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114 posts on "Banks"
May 23, 2022

The Adverse Effect of “Mandatory” Flood Insurance on Access to Credit

The National Flood Insurance Program (NFIP) was designed to reduce household and lender flood-risk exposure and “encourage lending.” In this post, which is based on our related study, we show that in certain situations the program actually limits access to credit, particularly for low-income borrowers—an unintended consequence of this well-intentioned program.

April 4, 2022

Climate Change and Financial Stability: The Weather Channel

Climate change could affect banks and the financial systems they anchor through various channels: increasingly extreme weather is one (Financial Stability Board, Basel Committee on Bank Supervision). In our recent staff report, we size up this channel by studying how U.S. banks, large and small, fared against disasters past. We find even the most destructive disasters had insignificant or small effects on bank stability and small and positive effects on bank income. We conjecture that recovery lending after disasters helps stabilize larger banks while smaller, local banks’ knowledge of “unmarked” (flood) hazards may help them navigate disaster risk. Federal disaster aid seems not to act as a bank stabilizer.

February 17, 2022

How (Un-)Informed Are Depositors in a Banking Panic? A Lesson from History

Photo: Depositors clamor to withdraw their savings from a bank in Berlin, 13 July 1931

How informed or uninformed are bank depositors in a banking crisis? Can depositors anticipate which banks will fail? Understanding the behavior of depositors in financial crises is key to evaluating the policy measures, such as deposit insurance, designed to prevent them. But this is difficult in modern settings. The fact that bank runs are rare and deposit insurance universal implies that it is rare to be able to observe how depositors would behave in absence of the policy. Hence, as empiricists, we are lacking the counterfactual of depositor behavior during a run that is undistorted by the policy. In this blog post and the staff report on which it is based, we go back in history and study a bank run that took place in Germany in 1931 in the absence of deposit insurance for insight.

February 7, 2022

The Future of Payments Is Not Stablecoins

Stablecoins, which we define as digital assets used as a medium of exchange that are purported to be backed by assets held specifically for that purpose, have grown considerably in the last two years. They rose from a market capitalization of $5.7 billion on December 1, 2019, to $155.6 billion on January 21, 2022. Moreover, a market that was once dominated by a single stablecoin—Tether (USDT)—now boasts five stablecoins with valuations over $1 billion (as of January 21, 2022; data about the supply of stablecoins can be found here). Analysts have started to pay increased attention to the stablecoin market, and the President’s Working Group (PWG) on Financial Markets released a report on stablecoins on November 1, 2021. In this post, we explain why we believe stablecoins are unlikely to be the future of payments.

January 11, 2022

How the Fed’s Overnight Reverse Repo Facility Works

Daily take-up at the overnight reverse repo (ON RRP) facility increased from less than $1 billion in early March 2021 to just under $2 trillion on December 31, 2021. In the second post in this series, we take a closer look at this important tool in the Federal Reserve’s monetary policy implementation framework and discuss the factors behind the recent increase in volume.

November 10, 2021

How Does Market Power Affect Fire-Sale Externalities?

An important role of capital and liquidity regulations for financial institutions is to counteract inefficiencies associated with “fire-sale externalities,” such as the tendency of institutions to lever up and hold illiquid assets to the extent that their collective actions increase financial vulnerabilities. However, theoretical models that study such externalities commonly assume perfect competition among financial institutions, in spite of high (and increasing) financial sector concentration. In this post, which is based on our forthcoming article, we consider instead how the effects of fire-sale externalities change when financial institutions have market power.

July 12, 2021

Tailoring Regulations

Regulations are not written in stone. The benefits derived from them, along with the costs of compliance for affected institutions and of enforcement for regulators, are likely to evolve. When this happens, regulators may seek to modify the regulations to better suit the specific risk profiles of regulated entities. In this post, we consider the Economic Growth, Regulatory Relief, and Consumer Protection Act (EGRRCPA) passed by Congress in 2018, which eased banking regulations for smaller institutions. We focus on one regulation—the Liquidity Coverage Ratio (LCR)—and assess how its relaxation affected newly exempt banks’ assets and liabilities, and the resilience of the banking system.

June 30, 2021

Hold the Check: Overdrafts, Fee Caps, and Financial Inclusion

Hold the Check: Overdrafts, Fee Caps, and Financial Inclusion

The 25 percent of low-income Americans without a checking account operate in a separate but unequal financial world. Instead of paying for things with cheap, convenient debit cards and checks, they get by with “fringe” payment providers like check cashers, money transfer, and other alternatives. Costly overdrafts rank high among reasons why households “bounce out” of the banking system and some observers have advocated capping overdraft fees to promote inclusion. Our recent paper finds unintended (if predictable) effects of overdraft fee caps. Studying a case where fee caps were selectively relaxed for some banks, we find higher fees at the unbound banks, but also increased overdraft credit supply, lower bounced check rates (potentially the costliest overdraft), and more low-income households with checking accounts. That said, we recognize that overdraft credit is expensive, sometimes more than even payday loans. In lieu of caps, we see increased overdraft credit competition and transparency as alternative paths to cheaper deposit accounts and increased inclusion.

Banking the Unbanked: The Past and Future of the Free Checking Account

Banking the Unbanked: The Past and Future of the Free Checking Account

About one in twenty American households are unbanked (meaning they do not have a demand deposit or checking account) and many more are underbanked (meaning they do not have the range of bank-provided financial services they need). Unbanked and underbanked households are more likely to be lower-income households and households of color. Inadequate access to financial services pushes the unbanked to use high-cost alternatives for their transactional needs and can also hinder access to credit when households need it. That, in turn, can have adverse effects on the financial health, educational opportunities, and welfare of unbanked households, thereby aggravating economic inequality. Why is access to financial services so uneven? The roots to part of this problem are historical, and in this post we will look back four decades to changes in regulation, shifts in the ownership structure of retail financial services, and the decline of free/low-cost checking accounts in the United States to search out a few of the contributory factors.

May 19, 2021

Keeping Borrowers Current in a Pandemic

Federal government actions in response to the pandemic have taken many forms. One set of policies is intended to reduce the risk that the pandemic will result in a housing market crash and a wave of foreclosures like the one that accompanied the Great Financial Crisis. An important and novel tool employed as part of these policies is mortgage forbearance, which provides borrowers the option to pause or reduce debt service payments during periods of hardship, without marking the loan delinquent on the borrower’s credit report. Widespread take-up of forbearance over the past year has significantly changed the housing finance system in the United States, in different ways for different borrowers. This post is the first of four focusing attention on the effects of mortgage forbearance and the outlook for the mortgage market. Here we use data from the New York Fed’s Consumer Credit Panel (CCP) to examine the effects of these changes on households during the pandemic.

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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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