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.
Asset securitization is an important source of corporate funding in capital markets. Collateralized loan obligations (CLOs) are securitization structures that allow syndicated bank lenders and bond underwriters to repackage business loans and sell them to investors as securities. CLOs are actively overseen by a collateral manager that has the responsibility to trade loans in the portfolio to benefit from gains and mitigate losses from credit exposures. Because CLOs include a diverse portfolio of loans, a single firm that commingles its lending role with the collateral management role can reap information advantages stemming from its “originate-to-distribute” activities.
The panic of 1907 was among the most severe we’ve covered in our series and also the most transformative, as it led to the creation of the Federal Reserve System. Also known as the “Knickerbocker Crisis,” the panic of 1907 shares features with the 2007-08 crisis, including “shadow banks” in the form high-flying, less-regulated trusts operating beyond the safety net of the time, and a pivotal “Lehman moment” when Knickerbocker Trust, the second-largest trust in the country, was allowed to fail after J.P. Morgan refused to save it.
Given the long list of problems that have emerged in banks over the past several years, it is time to consider performance bonds for bankers. Performance bonds are used to ensure that appropriate actions are taken by a party when monitoring or enforcement is expensive. A simple example is a security deposit on an apartment rental. The risk of losing the deposit motivates renters to take care of the apartment, relieving the landlord of the need to monitor the premises. Although not quite as simple as a security deposit, performance bonds for bankers could provide more incentive for bankers to take better care of our financial system.
The money market industry is in the midst of significant change. With the implementation this month of new Securities and Exchange Commission rules designed to make money market funds (MMFs) more resilient to stress, institutional prime and tax-exempt funds must report more accurate prices reflecting the net asset value (NAV) of shares based on market prices for the funds’ asset holdings, rather than promising a fixed NAV of $1 per share. The rules also permit prime funds, which invest in a mixture of corporate debt, certificates of deposit, and repurchase agreements, to impose fees or set limits on investors who redeem shares when market conditions sharply deteriorate. (Funds investing in government securities, which are more stable, are not subject to the new rules.) These changes, driven by a run on MMFs at the height of the financial crisis, add to earlier risk-limiting rules on portfolio holdings.
Christopher S. Armstrong, Wayne R. Guay, Hamid Mehran, and Joseph P. Weber
Financial reporting is valuable because corporate governance—which we view as the set of contracts that help align managers’ interests with those of shareholders—can be more efficient when the parties commit themselves to a more transparent information environment. This is a key theme in our recent article “The Role of Financial Reporting and Transparency in Corporate Governance,” which reviews the literature on the part played by financial reporting in resolving agency conflicts among managers, directors, and shareholders. In this post, we highlight some of the governance issues and recommendations discussed in the article.
Oil prices plunged 65 percent between July 2014 and December of the following year. During this period, the yield spread—the yield of a corporate bond minus the yield of a Treasury bond of the same maturity—of energy companies shot up, indicating increased credit risk. Surprisingly, the yield spread of non‑energy firms also rose even though many non‑energy firms might be expected to benefit from lower energy‑related costs. In this blog post, we examine this counterintuitive result. We find evidence of a liquidity spillover, whereby the bonds of more liquid non‑energy firms had to be sold to satisfy investors who withdrew from bond funds in response to falling energy prices.
Michael Fleming, Frank Keane, Jake Schurmeier, and Emma Weiss
The Federal Reserve lends specific Treasury and agency debt securities held in its System Open Market Account (SOMA)—and accepts general Treasury securities as collateral—through its daily securities lending program. The program supports Treasury and agency debt market function by providing a secondary and temporary source of securities to the broader market through the Fed’s trading counterparties, the primary dealers. Importantly, the size and composition of the SOMA portfolio reflect past monetary policy decisions, limiting the program's ability to help alleviate all collateral shortages. In this post, we provide a brief history of the Fed’s securities lending program and describe recent trends in activity and what is driving them.
Tobias Adrian, Richard Crump, Peter Diamond, and Rui Yu
In a previous post, we showed how market rates on U.S. Treasuries violate the expectations hypothesis because of time-varying risk premia. In this post, we provide evidence that term structure models have outperformed direct market-based measures in forecasting interest rates. This suggests that term structure models can play a role in long-run planning for public policy objectives such as assessing the viability of Social Security.
The Federal Open Market Committee implements monetary policy by raising or lowering its target for the federal funds rate, the interest rate banks charge each other for overnight loans. Because the Federal Reserve has no direct control over most interest rates, it relies on arbitrage in money markets for the change in the fed funds rate to be transmitted to other short-term rates, thus causing all short-term rates to move in tandem. This transmission to other rates is an important first step for the Fed’s actions to influence the real economy. In this post, we describe the major developments that have affected monetary policy transmission since the recent financial crisis. We conclude that while arbitrage may have been impeded at the beginning of the crisis, it currently remains effective in transmitting changes in monetary policy via the money markets.
Liberty Street Economics features insight and analysis from economists working at the intersection of research and policy. The editors are Michael Fleming, Andrew Haughwout, Thomas Klitgaard, and Donald Morgan.
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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