overnight rates on their balances. In this post, I discuss the benefits and costs of this new tool in an environment where excess reserves in the United States have now exceeded $1.4 trillion and account for close to 95 percent of all reserves.

Doing Well by Doing Good? Community Development Venture Capital

Anna Kovner

In a new working paper, Josh Lerner and I explore how the venture capital (VC) model can be harnessed to achieve socially targeted ends by examining the investment record of community development venture capital (CDVC) firms. Our results are mixed. Investments made by CDVC firms are less likely to succeed than are investments made by traditional VC firms. This lower probability of success persists even after controlling for the fact that CDVC firms invest in industries and geographies that have, on average, lower success rates. However, we do find that CDVC firms have the benefit of bringing traditional VC firms to underserved regions; controlling for the presence of traditional VC investments, we find that each additional CDVC investment draws an additional 0.06 new traditional VC firms to a region.