89 posts on "Liquidity"
November 10, 2021
How Does Market Power Affect Fire‑Sale Externalities?
An important role of capital and liquidity regulations for financial institutions is to counteract inefficiencies associated with “fire-sale externalities,” such as the tendency of institutions to lever up and hold illiquid assets to the extent that their collective actions increase financial vulnerabilities. However, theoretical models that study such externalities commonly assume perfect competition among financial institutions, in spite of high (and increasing) financial sector concentration. In this post, which is based on our forthcoming article, we consider instead how the effects of fire-sale externalities change when financial institutions have market power.
October 18, 2021
Were Banks Exposed to Sell‑offs by Open‑End Funds during the Covid Crisis?
Should open-end mutual funds experience redemption pressures, they may be forced to sell assets, thus contributing to asset price dislocations that in turn could be felt by other entities holding similar assets. This fire-sale externality is a key rationale behind proposed and implemented regulatory actions. In this post, I quantify the spillover risks from fire sales, and present some preliminary results on the potential exposure of U.S. banking institutions to asset fire sales from open-end funds.
July 12, 2021
Tailoring Regulations
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.
Posted at 7:00 am in Bank Capital, Banks, Financial Intermediation, Liquidity, Regulation | Permalink | Comments (2)
March 24, 2021
Did Dealers Fail to Make Markets during the Pandemic?
Sarkar and coauthors liquidity provision by dealers in several important financial markets during the COVID-19 pandemic: how much was provided, possible causes of any shortfalls, and the effects of the Federal Reserve’s actions to support the economy.
February 22, 2021
Measuring the Forest through the Trees: The Corporate Bond Market Distress Index
With more than $6 trillion outstanding, the U.S. corporate bond market is a significant source of funding for most large U.S. corporations. While prior literature offers a variety of measures to capture different aspects of corporate bond market functioning, there is little consensus on how to use those measures to identify periods of distress in the market as a whole. In this post, we describe the U.S. Corporate Bond Market Distress Index (CMDI), which offers a single measure to quantify joint dislocations in the primary and secondary corporate bond markets. As detailed in a new working paper, the index provides more salient information about the state of the corporate bond market relative to common measures of financial stress, thereby more accurately identifying periods of widespread dislocation in the market.
February 18, 2021
How Competitive are U.S. Treasury Repo Markets?
The Treasury repo market is at the center of the U.S. financial system, serving as a source of secured funding as well as providing liquidity for Treasuries in the secondary market. Recently, results published by the Bank for International Settlements (BIS) raised concerns that the repo market may be dominated by as few as four banks. In this post, we show that the secured funding portion of the repo market is competitive by demonstrating that trading is not concentrated overall and explaining how the pricing of inter-dealer repo trades is available to a wide-range of market participants. By extension, rate-indexes based on repo trades, such as SOFR, reflect a deep market with a broad set of participants.
Posted at 7:00 am in Bank Capital, Banks, Financial Institutions, Financial Markets, Liquidity, Repo, Treasury | Permalink
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.
September 22, 2020
Expanding the Toolkit: Facilities Established to Respond to the COVID‑19 Pandemic
Anna Kovner and Antoine Martin argue that the “credit” and lending facilities established by the Fed in response to the COVID-19 pandemic, while unprecedented, are a natural extension of the central bank’s existing toolkit.
Posted at 7:00 am in Central Bank, Crisis, Federal Reserve, Liquidity, Monetary Policy, Pandemic | Permalink
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.
July 17, 2020
MBS Market Dysfunctions in the Time of COVID‑19
Haoyang Liu, Asani Sarkar, and coauthors 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 dealers increasing the provision of liquidity. The analysis also highlights an innovative response by the Federal Reserve that seemed to have helped to normalize market functioning.
Posted at 7:00 am in Financial Institutions, Financial Markets, Liquidity, Pandemic | Permalink | Comments (2)
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