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Liberty Street Economics
70 posts on "Liquidity"October 21, 2020
Bank Capital, Loan Liquidity, and Credit Standards since the Global Financial Crisis
Did the 2007-09 financial crisis or the regulatory reforms that followed alter how banks change their underwriting standards over the course of the business cycle? We provide some simple, “narrative” evidence on that question by studying the reasons banks cite when they report a change in commercial credit standards in the Federal Reserve’s Senior Loan Officer Opinion Survey. We find that the economic outlook, risk tolerance, and other real factors generally drive standards more than financial factors such as bank capital and loan market liquidity. Those financial factors have mattered more since the crisis, however, and their importance increased further as post-crisis reforms were phased in in the middle of the following decade.
Posted by Blog Author at 7:00 AM in Bank Capital, Banks, Credit, Crisis, Liquidity, Regulation | Permalink | Comments (0)September 22, 2020
Expanding the Toolkit: Facilities Established to Respond to the COVID-19 Pandemic
First of three posts
The Federal Reserve’s response to the coronavirus pandemic has been unprecedented in its size and scope. In a matter of months, the Fed has, among other things, cut the federal funds rate to the zero lower bound, purchased a large amount of Treasury securities and agency mortgage‑backed securities (MBS) and, together with the U.S. Treasury, introduced several lending facilities. Some of these facilities are very similar to ones introduced during the 2007-09 financial crisis while others are completely new. In this post, we argue that the new facilities, while unprecedented, are a natural extension of the Fed’s toolkit, as they operate through similar economic mechanisms to prevent self-reinforcing bad outcomes. We also explain why these new facilities are particularly useful as part of the response to the pandemic, which is an economic shock very different from a financial crisis.
Posted by Blog Author at 7:00 AM in Central Bank, Crisis, Federal Reserve, Liquidity, Monetary Policy, Pandemic | Permalink | Comments (0)August 24, 2020
Explaining the Puzzling Behavior of Short-Term Money Market Rates
Since 2008, the Federal Reserve has dramatically increased the supply of bank reserves, effectively adopting a floor system for monetary policy implementation. Since then, the behavior of short-term money market rates has been at times puzzling. In particular, short-term rates have been surprisingly firm in recent months, despite the large increase in reserves by the Fed as a part of its response to the coronavirus pandemic. In this post, we provide evidence that both the supply of reserves and the supply of short-term Treasury securities are important factors for explaining short-term rates.
Continue reading "Explaining the Puzzling Behavior of Short-Term Money Market Rates" »
Posted by Blog Author at 7:00 AM in Fed Funds, Federal Reserve, Liquidity, Treasury | Permalink | Comments (0)July 07, 2020
A New Reserves Regime? COVID-19 and the Federal Reserve Balance Sheet
Aggregate reserves declined from nearly $3 trillion in August 2014 to $1.4 trillion in mid-September 2019, as the Federal Reserve normalized its balance sheet. This decline came to a halt in September 2019 when the Federal Reserve responded to turmoil in short-term money markets, with reserves fluctuating around $1.6 trillion in the early months of 2020. Then, in response to the COVID-19 pandemic, the Federal Reserve dramatically expanded its balance sheet, both directly, through outright purchases and repurchase agreements, and indirectly, as a consequence of the facilities to support market functioning and the flow of credit to the real economy. In this post, we characterize the increase in reserves between March and June 2020, describing changes to the distribution and concentration of reserves.
Continue reading "A New Reserves Regime? COVID-19 and the Federal Reserve Balance Sheet" »
Posted by Blog Author at 7:00 AM in Fed Funds, Federal Reserve, Fiscal Policy, Liquidity, Monetary Policy, Pandemic | 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.
Continue reading "Outflows from Bank-Loan Funds during COVID-19" »
Posted by Blog Author at 7:00 AM in Crisis, Financial Institutions, Financial Intermediation, Liquidity, Pandemic | Permalink | Comments (2)May 19, 2020
The Primary Dealer Credit 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.
On March 17, 2020, the Federal Reserve announced that it would re-establish the Primary Dealer Credit Facility (PDCF) to allow primary dealers to support smooth market functioning and facilitate the availability of credit to businesses and households. The PDCF started offering overnight and term funding with maturities of up to ninety days on March 20. It will be in place for at least six months and may be extended as conditions warrant. In this post, we provide an overview of the PDCF and its usage to date.
Posted by Blog Author at 7:00 AM in Bank Capital, Banks, Central Bank, Credit, Federal Reserve, Liquidity, Monetary Policy, Pandemic, Systemic Risk | Permalink | Comments (0)May 15, 2020
The Commercial Paper Funding 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.
In mid-March, the Federal Reserve announced a slew of credit and liquidity facilities aimed at supporting credit provision to U.S. households and businesses. Among the initiatives is the Commercial Paper Funding Facility (CPFF) which aims to support market functioning and provide a liquidity backstop for the commercial paper market. The domestic commercial paper market provides a venue for short-term financing for companies which employ more than 6 million Americans. Securities in the commercial paper market represent a key asset class for money market mutual funds. This post documents the dislocations in the commercial paper market that motivated the creation of this facility, and tracks the subsequent improvement in market conditions.
Posted by Blog Author at 7:00 AM in Central Bank, Corporate Finance, Federal Reserve, Financial Markets, Liquidity, Pandemic | Permalink | Comments (0)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.
Continue reading "The Money Market Mutual Fund Liquidity Facility" »
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)January 13, 2020
How Does Information Affect Liquidity in Over-the-Counter Markets?
A large volume of financial transactions occur in decentralized markets that commonly depend on a network of dealers. Dealers face two impediments to providing liquidity in these markets. First, dealers may face informed traders. Second, they may face costs associated with maintaining large balance sheets, either due to inventory or liquidity costs. In a recent paper, we study a model of over-the-counter (OTC) markets in which liquidity is endogenously determined by dealers who must contend with both asymmetric information and liquidity costs. This post provides an intuitive explanation of our model and the dynamics of interdealer liquidity.
Continue reading "How Does Information Affect Liquidity in Over-the-Counter Markets?" »
January 06, 2020
The Evolving Market for U.S. Sovereign Credit Risk
How should we measure market expectations of the U.S. government failing to meet its debt obligations and thereby defaulting? A natural candidate would be to use the spreads on U.S. sovereign single-name credit default swaps (CDS): since a CDS provides insurance to the buyer for the possibility of default, an increase in the CDS spread would indicate an increase in the market-perceived probability of a credit event occurring. In this post, we argue that aggregate measures of activity in U.S. sovereign CDS mask a decrease in risk-forming transactions after 2014. That is, quoted CDS spreads in this market are based on few, if any, market transactions and thus may be a misleading indicator of market expectations.
Continue reading "The Evolving Market for U.S. Sovereign Credit Risk" »
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.
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