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.
Uyanga Byambaa, Beverly Hirtle, Anna Kovner, and Matthew Plosser
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.
During moments of heightened economic uncertainty, authorities often need to decide on how much information to disclose. For example, during crisis periods, we often observe regulators limiting access to bank‑level information with the goal of restoring the public's confidence in banks. Thus, information management often plays a central role in ending financial crises. Despite the perceived importance of managing information about individual banks during a financial crisis, we are not aware of any empirical work that quantifies the effect of such policies. In this blog post, we highlight results from our recent working paper, demonstrating that in a crisis, a policy of suppressing information about banks' balance sheets has a significant and positive effect on deposits.
James Conklin, W. Scott Frame, Kristopher Gerardi, and Haoyang Liu
Editor’s note: When this post was first published, the chart labels for “Non-Boom Counties” were incorrect; the labels have been corrected. (February 26, 12:00 pm)
The role of subprime mortgage lending in the U.S. housing boom of the 2000s is hotly debated in academic literature. One prevailing
narrative ascribes the unprecedented home price growth during the mid-2000s to an expansion in mortgage lending to subprime borrowers. This post, based on our recent working paper, “Villains or Scapegoats? The Role of Subprime Borrowers in Driving the U.S. Housing Boom,” presents evidence that is inconsistent with conventional wisdom. In particular, we show that the housing boom and the subprime boom occurred in different places.
In recent years there has been a lot of interest in the effect of income inequality (heterogeneity) on the economy, from both academics and policymakers. Researchers have developed Heterogeneous Agent New Keynesian (HANK) models that incorporate heterogeneity and uninsurable idiosyncratic risk into the New Keynesian models that have become a cornerstone of monetary policy analysis. This research has argued that heterogeneity and idiosyncratic risk change many features of New Keynesian models – the
transmission of conventional monetary policy, the forward guidance puzzle, fiscal multipliers, the efficacy of targeted transfers and automatic stabilizers, among others. However, the source of the difference between HANK and representative agent New Keynesian (RANK) models remains unclear. This is because HANK models are typically not analytically tractable, leaving it unclear what exactly is driving the results. To shed light on the macroeconomic consequences of heterogeneity, we develop a stylized HANK model that contains key features present in more complicated HANK models.
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.
Correction: When this post was first published, line labels in the panel showing Tier 1 capital ratios were reversed; the labels have been corrected. (November 13, 10:40 a.m.)
Over the past two decades, the growth of shadow banking has transformed the way the U.S. banking system funds corporations. In this post, we describe how this growth has affected both the term loan and credit line businesses, and how the changes have resulted in a reduction in the liquidity insurance provided to firms.
Fedwire Funds, a key payment system in the United States, is used by banks to wire money to one another throughout the day. Historically, the total value of payments sent over Fedwire has been roughly proportional to economic activity. Since the financial crisis, however, we have instead observed a strong co-movement between total payments and the level of aggregate reserves. This co-movement suggests that a fraction of every dollar of reserves created recirculates on a daily basis. In this post, we investigate why total payments, a flow variable driven by real and financial activity, would co-move with total reserves, a stock variable controlled by the Federal Reserve.
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.
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.
Economic Research Tracker
Liberty Street Economics is now available on the iPhone® and iPad® and can be customized by economic research topic or economist.
We encourage your comments and queries on our posts and will publish them (below the post) subject to the following guidelines:
Please be brief: Comments are limited to 1500 characters.
Please be quick: Comments submitted after COB on Friday will not be published until Monday morning.
Please be aware: Comments submitted shortly before or during the FOMC blackout may not be published until after the blackout.
Please be on-topic and patient: Comments are moderated and will not appear until they have been reviewed to ensure that they are substantive and clearly related to the topic of the post. We reserve the right not to post any comment, and will not post comments that are abusive, harassing, obscene, or commercial in nature. No notice will be given regarding whether a submission will or will not be posted.
The LSE editors ask authors submitting a post to the blog to confirm that they have no conflicts of interest as defined by the American Economic Association in its Disclosure Policy. If an author has sources of financial support or other interests that could be perceived as influencing the research presented in the post, we disclose that fact in a statement prepared by the author and appended to the author information at the end of the post. If the author has no such interests to disclose, no statement is provided. Note, however, that we do indicate in all cases if a data vendor or other party has a right to review a post.