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123 posts on "Banks"
February 3, 2023

How the LIBOR Transition Affects the Supply of Revolving Credit

Photo of two sticky notes: one with LIbor crossed out, the other with SOFR checked. Concept of London Interbank Offered Rate being discontinued and succeeded by SOFR - Secured Overnight Financing Rate - as the base rate for loan and swap financial products.

In the United States, most commercial and industrial (C&I) lending takes the form of revolving lines of credit, known as revolvers or credit lines. For decades, like other U.S. C&I loans, credit lines were typically indexed to the London Interbank Offered Rate (LIBOR). However, since 2022, the U.S. and other developed-market economies have transitioned from credit-sensitive reference rates such as LIBOR to new risk-free rates, including the Secured Overnight Financing Rate (SOFR). This post, based on a recent New York Fed Staff Report, explores how the provision of revolving credit is likely to change as a result of the transition to a new reference rate.

January 17, 2023

The Recent Rise in Discount Window Borrowing

Photo of Federal Reserve building in Washington DC

The Federal Reserve’s primary credit program—offered through its “discount window” (DW)—provides temporary short-term funding to fundamentally sound banks. Historically, loan activity has been low during normal times due to a variety of factors, including the DW’s status as a back-up source of liquidity with a relatively punitive interest rate, the stigma attached to DW borrowing from the central bank, and, since 2008, elevated levels of reserves in the banking system. However, beginning in 2022, DW borrowing under the primary credit program increased notably in comparison to past years. In this post, we examine the factors that may have contributed to this recent trend.

January 11, 2023

Foreign Banking Organizations in the United States and the Price of Dollar Liquidity

Decorative photo: dollar bills and ripples and drop of water over them

Foreign banking organizations (FBOs) in the United States play an important role in setting the price of short-term dollar liquidity. In this post, based on remarks given at the 2022 Jackson Hole Economic Policy Symposium, we highlight FBOs’ activities in money markets and discuss how the availability of reserve balances affects these activities. Understanding the dynamics of FBOs’ business models and their balance sheet constraints helps us monitor the evolution of liquidity conditions during quantitative easing (QE) and tightening (QT) cycles.

Posted at 7:00 am in Banks, Central Bank, Currency | Permalink | Comments (1)
December 2, 2022

Does Bank Monitoring Affect Loan Repayment?

decorative: photo of approved loan application

Banks monitor borrowers after originating loans to reduce moral hazard and prevent loan losses. While monitoring represents an important activity of bank business, evidence on its effect on loan repayment is scant. In this post, which is based on our recent paper, we shed light on whether bank monitoring fosters loan repayment and to what extent it does so.

November 21, 2022

How Do Deposit Rates Respond to Monetary Policy?

Decorative: image of buildings with dollars superimposed and chart with arrows in upward direction with a percentage sign

When the Federal Open Market Committee (FOMC) wants to raise the target range for the fed funds rate, it raises the interest on reserve balances (IORB) paid to banks, the primary credit rate offered to banks, and the award rate paid to participants that invest in the overnight reverse repo (ON RRP) market to keep the fed funds rate within the target range (see prior Liberty Street Economics posts on this topic). When these rates change, market participants respond by adjusting the valuation of financial products, of which a significant category is deposits. Understanding how deposit terms adapt to changes in policy rates is important to understanding the impact of monetary policy more broadly. In this post, we evaluate the pass through of the fed funds rate to deposit rates (that is, deposit betas) over the past several interest rate cycles and discuss factors that affect deposit rates.      

Posted at 7:00 am in Banks, Central Bank, Fed Funds | Permalink
November 14, 2022

Banking System Vulnerability: 2022 Update

To assess the vulnerability of the U.S. financial system, it is important to monitor leverage and funding risks—both individually and in tandem. In this post, we provide an update of four analytical models aimed at capturing different aspects of banking system vulnerability with data through 2022:Q2, assessing how these vulnerabilities have changed since last year. The four models were introduced in a Liberty Street Economics post in 2018 and have been updated annually since then.

November 9, 2022

A Closer Look at Chinese Overseas Lending

While considerable attention has focused on China’s credit boom and the rise of China’s domestic debt levels, another important development in international finance has been growth in China’s lending abroad. In this post, we summarize what is known about the size and scope of China’s external lending, discuss the incentives that drove this lending, and consider some of the challenges these exposures pose for Chinese lenders and foreign borrowers.

October 12, 2022

With Abundant Reserves, Do Banks Adjust Reserve Balances to Accommodate Payment Flows?

Photo: decorative of 100 dollar bills and bank building columns

As a result of the global financial crisis (GFC), the Federal Reserve switched from a regime of scarce reserves to one of abundant reserves. In this post, we explore how banks’ day-to-day management of reserve balances with respect to payment flows changed with this regime switch. We find that bank behavior did not change on average; under both regimes, banks increased their opening balances when they expected higher outgoing payments and, similarly, decreased these balances with expected higher incoming payments. There are substantial differences across banks, however. At the introduction of the abundant-reserves regime, small domestic banks no longer adjusted balances alongside changes in outgoing payments. 

Posted at 7:00 am in Banks, Federal Reserve, Liquidity | Permalink
October 5, 2022

Measuring the Ampleness of Reserves

Over the past fifteen years, reserves in the banking system have grown from tens of billions of dollars to several trillion dollars. This extraordinary rise poses a natural question: Are the rates paid in the market for reserves still sensitive to changes in the quantity of reserves when aggregate reserve holdings are so large? In today’s post, we answer this question by estimating the slope of the reserve demand curve from 2010 to 2022, when reserves ranged from $1 trillion to $4 trillion.

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.

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