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.
The 2007-09 financial crisis highlighted weaknesses in the over‑the‑counter (OTC) derivatives markets and the increased risk of contagion due to the interconnectedness of market participants in these markets. As a response, the global regulatory community introduced a number of reforms to both the market structure and the regulatory environment. The intent of these innovations was to improve the functioning of OTC markets but some market participants have suggested that some of the new regulations may have had unintended consequences. In this post, we discuss some key takeaways from a recent two-day conference on “Over‑the‑Counter Derivatives and Recent Regulatory Changes,” where policymakers, academics, practitioners, and other experts convened to discuss the evolution of OTC derivatives markets after the crisis.
Catherine Chen, Marco Cipriani, Gabriele La Spada, Philip Mulder, and Neha Shah
On October 14, 2016, amendments to Securities and Exchange Commission (SEC) rule 2a-7, which governs money market mutual funds (MMFs), went into effect. The changes are designed to reduce MMFs’ susceptibility to destabilizing runs and contain two principal requirements. First, institutional prime and muni funds—but not retail or government funds—must now compute their net asset values (NAVs) using market-based factors, thereby abandoning the fixed NAV that had been a hallmark of the MMF industry. Second, all prime and muni funds must adopt a system of gates and fees on redemptions, which can be imposed under certain stress scenarios. This post studies the effect of the amendments on the size and composition of the MMF industry and, in particular, whether MMF investors shifted their assets from prime and muni funds toward government funds in anticipation of the tighter regulatory regime.
Corporate bonds are an important source of funding for public corporations in the United States. When these bonds cannot be easily traded in secondary markets or when investors cannot easily hedge their bond positions in derivatives markets, the issuance costs to corporations increase, leading to higher overall funding costs. In this post, we examine recent trends in arbitrage-based measures of liquidity in corporate bond and credit default swap (CDS) markets and evaluate potential explanations for the deterioration in these measures that occurred between the middle of 2015 and early 2016.
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.
The New York Fed takes bank culture and governance seriously. As Bank President William Dudley said at a 2014 workshop for policymakers and industry participants, improving the culture and governance of banks is “an imperative,” both to ensure financial stability and to deepen public trust in our financial system. The Bank built on that first workshop with a second in November 2015 and will host a third event later this month, on October 20.
How does monetary policy affect spending in the economy? The economic literature suggests two main channels of monetary transmission: the money or interest rate channel and the bank lending channel. The first view focuses on changes in real interest rates resulting from a shift in monetary policy and corresponding responses in consumption, saving, and investment. The second view focuses on changes in the supply of bank credit resulting from an altered policy stance and concomitant changes in spending.
Moreno Bertoldi, Paolo Pesenti, Hélène Rey, and Valérie Rouxel-Laxton
On April 18, 2016, the New York Fed hosted a conference on current and future policy directions for the linked economies of Europe and the United States. "The Transatlantic Economy: Convergence or Divergence?"—organized jointly with the Centre for Economic Policy Research and the European Commission—brought together U.S. and Europe-based policymakers, regulators, and academics to discuss a series of important issues: Are the economies of the euro area and the United States on a convergent or divergent path? Are financial regulatory reforms making the banking and financial structures more similar? Will this imply a convergence in macroprudential policies? Which instruments do the United States and the euro area have at their disposal to raise investment, spur productivity, and avoid secular stagnation? In this post, we summarize the principal themes and findings of the conference discussion.
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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