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.
Regulations are not written in stone. The benefits derived from them, along with the costs of compliance for affected institutions and of enforcement for regulators, are likely to evolve. When this happens, regulators may seek to modify the regulations to better suit the specific risk profiles of regulated entities. In this post, we consider the Economic Growth, Regulatory Relief, and Consumer Protection Act (EGRRCPA) passed by Congress in 2018, which eased banking regulations for smaller institutions. We focus on one regulation—the Liquidity Coverage Ratio (LCR)—and assess how its relaxation affected newly exempt banks’ assets and liabilities, and the resilience of the banking system.
Jennifer Dlugosz, Brian Melzer, and Donald P. Morgan
The 25 percent of low-income Americans without a checking account operate in a separate but unequal financial world. Instead of paying for things with cheap, convenient debit cards and checks, they get by with “fringe” payment providers like check cashers, money transfer, and other alternatives. Costly overdrafts rank high among reasons why households “bounce out” of the banking system and some observers have advocated capping overdraft fees to promote inclusion. Our recent paper finds unintended (if predictable) effects of overdraft fee caps. Studying a case where fee caps were selectively relaxed for some banks, we find higher fees at the unbound banks, but also increased overdraft credit supply, lower bounced check rates (potentially the costliest overdraft), and more low-income households with checking accounts. That said, we recognize that overdraft credit is expensive, sometimes more than even payday loans. In lieu of caps, we see increased overdraft credit competition and transparency as alternative paths to cheaper deposit accounts and increased inclusion.
Stein Berre, Kristian Blickle, and Rajashri Chakrabarti
About one in twenty American households are unbanked (meaning they do not have a demand deposit or checking account) and many more are underbanked (meaning they do not have the range of bank-provided financial services they need). Unbanked and underbanked households are more likely to be lower-income households and households of color. Inadequate access to financial services pushes the unbanked to use high-cost alternatives for their transactional needs and can also hinder access to credit when households need it. That, in turn, can have adverse effects on the financial health, educational opportunities, and welfare of unbanked households, thereby aggravating economic inequality. Why is access to financial services so uneven? The roots to part of this problem are historical, and in this post we will look back four decades to changes in regulation, shifts in the ownership structure of retail financial services, and the decline of free/low-cost checking accounts in the United States to search out a few of the contributory factors.
In March 2020, U.S. prime money market funds (MMFs) suffered heavy outflows following the liquidity shock triggered by the COVID-19 crisis. In a previous post, we characterized the run on the prime MMF industry as a whole and the role of the liquidity facility established by the Federal Reserve (the Money Market Mutual Fund Liquidity Facility) in stemming the run. In this post, based on a recent Staff Report, we contrast the behaviors of retail and institutional investors during the run and explain the different reasons behind the run.
The Main Street Lending Program was the last of the facilities launched by the Fed and Treasury to support the flow of credit during the COVID-19 pandemic of 2020-21. The others primarily targeted Wall Street borrowers; Main Street was for smaller firms that rely more on banks for credit. It was a complicated program that worked by purchasing loans and sharing risk with lenders. Despite its delayed launch, Main Street purchased more debt than any other facility and was accelerating when it closed in January 2021. This post first locates Main Street in the constellation of COVID-19 credit programs, then looks in detail at its design and usage with an eye toward any future programs.
Viral V. Acharya, Matteo Crosignani, Tim Eisert, and Christian Eufinger
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.
In prior research, we documented evidence suggesting that digital payment adoptions have accelerated as a result of the 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.
Ivan T. Ivanov, Marco Macchiavelli, and João A.C. Santos
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.
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.
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.
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