Liberty Street Economics
Return to Liberty Street Economics Home Page

93 posts on "Financial Markets"

October 20, 2014

Don’t Be Late! The Importance of Timely Settlement of Tri-Party Repo Contracts



Tri-party repo is popular among securities dealers as a way to raise short-term funding. The tri-party repo settlement process has been improved, and continues to be improved, with the implementation of a set of recent reforms. Two main goals of these reforms are to sharply reduce the amount of liquidity needed to facilitate the settlement of tri-party repo contracts, and to increase the use of more resilient sources of liquidity (for example, term financing and committed credit) to ensure that settlement can occur in good and bad times. In this post, we detail how the reforms have affected the sources of liquidity that dealers can use to facilitate settlement of tri-party repo contracts. We then explain cash investors’ role in the settlement process, and highlight how their current practice of sending principal payments late in the day disrupts the timely settlement of tri-party repo contracts.


Continue reading "Don’t Be Late! The Importance of Timely Settlement of Tri-Party Repo Contracts" »

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

October 06, 2014

What Can We Learn from Prior Periods of Low Volatility?



Volatility, a measure of how much financial markets are fluctuating, has been near its record low in many asset classes. Over the last few decades, there have been only two other periods of similarly low volatility: in May 2013, and prior to the financial crisis in 2007. Is there anything we can learn from the recent period of low volatility versus what occurred slightly more than one year ago and seven years ago? Probably; the current volatility environment appears quite similar to the one in May 2013, but it’s substantially different from what happened prior to the financial crisis.

Continue reading "What Can We Learn from Prior Periods of Low Volatility?" »

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

October 01, 2014

Cross-Country Evidence on Transmission of Liquidity Risk through Global Banks

Claudia M. Buch, James Chapman, and Linda Goldberg

Over the past thirty years, the typical large bank has become a global entity with subsidiaries in many countries. In parallel, financial liberalization has increased the interconnectedness of banking systems, with domestic banking systems becoming more exposed to shocks transmitted through foreign banks. This globalization of banking propagated liquidity risk during the global financial crisis and subsequent euro area crisis. Unfortunately, little is known about how cross-border operations of global banks transmit liquidity shocks between countries. The seminal work by Peek and Rosengren (1997, 2000) provides early examples of how bank-level data can help identify the specific transmission channels. There are, however, two limitations to conducting this line of research. First, there is a lack of public data on the balance sheets of global banks. Second, it is difficult to compare the results of different research projects that use sensitive supervisory data collected by banking supervisors and central banks. Together with other scholars, we established the International Banking Research Network (IBRN) to overcome these limitations.

Continue reading "Cross-Country Evidence on Transmission of Liquidity Risk through Global Banks" »

September 19, 2014

What Explains the June Spike in Treasury Settlement Fails?



In June of this year—as we noted in the preceding post—settlement fails in U.S. Treasury securities spiked to their highest level since the implementation of the fails charge in May 2009. Our first post reviewed what fails are, why they arise, and how they can be measured. In this post, we dig into the fails data to identify possible explanations for the high level of fails in June. We observe that sequential fails of several benchmark securities accounted for the lion’s share of fails in June, but that fails in seasoned securities—which have been trending upward for some time—were also elevated.


Continue reading "What Explains the June Spike in Treasury Settlement Fails?" »

Posted by Blog Author at 7:05 AM in Financial Institutions, Financial Markets | Permalink | Comments (3)

Measuring Settlement Fails



In June 2014, settlement fails of U.S. Treasury securities reached their highest level since the implementation of the Treasury fails charge in May 2009, attracting significant attention from market participants. In this post, we review what fails are, why they are of interest, and how they can be measured. In a companion post following this one, we evaluate the particular circumstances of the June 2014 fails.


Continue reading "Measuring Settlement Fails" »

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

September 18, 2014

At the N.Y. Fed: Workshop on the Risks of Wholesale Funding



Risk of Wholesale Funding Conference The Federal Reserve Banks of Boston and New York recently cosponsored a workshop on the risks of wholesale funding. Wholesale funding refers to firm financing via deposits and other liabilities from pension funds, money market mutual funds, and other financial intermediaries. Compared with stable retail funding, the supply of wholesale funding is volatile, especially during financial crises. For instance, when a firm relies on short-term wholesale funds to support long-term illiquid assets, it becomes vulnerable to runs by its wholesale creditors, as seen during the recent financial crisis. The workshop was organized to promote a better understanding of the risks posed by wholesale funding and to explore policy options for minimizing these risks.

Continue reading "At the N.Y. Fed: Workshop on the Risks of Wholesale Funding" »

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

August 11, 2014

Inflation in the Great Recession and New Keynesian Models



Since the financial crisis of 2007-08 and the Great Recession, many commentators have been baffled by the “missing deflation” in the face of a large and persistent amount of slack in the economy. Some prominent academics have argued that existing models cannot properly account for the evolution of inflation during and following the crisis. For example, in his American Economic Association presidential address, Robert E. Hall called for a fundamental reconsideration of Phillips curve models and their modern incarnation—so-called dynamic stochastic general equilibrium (DSGE) models—in which inflation depends on a measure of slack in economic activity. The argument is that such theories should have predicted more and more disinflation as long as the unemployment rate remained above a natural rate of, say, 6 percent. Since inflation declined somewhat in 2009, and then remained positive, Hall concludes that such theories based on a concept of slack must be wrong.

Continue reading "Inflation in the Great Recession and New Keynesian Models" »

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

August 04, 2014

Financial Stability Monitoring




In a recently released New York Fed staff report, we present a forward-looking monitoring program to identify and track time-varying sources of systemic risk. Our program distinguishes between shocks, which are difficult to prevent, and the vulnerabilities that amplify shocks, which can be addressed. Drawing on a substantial body of research, we identify leverage, maturity transformation, interconnectedness, complexity, and the pricing of risk as the primary vulnerabilities in the financial system. The monitoring program tracks these vulnerabilities in four sectors of the economy: asset markets, the banking sector, shadow banking, and the nonfinancial sector. The framework also highlights the policy trade-off between reducing systemic risk and raising the cost of financial intermediation by taking pre-emptive actions to reduce vulnerabilities.

Continue reading "Financial Stability Monitoring" »

July 09, 2014

Lifting the Veil on the U.S. Bilateral Repo Market

Adam Copeland, Isaac Davis, Eric LeSueur, and Antoine Martin

The repurchase agreement (repo), a contract that closely resembles a collateralized loan, is widely used by financial institutions to lend to each other. The repo market is divided into trades that settle on the books of the two large clearing banks (that is, tri-party repo) and trades that do not (that is, bilateral repo). While there are public data about the tri-party repo segment, there is little to no information on the bilateral repo segment. In this post, we update a methodology we developed earlier to estimate the size and composition of collateral posted for bilateral repos, and find that U.S. Treasury securities are the dominant form of collateral for bilateral repos. This new finding implies that the collateral posted for bilateral repos is of higher quality than the collateral posted for tri-party repos.

Continue reading "Lifting the Veil on the U.S. Bilateral Repo Market" »

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

June 25, 2014

Do Currency Forwards Say Anything about the Future Value of the U.S. Dollar?

J. Benson Durham

Currency forwards do include useful information about the future value of the U.S. dollar, but any messages are hard to decipher without tools. Just as the yield curve reflects expected short rates as well as term premiums, foreign exchange forwards embed not only anticipated depreciation but also premiums for currency risk. This complicates life for both central bankers, who routinely tease information from asset prices, and portfolio managers, who need to estimate expected returns and beat benchmarks. Most analyses of market quotes suggest that forwards as well as interest rate differentials largely comprise noise rather than information about anticipated currency returns. However, drawing on my recent staff report, a new method, analogous to common arbitrage-free term structure models and based solely on observable prices, suggests that forwards provide lucid clues about the expected path of the U.S. dollar.

Continue reading "Do Currency Forwards Say Anything about the Future Value of the U.S. Dollar?" »

Posted by Blog Author at 7:00 AM in Financial Markets | Permalink | Comments (0)
About the Blog
Liberty Street Economics features insight and analysis from economists working at the intersection of research and Fed policymaking.

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.

Upcoming Posts
Useful Links
Feedback & Comment Guidelines
Liberty Street Economics invites you to comment on a post.
Comment Guidelines
We encourage you to submit comments, queries and suggestions on our blog entries. We will post them below the entry, subject to the following guidelines:
Please be brief: Comments are limited to 1500 characters.
Please be quick: Comments submitted more than 1 week after the blog entry appears will not be posted.
Please try to submit before COB on Friday: Comments submitted after that will not be posted until Monday morning.
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. The moderator will not post comments that are abusive, harassing, or threatening; obscene or vulgar; or commercial in nature; as well as comments that constitute a personal attack.  We reserve the right not to post a comment; no notice will be given regarding whether a submission will or will not be posted.
Archives