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50 posts on "Financial Intermediation"December 22, 2020
How Does Zombie Credit Affect Inflation? Lessons from Europe
Even after the unprecedented stimulus by central banks in Europe following the global financial crisis, Europe’s economic growth and inflation have remained depressed, consistently undershooting projections. In a striking resemblance to Japan’s “lost decades,” the European economy has been recently characterized by persistently low interest rates and the provision of cheap bank credit to impaired firms, or “zombie credit.” In this post, based on a recent staff report, we propose a “zombie credit channel” that links the rise of zombie credit to dis-inflationary pressures.
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November 23, 2020
Monetizing Privacy with Central Bank Digital Currencies
In prior research, we documented evidence suggesting that digital payment adoptions have accelerated as a result of the COVID-19 pandemic. While digitalization of payment activity improves data utilization by firms, it can also infringe upon consumers’ right to privacy. Drawing from a recent paper, this blog post explains how payment data acquired by firms impacts market structure and consumer welfare. Then, we discuss the implications of introducing a central bank digital currency (CBDC) that offers consumers a low-cost, privacy-preserving electronic means of payment—essentially, digital cash.
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Posted by Blog Author at 7:00 AM in Central Bank, Currency, Financial Intermediation, Household Finance | Permalink | Comments (0)November 18, 2020
The Impact of Natural Disasters on the Corporate Loan Market
Natural disasters are usually associated with an increase in the demand for credit by both households and companies in the affected regions. However, if capacity constraints preclude banks from meeting the local increase in demand, the banks may reduce lending elsewhere, thus propagating the shock to unaffected areas. In this post, we analyze the corporate loan market and find that banks, particularly those with lower capital, reduce credit provisioning to distant regions unaffected by natural disasters. We also find that shadow banks only partially offset the reduction in bank credit, so borrowers in regions unaffected by natural disasters experience a decline in credit supply.
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November 10, 2020
The Fed Funds Market during the 2007-09 Financial Crisis
The U.S. federal funds market played a central role in the financial system during the 2007-09 crisis, because it was the market which provided banks with immediate liquidity, even late in the day. Interpreting changes in fed funds rates is notoriously difficult, however, as many of the economic drivers behind the rates are simultaneously changing. In this post, I highlight results from a working paper which untangles the impact of these economic drivers and measures their respective effects on the marketplace using data over a sample period leading up to and during the financial crisis. The analysis shows that the spread between fed funds sold and bought widened because of increases in counterparty risk. Further, there was a large increase in the supply of cash into this market, suggesting that banks viewed fed funds as a relatively safe place to invest cash in a crisis environment.
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Posted by Blog Author at 7:00 AM in Crisis, Fed Funds, Financial Intermediation | Permalink | Comments (0)September 28, 2020
COVID-19 and the Search for Digital Alternatives to Cash
Today, the majority of retail payments in the United States are digital. Practically all digital payments are tracked, collected, and aggregated by financial institutions, payment providers, and vendors. This trend has accelerated during the COVID-19 pandemic as payments that require physical contact, such as cash, have been discouraged. As cash gradually becomes obsolete, consumers are left with fewer alternatives for making private transactions. In this post, we outline some evidence on the impact of COVID-19 on consumer payment behavior and follow up in the second post in this Liberty Street Economics series with a look at the implications of cash obsolescence for privacy.
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Posted by Blog Author at 7:00 AM in Central Bank, Currency, Financial Intermediation, Household Finance, Pandemic | Permalink | Comments (0)July 16, 2020
Federal Reserve Agency CMBS Purchases
On March 23, the Open Market Trading Desk (the Desk) at the Federal Reserve Bank of New York initiated plans to purchase agency commercial mortgage-backed securities (agency CMBS) at the direction of the FOMC in order to support smooth market functioning of the markets for these securities. This post describes the deterioration in market conditions that led to agency CMBS purchases, how the Desk conducts these operations, and how market functioning has improved since the start of the purchase operations.
Posted by Blog Author at 9:38 AM in Dealers, Federal Reserve, Financial Intermediation, Financial Markets, Fire Sale | Permalink | Comments (1)June 25, 2020
Insider Networks
Modern-day financial systems are highly complex, with billions of exchanges in information, assets, and funds between individuals and institutions. Though daunting to operationalize, regulating these transmissions may be desirable in some instances. For example, securities regulators aim to protect investors by tracking and punishing insider trading. Recent evidence shows that insiders have formed sophisticated networks that enable them to pursue activities outside the purview of regulatory oversight. In understanding the cat-and-mouse game between regulators and insiders, a key consideration is the networks that insiders might form in order to circumvent regulation, and how regulators might cope with insiders’ tactics. In this post, we introduce a theoretical framework that considers network formation in response to regulation and review the key insights.
Posted by Blog Author at 7:00 AM in Bank Capital, Banks, Central Bank, Financial Institutions, Financial Intermediation, Financial Markets, Regulation | Permalink | Comments (0)June 16, 2020
Outflows from Bank-Loan Funds during COVID-19
The COVID-19 pandemic has put significant pressure on debt markets, especially those populated by riskier borrowers. The leveraged loan market, in particular, came under remarkable stress during the month of March. Bank-loan mutual funds, among the main holders of leveraged loans, suffered massive outflows that were reminiscent of the outflows they experienced during the 2008 crisis. In this post, we show that the flow sensitivity of the loan-fund industry to the COVID-19 crisis (and to negative shocks more generally) seems to be even greater than that of high-yield bond funds, which also invest in high-risk debt securities and have received much attention because of their possible exposure to run-like behavior by investors and their implications for financial stability.
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Posted by Blog Author at 7:00 AM in Crisis, Financial Institutions, Financial Intermediation, Liquidity, Pandemic | Permalink | Comments (2)May 08, 2020
The Money Market Mutual Fund Liquidity Facility
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.
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Posted by Blog Author at 7:00 AM in Central Bank, Credit, Federal Reserve, Financial Institutions, Financial Intermediation, Financial Markets, Liquidity, Monetary Policy, Pandemic | Permalink | Comments (0)February 19, 2020
At the New York Fed: Fourteenth Annual Joint Conference with NYU-Stern on Financial Intermediation
An understanding of the developments in financial intermediation is critical to the efforts of the New York Fed to promote financial stability and economic growth. In line with this mission, the Bank recently hosted the fourteenth annual Federal Reserve Bank of New York-New York University Stern School of Business Conference on Financial Intermediation. As in years past, the conference attracted a large number of academics and policymakers from around the world who engaged in discussions of their most recent research. In this post, we discuss highlights of the conference.
About the BlogLiberty 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.
Liberty Street Economics does not publish new posts during the blackout periods surrounding Federal Open Market Committee meetings.
The views expressed are those of the authors, and do not necessarily reflect the position of the New York Fed or the Federal Reserve System.
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