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207 posts on "Financial Institutions"

October 19, 2020

How Has Post-Crisis Banking Regulation Affected Hedge Funds and Prime Brokers?



LSE_2020_hedge-funds-prime-brokers_eisenbach_460

“Arbitrageurs” such as hedge funds play a key role in the efficiency of financial markets. They compare closely related assets, then buy the relatively cheap one and sell the relatively expensive one, thereby driving the prices of the assets closer together. For executing trades and other services, hedge funds rely on prime brokers and broker-dealers. In a previous Liberty Street Economics blog post, we argued that post-crisis changes to regulation and market structure have increased the costs of arbitrage activity, potentially contributing to the persistent deviations in the prices of closely related assets since the 2007–09 financial crisis. In this post, we document how post-crisis changes to bank regulations have affected the relationship between hedge funds and broker-dealers.

Continue reading "How Has Post-Crisis Banking Regulation Affected Hedge Funds and Prime Brokers?" »

October 13, 2020

Weathering the Storm: Who Can Access Credit in a Pandemic?



LSE_Weathering the Storm: Who Can Access Credit in a Pandemic?

Credit enables firms to weather temporary disruptions in their business that may impair their cash flow and limit their ability to meet commitments to suppliers and employees. The onset of the COVID recession sparked a massive increase in bank credit, largely driven by firms drawing on pre-committed credit lines. In this post, which is based on a recent Staff Report, we investigate which firms were able to tap into bank credit to help sustain their business over the ensuing downturn.

Continue reading "Weathering the Storm: Who Can Access Credit in a Pandemic?" »

Posted by Blog Author at 7:00 AM in Corporate Finance, Financial Institutions | Permalink | Comments (0)

October 01, 2020

The Impact of the Corporate Credit Facilities



The Impact of the Corporate Credit Facilities

American companies have raised almost $1 trillion in the U.S. corporate bond market since March. If companies had been unable to refinance those bonds, their inability to repay may have led to an immediate default on all of their obligations, creating a cascade of defaults and layoffs. Based on Compustat data, an inability to access public bond markets could have affected companies employing more than 16 million people. In this post, we document the impact of the Primary Market and Secondary Market Corporate Credit Facilities (PMCCF and SMCCF) on bond market functioning, summarizing a detailed evaluation described in a new working paper. We also describe the impact that a collapse of corporate bond markets could have had on employment and investment.

Continue reading "The Impact of the Corporate Credit Facilities" »

Posted by Blog Author at 7:00 AM in Financial Institutions, Financial Markets, Pandemic | Permalink | Comments (2)

July 17, 2020

MBS Market Dysfunctions in the Time of COVID-19



MBS Market Dysfunctions in the Time of COVID-19

The COVID-19 pandemic elevated financial market illiquidity and volatility, especially in March 2020. The mortgage-backed securities (MBS) market, which plays a critical role in the housing market by funding the vast majority of U.S. residential mortgages, also suffered a period of dysfunction. In this post, we study a particular aspect of MBS market disruptions by showing how a long-standing relationship between cash and forward markets broke down, in spite of MBS dealers increasing the provision of liquidity. (See our related staff report for greater detail.) We also highlight an innovative response by the Federal Reserve that seemed to have helped to normalize market functioning.

Continue reading "MBS Market Dysfunctions in the Time of COVID-19" »

June 25, 2020

Insider Networks



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.

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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.

Continue reading "Outflows from Bank-Loan Funds during COVID-19" »

June 12, 2020

How Fed Swap Lines Supported the U.S. Corporate Credit Market amid COVID-19 Strains



The onset of the COVID-19 shock in March 2020 brought large changes to the balance sheets of the U.S. branches of foreign banking organizations (FBOs). Most of these branches saw sizable usage of committed credit lines by U.S.-based clients, resulting in increased funding needs. In this post, we show that branches of FBOs from countries whose central banks used standing swap lines with the Federal Reserve (“standing swap central banks”—SSCBs) met their increased funding needs by accessing dollars that flowed into the United States through their foreign parent banks. This volume of dollar inflows accounted for at least half of the late March aggregate take-up at SSCB dollar operations.

Continue reading "How Fed Swap Lines Supported the U.S. Corporate Credit Market amid COVID-19 Strains" »

May 26, 2020

The Primary and Secondary Market Corporate Credit Facilities



LSE_https://libertystreeteconomics.newyorkfed.org/2020/05/the-primary-and-secondary-market-corporate-credit-facilities.html

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.

On April 9, the Federal Reserve announced that it would take additional actions to provide up to $2.3 trillion in loans to support the economy in response to the coronavirus pandemic. Among the initiatives are the Primary Market and Secondary Market Corporate Credit Facilities (PMCCF and SMCCF), whose intent is to provide support for large U.S. businesses that typically finance themselves by issuing debt in capital markets. Corporate bonds support the operations of companies with more than 17 million employees based in the United States and these bonds are key assets for retirees and pension funds. If companies are unable to issue corporate bonds, they may be unable to invest in inventory and equipment, meet current liabilities, or pay employees. Maintaining access to credit is thus crucially important during the COVID‑19 pandemic, both for issuing companies and for their employees. This post documents the dislocations in the corporate bond market that have motivated the creation of these facilities and explains how we expect these facilities to support U.S. businesses and their employees both through the COVID‑related disruptions and beyond, when the economy recovers.

Continue reading "The Primary and Secondary Market Corporate Credit Facilities" »

Posted by Blog Author at 7:00 AM in Financial Institutions, Financial Markets, Pandemic | Permalink | Comments (0)

May 08, 2020

The Money Market Mutual Fund Liquidity Facility



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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.

Continue reading "The Money Market Mutual Fund Liquidity Facility" »

April 08, 2020

How Does Supervision Affect Bank Performance during Downturns?



LSE_How Does Supervision Affect Bank Performance during Downturns?

Supervision and regulation are critical tools for the promotion of stability and soundness in the financial sector. In a prior post, we discussed findings from our recent research paper which examines the impact of supervision on bank performance (see earlier post How Does Supervision Affect Banks?). As described in that post, we exploit new supervisory data and develop a novel strategy to estimate the impact of supervision on bank risk taking, earnings, and growth. We find that bank holding companies (BHCs or “banks”) that receive more supervisory attention have less risky loan portfolios, but do not have lower growth or profitability. In this post, we examine the benefits of supervision over time, and especially during banking industry downturns.

Continue reading "How Does Supervision Affect Bank Performance during Downturns?" »

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