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63 posts on "Banks"

February 20, 2019

Stressed Outflows and the Supply of Central Bank Reserves



LSE_Stressed Outflows and the Supply of Central Bank Reserves

Since the financial crisis, banking regulators around the world have been intensely aware of liquidity risk and, in part as a response, have introduced the Basel III liquidity regulation. Today, the world’s largest banks hold substantial liquidity buffers comprising both securities and central bank reserves, to satisfy internal liquidity stress tests and minimum quantitative regulatory requirements. The appropriate level of liquidity buffers depends on the likely outflows in a market stress situation. In this post, we use public data to provide a rough estimate of stressed outflows that the largest banks would face and consider how they could meet these outflows.

Continue reading "Stressed Outflows and the Supply of Central Bank Reserves" »

Posted by Blog Author at 7:00 AM in Banks, Federal Reserve, Liquidity | Permalink | Comments (0)

January 18, 2019

Post-Crisis Financial Regulation: Experiences from Both Sides of the Atlantic



LSE_Post-Crisis Financial Regulation: Experiences from Both Sides of the Atlantic

To mark the 100-year anniversary of the Banca d’Italia’s New York office, the Federal Reserve Bank of New York and the Banca d’Italia hosted a workshop on post-crisis financial regulation in November 2018. The goal of the workshop was to discuss differences in regulation between the United States and Europe (and around the globe more broadly), examine gaps in current regulations, identify challenges to be addressed, and raise awareness about the unintended consequences of regulation. The workshop included presentations by researchers from the U.S. and Europe on such topics as market liquidity, funding, and capital requirements. In this post, we present some of the findings and discussions from the workshop.

Continue reading "Post-Crisis Financial Regulation: Experiences from Both Sides of the Atlantic" »

Posted by Blog Author at 7:00 AM in Banks, Central Bank, Crisis, Financial Intermediation | Permalink | Comments (0)

January 17, 2019

The Indirect Costs of Lehman’s Bankruptcy



Fifth of five posts
LSE_The Indirect Costs of Lehman’s Bankruptcy

In our previous post, we assessed losses to customers and clients from foregone opportunities after Lehman Brothers filed for bankruptcy in September 2008. In this post, we examine losses to Lehman and its investors in anticipation of bankruptcy. For example, if bankruptcy is expected, Lehman’s earnings may decline as customers close their accounts or certain securities (such as derivatives) to which Lehman is a counterparty may lose value. We estimate these losses by analyzing Lehman’s earnings and stock, bond, and credit default swap (CDS) prices.

Continue reading "The Indirect Costs of Lehman’s Bankruptcy" »

Posted by Blog Author at 7:00 AM in Banks, Crisis, Stocks | Permalink | Comments (0)

January 16, 2019

Customer and Employee Losses in Lehman’s Bankruptcy



Fourth of five posts
LSE_2019_lehman4-clients_sarkar_460

In our second post on the Lehman bankruptcy, we discussed the cost to Lehman’s creditors from having their funds tied up in bankruptcy proceedings. In this post, we focus on losses to Lehman’s customers and employees from the destruction of firm-specific assets that could not be deployed as productively with other firms. Our conclusions are based in part on what happened after bankruptcy—whether, for example, customer accounts moved to other firms or employees found jobs elsewhere. While these costs are difficult to pin down, the analysis suggests that the most notable losses were borne by mutual funds that relied on Lehman’s specialized brokerage advice and firms that employed Lehman for its equity underwriting services.

Continue reading "Customer and Employee Losses in Lehman’s Bankruptcy" »

Posted by Blog Author at 7:00 AM in Banks, Crisis, Dealers, Employment, Financial Intermediation | Permalink | Comments (0)

January 14, 2019

Creditor Recovery in Lehman’s Bankruptcy



Second of five posts
LSE_Creditor Recovery in Lehman’s Bankruptcy

Expectations of creditor recovery were low when the Lehman Brothers bankruptcy process started. On the day the firm filed for bankruptcy in September 2008, the average price of Lehman’s senior bonds implied a recovery rate of about 30 percent for senior creditors. A month later the bond price was implying a recovery rate of 9 percent, consistent with results from Lehman’s CDS auction. Two and a half years later, Lehman’s estate estimated that the recovery rate for holding company creditors would be just 16 percent. So, ten years after the filing, how much did creditors actually recover?

Continue reading "Creditor Recovery in Lehman’s Bankruptcy" »

Posted by Blog Author at 7:02 AM in Banks, Crisis, Fire Sale, Liquidity | Permalink | Comments (0)

How Much Value Was Destroyed by the Lehman Bankruptcy?



First of five posts
LSE_How Much Value Was Destroyed by the Lehman Bankruptcy?

Lehman Brothers Holdings Inc. (LBHI) filed for Chapter 11 bankruptcy protection on September 15, 2008, initiating one of the largest and most complex bankruptcy proceedings in history. Recovery prospects for creditors, who submitted about $1.2 trillion of claims against the Lehman estate, were quite bleak. This week, we will publish a series of four posts that provide an assessment of the value lost to Lehman, its creditors, and other stakeholders now that the bankruptcy proceedings are winding down. Where appropriate, we also consider the liquidation of Lehman’s investment banking affiliate, which occurred in separate proceedings under the Securities Investor Protection Act (SIPA).

Continue reading "How Much Value Was Destroyed by the Lehman Bankruptcy?" »

Posted by Blog Author at 7:00 AM in Banks, Crisis, Dealers, Financial Intermediation | Permalink | Comments (2)

November 19, 2018

"Skin in the Game," Depositor Discipline, and Bank Risk Taking






In a previous post, we argued that double liability for bank owners might not limit their risk taking, despite the extra “skin in the game,” if it also weakens depositor discipline of banks. This post, drawing on our recent working paper, looks at the interplay of those opposing forces in the late 1920s when bank liability differed across states. We find that double liability may have reduced the outflow of deposits during the crisis, but wasn’t successful in mitigating bank risk during the boom.

Continue reading ""Skin in the Game," Depositor Discipline, and Bank Risk Taking" »

October 15, 2018

Did Banks Subject to LCR Reduce Liquidity Creation?



LSE_2018_Did Banks Subject to LCR Reduce Liquidity Creation?

Banks traditionally provide loans that are funded mostly by deposits and thereby create liquidity, which benefits the economy. However, since the loans are typically long-term and illiquid, whereas the deposits are short-term and liquid, this creation of liquidity entails risk for the bank because of the possibility that depositors may “run” (that is, withdraw their deposits on short notice). To mitigate this risk, regulators implemented the liquidity coverage ratio (LCR) following the financial crisis of 2007-08, mandating banks to hold a buffer of liquid assets. A side effect of the regulation, however, is a reduction in liquidity creation by banks subject to LCR, as we find in our recent paper.

Continue reading "Did Banks Subject to LCR Reduce Liquidity Creation?" »

October 12, 2018

Leverage Rule Arbitrage



LSE_Leverage Rule Arbitrage

Classic arbitrage involves the same asset selling at different prices; the leverage rule arbitrage we study here involves assets of different risk levels requiring the same amount of capital. The supplementary leverage ratio (SLR) rule, finalized by U.S. regulators in September 2014, requires a minimum ratio of capital to assets at the largest U.S. banks. The floor is higher for more systemically important banks, but not for banks with riskier assets. That non-risk-based aspect of SLR was intentional, since the leverage limit was meant to backstop (“supplement”) risk-based capital rules in case banks underestimate their asset risk and overstate their capital strength. As policymakers have noted and bankers have warned, if the leverage rule is the binding capital requirement, banks can “arbitrage” the rule by selling safer assets and replacing them with riskier, higher-yielding ones. The findings of our recent staff report are consistent with those concerns.

Continue reading "Leverage Rule Arbitrage" »

Posted by Blog Author at 11:05 AM in Banks, Financial Institutions, Financial Intermediation | Permalink | Comments (0)

October 11, 2018

What Happens When Regulatory Capital Is Marked to Market?



LSE_What Happens When Regulatory Capital Is Marked to Market?

Minimum equity capital requirements are a key part of bank regulation. But there is little agreement about the right way to measure regulatory capital. One of the key debates is the extent to which capital ratios should be based on current market values rather than historical “accrual” values of assets and liabilities. In a new research paper, we investigate the effects of a recent regulatory change that ties regulatory capital directly to the market value of the securities portfolio for some banks.

Continue reading "What Happens When Regulatory Capital Is Marked to Market?" »

Posted by Blog Author at 7:00 AM in Bank Capital, Banks, Financial Intermediation, Regulation | Permalink | Comments (0)
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