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 recent era of globalization has witnessed growing cross-country trade integration as firms’ production chains have spread across the world, and with stock market returns becoming more correlated across countries. While research has predominantly focused on how financial integration impacts the propagation of shocks across international financial markets, trade also influences these cross-border spillovers. In particular, one important aspect, highlighted by the recent work of di Giovanni and Hale (2020), is how the global production network influences the transmission of U.S. monetary policy to world stock markets.
Gara Afonso, Marco Cipriani, Steph Clampitt, Haitham Jendoubi, Gabriele La Spada, and Will Riordan
Changes in the distribution of banks’ reserve balances are important since they may impact conditions in the federal funds market and alter trading dynamics in money markets more generally. In this post, we propose using the Lorenz curve and Gini coefficient as a new approach to measuring reserve concentration. Since 2013, concentration, as captured by the Lorenz curve and the Gini coefficient, has co-moved with aggregate reserves, decreasing as aggregate reserves declined (such as in 2015-18) and increasing as aggregate reserves increased (such as at the onset of the COVID-19 pandemic).
Sarah Ngo Hamerling, Donald P. Morgan, and John Sporn
Did the 2007-09 financial crisis or the regulatory reforms that followed alter how banks change their underwriting standards over the course of the business cycle? We provide some simple, “narrative” evidence on that question by studying the reasons banks cite when they report a change in commercial credit standards in the Federal Reserve’s Senior Loan Officer Opinion Survey. We find that the economic outlook, risk tolerance, and other real factors generally drive standards more than financial factors such as bank capital and loan market liquidity. Those financial factors have mattered more since the crisis, however, and their importance increased further as post-crisis reforms were phased in in the middle of the following decade.
Nina Boyarchenko, Thomas M. Eisenbach, Pooja Gupta, Or Shachar, and Peter Van Tassel
“Arbitrageurs” such as hedge funds play a key role in the efficiency of financial markets. They compare closely related assets, then buy the relatively cheap one and sell the relatively expensive one, thereby driving the prices of the assets closer together. For executing trades and other services, hedge funds rely on prime brokers and broker-dealers. In a previous Liberty Street Economics blog post, we argued that post-crisis changes to regulation and market structure have increased the costs of arbitrage activity, potentially contributing to the persistent deviations in the prices of closely related assets since the 2007–09 financial crisis. In this post, we document how post-crisis changes to bank regulations have affected the relationship between hedge funds and broker-dealers.
Madeline Finnegan, Sarah Ngo Hamerling, Beverly Hirtle, Anna Kovner, Stephan Luck, and Matthew Plosser
Editor’s note: Since this post was first published, we have corrected a description accompanying the Variable Capital Buffer graphic — Currently, with a countercyclical capital buffer set to 0, the combined minimum and buffer CET1 requirements range from 7 percent to 10.5 percent. (October 6:10 p.m.)
By many measures the U.S. banking industry entered 2020 in good health. But the widespread outbreak of the COVID-19 virus and the associated economic disruptions have caused unemployment to skyrocket and many businesses to suspend or significantly reduce operations. In this post, we consider the implications of the pandemic for the stability of the banking sector, including the potential impact of dividend suspensions on bank capital ratios and the use of banks’ regulatory capital buffers.
Editor’s note: When this post was first published, the table showed incorrect figures for the Professional/Business Services industry; the table has been corrected. (August 10, 10:20 a.m.)
The COVID-19 pandemic has caused significant economic disruptions among U.S. corporations. In this post, we study the preliminary impact of these disruptions on the cash flow and leverage of public U.S. corporations using public filings through April 2020. We find that the pandemic had a negative impact on cash flow while also reducing corporations’ interest expenses. However, the cash flow shock far outpaced the benefits of lower interest payments, especially in industries that were disproportionately levered. Looking ahead, we find that a sizable share of U.S. corporations have interest expense greater than cash flow, raising concerns about the ability of those corporations to endure further liquidity shocks.
Modern-day financial systems are highly complex, with billions of exchanges in information, assets, and funds between individuals and institutions. Though daunting to operationalize, regulating these transmissions may be desirable in some instances. For example, securities regulators aim to protect investors by tracking and punishing
Recent evidence shows that insiders have formed
that enable them to pursue activities outside the purview of regulatory oversight. In understanding the cat-and-mouse game between regulators and insiders, a key consideration is the networks that insiders might form in order to circumvent regulation, and how regulators might cope with insiders’ tactics. In this post, we introduce a
theoretical framework that considers network formation in response to regulation and review the key insights.
This post is part of an ongoing series on the credit and liquidity facilities established by the Federal Reserve to support households and businesses during the COVID-19 outbreak.
On March 17, 2020, the Federal Reserve announced that it would re-establish the Primary Dealer Credit Facility (PDCF) to allow primary dealers to support smooth market functioning and facilitate the availability of credit to businesses and households. The PDCF started offering overnight and term funding with maturities of up to ninety days on March 20. It will be in place for at least six months and may be extended as conditions warrant. In this post, we provide an overview of the PDCF and its usage to date.
Uyanga Byambaa, Beverly Hirtle, Anna Kovner, and Matthew Plosser
Supervision and regulation are critical tools for the promotion of stability and soundness in the financial sector. In a prior post, we discussed findings from our recent research paper which examines the impact of supervision on bank performance (see earlier post How Does Supervision Affect Banks?). As described in that post, we exploit new supervisory data and develop a novel strategy to estimate the impact of supervision on bank risk taking, earnings, and growth. We find that bank holding companies (BHCs or “banks”) that receive more supervisory attention have less risky loan portfolios, but do not have lower growth or profitability. In this post, we examine the benefits of supervision over time, and especially during banking industry downturns.
Kristian Blickle, Fernando Duarte, Thomas Eisenbach, and Anna Kovner
A key part of understanding the stability of the U.S. financial system is to monitor leverage and funding risks in the financial sector and the way in which these vulnerabilities interact to amplify negative shocks. In this post, we provide an update of four analytical models, introduced in aLiberty Street Economics post last year, that aim to capture different aspects of banking system vulnerability. Since their introduction, vulnerabilities as indicated by these models have increased moderately, continuing the slow but steady upward trend that started around 2016. Despite the recent increase, the overall level of vulnerabilities according to this analysis remains subdued and is still significantly smaller than before the financial crisis of 2008-09.
Liberty Street Economics features insight and analysis from New York Fed economists working at the intersection of research and policy. Launched in 2011, the blog takes its name from the Bank’s headquarters at 33 Liberty Street in Manhattan’s Financial District.
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