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63 posts on "Banks"

October 10, 2018

Why Do Banks Target ROE?



LSE_Why Do Banks Target ROE?

Nonfinancial corporations focus on the growth in earnings per share (EPS) to benchmark their performance. Banks used to follow a similar practice, but starting in the late 1970s they began to emphasize return on equity (ROE) instead. In this blog post, we outline findings from our recent staff report, which argues that banks had an incentive to make this change when their charter values eroded owing to increased competition, and the incentive to change was magnified by risk-insensitive deposit insurance.

Continue reading "Why Do Banks Target ROE?" »

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

October 09, 2018

Analyzing the Effects of CFPB Oversight



LSE_Analyzing the Effects of CFPB Oversight

The Consumer Financial Protection Bureau (CFPB), created in 2011, is a key element of post-crisis U.S. financial regulation, as well as the subject of intense debate. While some have praised the agency, citing the benefits of consumer financial protection, others argue that its activities involve high compliance costs, increase uncertainty and legal risk, and ultimately reduce the availability of financial services for consumers. We present new evidence on whether the CFPB’s supervisory and enforcement activities have significantly affected the supply of mortgage credit, or had other effects on bank risk-taking and profitability.

Continue reading "Analyzing the Effects of CFPB Oversight" »

October 03, 2018

The Cost of Regulatory Capital



LSE_The Cost of Regulatory Capital

Banks contend that equity capital is expensive and that an increase in capital requirements will adversely impact bank services, including the volume and cost of mortgages and corporate loans. For example, JPMorgan CEO Jamie Dimon said in 2017 that “It is clear that the banks have too much capital…and more of that capital can be safely used to finance the economy.” In a recent staff report, we compare the different treatments of short-term credit commitments under the Basel I and Basel II Accords to assess the effect of capital regulation on banks’ cost of capital.

Continue reading "The Cost of Regulatory Capital" »

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

October 01, 2018

Regulatory Changes and the Cost of Capital for Banks



LSE_Regulatory Changes and the Cost of Capital for Banks

In response to the financial crisis nearly a decade ago, a number of regulations were passed to improve the safety and soundness of the financial system. In this post and our related staff report, we provide a new perspective on the effect of these regulations by estimating the cost of capital for banks over the past two decades. We find that, while banks’ cost of capital soared during the financial crisis, after the passage of the Dodd-Frank Act (DFA), banks experienced a greater decrease in their cost of capital than nonbanks and nonbank financial intermediaries (NBFI).

Continue reading "Regulatory Changes and the Cost of Capital for Banks" »

Posted by Blog Author at 7:02 AM in Bank Capital, Banks, Corporate Finance, Crisis, Dodd-Frank | Permalink | Comments (0)

The Effects of Post-Crisis Banking Reforms



LSE_The Effects of Post-Crisis Banking Reforms

The financial crisis of 2007-08 exposed many limitations of the regulatory architecture of the U.S. financial system. In an attempt to mitigate these limitations, there has been a wave of regulatory reforms in the post-crisis period, especially in the banking sector. These include tighter bank capital and liquidity rules; new resolution procedures for failed banks; the creation of a stand-alone consumer protection agency; greater transparency in money market funds; and a move to central clearing of derivatives, among other measures. As these reforms have been finalized and implemented, a healthy debate has emerged in the policy and academic communities over the degree to which they have achieved their intended goals and the extent of any unintended consequences that might have arisen in the process.

Continue reading "The Effects of Post-Crisis Banking Reforms" »

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

August 03, 2018

At the New York Fed: Thirteenth Annual Joint Conference with NYU-Stern on Financial Intermediation



Better understanding of financial intermediation is critical to the efforts of the New York Fed to promote financial stability and economic growth. In pursuit of this mission, the New York Fed recently hosted the thirteenth annual Federal Reserve Bank of New York–New York University Stern School of Business Conference on Financial Intermediation. At this conference, a range of authors were invited to discuss their research in this area. In this post, we present some of the discussion and findings from the conference.

Continue reading "At the New York Fed: Thirteenth Annual Joint Conference with NYU-Stern on Financial Intermediation" »

July 16, 2018

Tax Reform’s Impact on Bank and Corporate Cyclicality



Tax Reform’s Impact on Bank and Corporate Cyclicality

The Tax Cuts and Jobs Act (TCJA) is expected to increase after-tax profits for most companies, primarily by lowering the top corporate statutory tax rate from 35 percent to 21 percent. At the same time, the TCJA provides less favorable treatment of net operating losses and limits the deductibility of net interest expense. We explain how the latter set of changes may heighten bank and corporate borrower cyclicality by making bank capital and default risk for highly levered corporations more sensitive to economic downturns.

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Posted by Blog Author at 7:00 AM in Banks, Systemic Risk | Permalink | Comments (3)

July 11, 2018

Size Is Not All: Distribution of Bank Reserves and Fed Funds Dynamics



LSE_2018_Size Is Not All: Distribution of Bank Reserves and Fed Funds Dynamics

As a consequence of the Federal Reserve’s large-scale asset purchases from 2008-14, banks’ reserve balances at the Fed have increased dramatically, rising from $10 billion in March 2008 to more than $2 trillion currently. In that new environment of abundant reserves, the FOMC put in place a framework for controlling the fed funds rate, using the interest rate that it offered to banks and a different, lower interest rate that it offered to non-banks (and banks). Now that the Fed has begun to gradually reduce its asset holdings, aggregate reserves are shrinking as well, and an important question becomes: How does a change in the level of aggregate reserves affect trading in the fed funds market? In our recent paper, we show that the answer depends not just on the aggregate size of reserve balances, as is sometimes assumed, but also on how reserves are distributed among banks. In particular, we show that a measure of the typical trade in the market known as the effective fed funds rate (EFFR) could rise above the rate paid on banks’ reserve balances if reserves remain heavily concentrated at just a few banks.

Note: This analysis provides insight into how the fed funds market might react to changes in the aggregate level of bank reserves. However, as it does not account for all relevant factors, it should not be construed as an analysis of any specific time period. In particular, our analysis does not incorporate the technical adjustment introduced by the FOMC on June 13 that lowered the interest paid on banks' reserves relative to the top of the target range.

Continue reading "Size Is Not All: Distribution of Bank Reserves and Fed Funds Dynamics" »

Posted by Blog Author at 7:00 AM in Banks, Central Bank, Fed Funds, Monetary Policy | Permalink | Comments (0)

June 19, 2018

At the New York Fed: Conference on the Effects of Post-Crisis Banking Reforms



The financial crisis of 2007-08 and the ensuing recession, the most severe since the 1930s, prompted a wave of regulatory reforms: tighter bank capital and liquidity rules, new failed bank resolution procedures, a stand-alone consumer protection agency, greater transparency in money market funds, central clearing of derivatives, and others as well. As these reforms have gradually taken effect, a healthy debate has emerged in the policy and academic communities over their efficacy in achieving their intended goals and possible unintended consequences.

Continue reading "At the New York Fed: Conference on the Effects of Post-Crisis Banking Reforms" »

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

June 01, 2018

Hey, Economist! Outgoing New York Fed President Bill Dudley on FOMC Preparation and Thinking Like an Economist

LSE_2018.06.01-LSE-Dudley_920x576

Bill Dudley will soon turn over the keys to the vault—so to speak. But before his tenure ends after nine years as president of the New York Fed, Liberty Street Economics sought to capture his parting reflections on economic research, FOMC preparation, and leadership. Publications editor Trevor Delaney recently caught up with Dudley. This transcript has been lightly edited.

Continue reading "Hey, Economist! Outgoing New York Fed President Bill Dudley on FOMC Preparation and Thinking Like an Economist" »

Posted by Blog Author at 7:00 AM in Banks, Federal Reserve, Hey, Economist!, Monetary Policy | Permalink | Comments (0)
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