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 New York Fed engages with individuals, households and businesses in the Second District and maintains an active dialogue in the region. The Bank gathers and shares regional economic intelligence to inform our community and policy makers, and promotes sound financial and economic decisions through community development and education programs.
Marco Cipriani, Gabriele La Spada, Reed Orchinik, and Aaron Plesset
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.
Over the first three weeks of March, as uncertainty surrounding the COVID-19 pandemic increased, prime and municipal (muni) money market funds (MMFs) faced large redemption pressures. Similarly to past episodes of industry dislocation, such as the 2008 financial crisis and the 2011 European bank crisis, outflows from prime and muni MMFs were mirrored by large inflows into government MMFs, which have historically been seen by investors as a safe haven in times of crisis. In this post, we describe a liquidity facility established by the Federal Reserve in response to these outflows.
After the global financial crisis, regulatory changes were implemented to support financial stability, with some changes directly addressing capital and liquidity in bank holding companies (BHCs) and others targeting BHC size and complexity. Although the overall size of the largest U.S. BHCs has not decreased since the crisis, the organizational complexity of these same organizations has declined, with less notable changes being observed in their range of businesses and geographic scope (Goldberg and Meehl, forthcoming). In this post, we explore how different types of BHC risks—risks that can influence the probability that a BHC is stressed, as well as the chance of systemic implications—have changed over time. The results are mixed: Levels of most BHC risks tend to be higher than in the years immediately preceding the crisis, but are markedly lower than the levels seen during and immediately following the crisis.
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.
Over the past thirty years, more than 2,900 U.S. banks have transformed from pure depository institutions into conglomerates involved in a broad range of business activities. What type of banks choose to become conglomerate organizations? In this post, we document that, from 1986 to 2018, such institutions had, on average, a higher return on equity in the three years prior to their decision to expand, as well as a lower level of risk overall. However, this superior pre-expansion performance diminishes over time, and all but disappears by the end of the 1990s.
Marco Cipriani, Jeff Gortmaker, and Gabriele La Spada
In a recent post, we documented the transmission of monetary policy through money market funds (MMFs). In this post, we complement that analysis by comparing the transmission of monetary policy via MMFs to the transmission via bank deposits and studying the impact of the differential pass-through on the size of the MMF industry. To this purpose, we focus on rates on certificates of deposit (CDs) offered to banks’ retail customers and compare their response to monetary policy with that of retail MMF yields.
How does competition among banks affect credit growth and real economic growth? In addition, how does it affect financial stability? In this blog post, we derive insights into this important set of questions from novel data on the U.S. banking system during the nineteenth century.
Marco Cipriani, Jeff Gortmaker, and Gabriele La Spada
In December 2015, the Federal Reserve tightened monetary policy for the first time in almost ten years and, over the following three years, it raised interest rates eight more times, increasing the target range for the federal funds rate from 0-25 basis points (bps) to 225-250 bps. To what extent are changes in the fed funds rate transmitted to cash investors, and are there differences in the pass-through between retail and institutional investors? In this post, we describe the impact of recent rate increases on the yield paid by money market funds (MMFs) to their investors and show that the impact varies depending on investors’ sophistication.
Alan Basmajian, Brad Groarke, Vanessa Kargenian, Kimberley Liao, Erika Ota-Liedtke, Jesse Maniff, and Asani Sarkar
Financial technology (“FinTech”) refers to the evolving intersection of financial services and technology. In March, the New York Fed hosted "The First New York Fed Research Conference on FinTech” to understand the implications of FinTech developments on issues that are relevant to the Fed’s mandates such as lending, payments, and regulation. In this post, we summarize the principal themes and findings of the conference.
Fernando M. Duarte, Collin Jones, and Francisco Ruela
Second of two posts
When a financial firm suffers sufficiently high losses, it might default on its counterparties, who may in turn become unable to pay their own creditors, and so on. This “domino” or “cascade” effect can quickly propagate through the financial system, creating undesirable spillovers and unnecessary defaults. In this post, we use the framework that we discussed in “Assessing Contagion Risk in a Financial Network,” the first part of this two-part series, to answer the question: How vulnerable is the U.S. financial system to default spillovers?
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.
The editors are Michael Fleming, Andrew Haughwout, Thomas Klitgaard, and Asani Sarkar, all economists in the Bank’s Research Group.
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