Liberty Street Economics

May 10, 2023

Assessing the Outlook for Employment across Industries

Thomas Klitgaard and Ethan Nourbash

Decorative photo: workers walking on city street during rush hour

Job gains exceeded output growth in 2022, bringing GDP per worker back down to its trend level after being well above for an extended period. Employment is consequently set to grow slower than output going forward, as it typically does. Breaking down the GDP per worker by industry, though, shows a significant divergence between the services and goods-producing sectors. Productivity in the services sector was modestly above its pre-pandemic path at the end of last year, suggesting room for relatively strong employment growth, with the gap particularly large in the health care, professional and business services, and leisure and hospitality sectors. Productivity in goods-producing industries, though, was depressed, implying that payroll growth is set to lag that sector’s GDP growth.

Posted at 7:00 am in Labor Market, Macroeconomics | Permalink

May 8, 2023

Are There Too Many Ways to Clear and Settle Secured Financing Transactions?

Adam Copeland, Frank Keane, and Jenny Phan

Decorative photo: digital terminal screen with rows and columns of numbers and candlestick chart over it with hand with a pen pointing on the chart.

The New York Fed’s Treasury Market Practices Group (TMPG) recently released a consultative white paper on clearing and settlement processes for secured financing trades (SFT) involving U.S. Treasury securities. The paper describes the many ways that Treasury SFTs are cleared and settled— information that may not be readily available to all market participants. It also identifies potential risk and resiliency issues, and so promotes discussion about whether current practices have room for improvement. This work is timely given the SEC’s ongoing efforts to improve transparency and lower systemic risk in the Treasury market by increasing the prevalence of central clearing. In this post, we summarize the current state of clearing and settlement for Treasury SFTs and highlight some of the key risks described in the white paper.

Posted at 7:00 am in Financial Markets, Repo, Treasury | Permalink

May 5, 2023

MCT Update: Inflation Persistence Continued to Decline in March

Martin Almuzara, Babur Kocaoglu, and Argia Sbordone

Decorative photo: Closeup of sales receipt

This post presents an updated estimate of inflation persistence, following the release of personal consumption expenditure (PCE) price data for March 2023. The estimates are obtained by the Multivariate Core Trend (MCT), a model we introduced on Liberty Street Economics last year and covered most recently in a March post. The MCT is a dynamic factor model estimated on monthly data for the seventeen major sectors of the PCE price index. It decomposes each sector’s inflation as the sum of a common trend, a sector-specific trend, a common transitory shock, and a sector-specific transitory shock. The trend in PCE inflation is constructed as the sum of the common and the sector-specific trends weighted by the expenditure shares.

Posted at 7:00 am in Inflation, Macroeconomics | Permalink

April 20, 2023

Moving Out of a Flood Zone? That May Be Risky!

Kristian Blickle, Katherine Engelman, Theo Linnemann, and João A.C. Santos

Photo: Blue house and property sitting in a flood; for a story on climate change.

An often-overlooked aspect of flood-plain mapping is the fact that these maps designate stark boundaries, with households falling either inside or outside of areas designated as “flood zones.” Households inside flood zones must insure themselves against the possibility of disasters. However, costly insurance may have pushed lower-income households out of areas officially designated a flood risk and into physically adjacent areas. While not designated an official flood risk, Federal Emergency Management Agency (FEMA) and disaster data shows that these areas are still at considerable risk of flooding. In this post, we examine whether flood maps may have inadvertently clustered those households financially less able to bear the consequences of a disaster into areas that may still pose a significant flood risk.

Posted at 9:00 am in Climate Change, Household Finance, Housing | Permalink

CRISK: Measuring the Climate Risk Exposure of the Financial System

Hyeyoon Jung

Photo: windmill farm with solar panels on the ground around them; story about climate change and bank risk.

A growing number of climate-related policies have been adopted globally in the past thirty years (see chart below). The risk to economic activity from changes in policies in response to climate risks, such as carbon taxes and green subsidies, is often referred to as transition risk. Transition risk can adversely affect the real economy through […]

Posted at 7:00 am in Climate Change, Financial Institutions, Financial Markets, Systemic Risk | Permalink

April 18, 2023

Monitoring Banks’ Exposure to Nonbanks: The Network of Interconnections Matters

Nicola Cetorelli, Mattia Landoni, and Lina Lu

Decorative image: View of high rise glass building and dark steel in London

The first post in this series discussed the potential exposure of banks to the open-end funds sector, by virtue of commonalities in asset holdings that expose banks to balance sheet losses in the event of an asset fire sale by these funds. In this post, we summarize the findings reported in a recent paper of ours, in which we expand the analysis to consider a broad cross section of non-bank financial institution (NBFI) segments. We unveil an innovative monitoring insight: the network of interconnections across NBFI segments and banks matters. For example, certain nonbank institutions may not have a meaningful asset overlap with banks, but their fire sales could nevertheless represent a vulnerability for banks because their assets overlap closely with other NBFIs that banks are substantially exposed to.

Posted at 7:02 am in Bank Capital, Banks, Nonbank (NBFI), Systemic Risk | Permalink | Comments (2)

Enhancing Monitoring of NBFI Exposure: The Case of Open‑End Funds

Nicola Cetorelli and Debashish Sarkar

Decorative photo: High-rise glass buildings

Non-bank financial institutions (NBFIs) have grown steadily over the last two decades, becoming important providers of financial intermediation services. As NBFIs naturally interact with banking institutions in many markets and provide a wide range of services, banks may develop significant direct exposures stemming from these counterparty relationships. However, banks may be also exposed to NBFIs indirectly, simply by virtue of commonality in asset holdings. This post and its companion piece focus on this indirect form of exposure and propose ways to identify and quantify such vulnerabilities.

Posted at 7:00 am in Banks, Financial Institutions, Financial Markets, Nonbank (NBFI) | Permalink

April 17, 2023

Financial Fragility without Banks

Stein Berre and Asani Sarkar

Painting of the old town hall in Amsterdam with the Bank of Amsterdam to the right by Pieter Saenredam.

Proponents of narrow banking have argued that lender of last resort policies by central banks, along with deposit insurance and other government interventions in the money markets, are the primary causes of financial instability. However, as we show in this post, non-bank financial institutions (NBFIs) triggered a financial crisis in 1772 even though the financial system at that time had few banks and deposits were not insured. NBFIs profited from funding risky, longer-dated assets using cheap short-term wholesale funding and, when they eventually failed, authorities felt compelled to rescue the financial system.

Posted at 7:00 am in Crisis, Economic History, Financial Intermediation | Permalink | Comments (2)

April 14, 2023

Mitigating the Risk of Runs on Uninsured Deposits: the Minimum Balance at Risk

Marco Cipriani, Michael Holscher, Patrick McCabe, Antoine Martin, and Richard Berner

Decorative image: SANTA CLARA, CALIFORNIA - MARCH 13: Members of the media line up outside of a Silicon Valley Bank office on March 13, 2023 in Santa Clara, California. Days after Silicon Valley Bank collapsed, customers are lining up to try and retrieve their funds from the failed bank. The Silicon Valley Bank failure is the second largest in U.S. history. (Photo by Justin Sullivan/Getty Images)

The incentives that drive bank runs have been well understood since the seminal work of Nobel laureates Douglas Diamond and Philip Dybvig (1983). When a bank is suspected to be insolvent, early withdrawers can get the full value of their deposits. If and when the bank runs out of funds, however, the bank cannot pay remaining depositors. As a result, all depositors have an incentive to run. The failures of Silicon Valley Bank and Signature Bank remind us that these incentives are still present for uninsured depositors, that is, those whose bank deposits are larger than deposit insurance limits. In this post, we discuss a policy proposal to reduce uninsured depositors’ incentives to run.

Posted at 7:00 am in Bank Capital, Crisis, Financial Intermediation, International Economics | Permalink

April 13, 2023

How Did New York City’s Economy Weather the Pandemic?

Jason Bram

Decorative photo: Skyline Of Manhattan From The Highline and Empire State Building, New York City, USA

When COVID-19 first struck the U.S. in early 2020, New York City was the epicenter of the pandemic. By early April, there was an unthinkable scale of suffering, with massive hospitalizations and roughly 800 fatalities per day, accounting for nearly half of the nationwide total. The rapid spread was facilitated by the city’s extraordinarily high population density and widespread use of mass transit. What followed was a quick and massive shutdown of restaurants, retail stores, personal services, offices, and more. And the shutdowns, of course, led to widespread job losses. Between February and May, one out of five jobs in the city vanished; in the restaurant industry, 70 percent of jobs were lost. Although the pandemic didn’t go away, the city’s economy has recovered steadily, aside from a brief but sharp setback in late 2020. By early 2023, New York had finally reversed just about all of the total job loss. In this post, we look at the contours of the city’s recovery as a possible guide to where we go from here.

Posted at 11:02 am in Employment, Labor Market, New Jersey, New York, Regional Analysis | Permalink

Markets & Policy Implementation

Liberty Street Economics

Assessing the Outlook for Employment across Industries

Are There Too Many Ways to Clear and Settle Secured Financing Transactions?

MCT Update: Inflation Persistence Continued to Decline in March

Moving Out of a Flood Zone? That May Be Risky!

CRISK: Measuring the Climate Risk Exposure of the Financial System

Monitoring Banks’ Exposure to Nonbanks: The Network of Interconnections Matters

Enhancing Monitoring of NBFI Exposure: The Case of Open‑End Funds

Financial Fragility without Banks

Mitigating the Risk of Runs on Uninsured Deposits: the Minimum Balance at Risk

How Did New York City’s Economy Weather the Pandemic?

Economic Inequality

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