Liberty Street Economics

November 18, 2025

U.S. Banks Have Developed a Significant Nonbank Footprint

Nicola Cetorelli and Saketh Prazad

central banking and international currency concept. Businessman exchanging dollar Yuan Yen Pound sterling and Euro for forex and currency exchange money transfer. international currency, world bank

In light of the rapid growth of nonbank financial institutions (NBFIs), many have argued that bank-led financial intermediation is on the decline, based on the traditional notion that banks operate to take in deposits and make loans. However, we argue that deposit-taking and loan-making have not accurately characterized U.S. banking operations in recent decades. Instead, as we propose in this post, absent regulatory restrictions, banks naturally expand their boundaries to include NBFI subsidiaries. A significant component of the growth of NBFIs has in fact taken place inside the boundaries of banking firms.

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

November 12, 2025

How Has Treasury Market Liquidity Fared in 2025?

Michael J. Fleming

In 2025, the Federal Reserve has cut interest rates, trade policy has shifted abruptly, and economic policy uncertainty has increased. How have these developments affected the functioning of the key U.S. Treasury securities market? In this post, we return to some familiar metrics to assess the recent behavior of Treasury market liquidity. We find that liquidity briefly worsened around the April 2025 tariff announcements but that its relation to Treasury volatility has been similar to what it was in the past.

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

November 6, 2025

Economic Capital: A Better Measure of Bank Failure?

Beverly Hirtle and Matthew C. Plosser

Financial stability: A classic bank building with columns, financial symbols, and charts, showcasing the reliability and trustworthiness of a bank

Bank failures and distress can be costly to the economy, causing losses to creditors and reducing the flow of credit and other financial intermediation services. Thus, there is significant value in being able to identify “at risk” banks in a timely and accurate way. In a previous post, we presented a new solvency metric, Economic Capital, and showed how solvency risks in the U.S. banking industry have evolved over time according to this measure. In this post, we continue to draw on our recent Staff Report to present analysis showing that Economic Capital identifies failing banks earlier and more accurately than more conventional solvency measures.

Posted at 7:00 am in Bank Capital | Permalink

November 4, 2025

Banking System Vulnerability: 2025 Update

Matteo Crosignani, Thomas Eisenbach, and Fulvia Fringuellotti

Banking System and Electronic Transfer for Business

As in previous years, we provide in this post an update on the vulnerability of the U.S. banking system based on four analytical models that capture different aspects of this vulnerability. We use data through 2025:Q2 for our analysis, and also discuss how the vulnerability measures have changed since our last update one year ago.

Posted at 7:00 am in Bank Capital, Banks, Financial Institutions, Liquidity, Systemic Risk | Permalink

October 16, 2025

The Shadow Value of Central Bank Lending

Tomas Jankauskas, Ugo Albertazzi, Lorenzo Burlon, and Nicola Pavanini

Frankfurt, Hesse / Germany - May 16, 2018: Sign at the entrance of new European Central Bank headquarters in Frankfurt, Germany - the ECB is the central bank for the euro

After the Great Financial Crisis, the European Central Bank (ECB) extended its monetary policy toolbox to include the use of long-term loans to banks at interest rates close to zero or even negative. These central bank interventions were aimed at supporting the transmission of expansionary monetary policy and likely played a crucial role in bolstering the financial stability of the euro area, namely by reducing the chance of bank runs. However, quantitative evidence on the effects of these interventions on financial stability remains scant. In this post, we quantify the effectiveness of central bank lending programs in supporting financial stability through the lens of a novel structural model discussed in this paper.

Posted at 7:00 am in Banks, Central Bank | Permalink

October 15, 2025

A Danger to Self and Others: Consequences of Involuntary Hospitalization

Natalia Emanuel, Pim Welle, and Valentin Bolotnyy

Lonely senior patient suffering from insomnia and sitting on the hospital bed at night

Every state in the country has a law permitting involuntary hospitalization if a person presents a danger to themselves or others as a result of mental illness. If a person reaches this high bar, the logic goes, they should be confined in a psychiatric hospital for treatment until they are stabilized. (The process is also sometimes called involuntary commitment, involuntary psychiatric hold, or sectioning.) Although there is no definitive national accounting, it is estimated that about 1.2 million involuntary psychiatric hospitalizations occur every year (Lee and Cohen 2021). This puts the magnitude on par with the 1.2 million individuals imprisoned in state, federal, and military prisons every year (Carson 2022). In a new Staff Report, we use data from Allegheny County, which includes Pittsburgh, to measure how psychiatric commitments are impacting an individual’s risk of danger to themselves or others, earnings, and housing.

Posted at 7:00 am in Labor Market | Permalink | Comments (3)

October 14, 2025

Consumption Sensitivity of Uncertain Households

Gizem Kosar and Davide Melcangi

Attractive brunette window shopping looking into boutique. Outdoor store selling luxury items.

Uncertainty is a key component of everyday economic decisions of consumers and, perhaps not surprisingly, it plays a central role in economic models. According to economic theory, forward-looking consumers rely on their expectations and perceived uncertainty when making economic decisions. Nevertheless, measuring the uncertainty that households actually perceive, and how it affects consumer behavior, is challenging. The probabilistic nature of the Survey of Consumer Expectations enables us to make progress on this subject and to construct household-specific time-varying uncertainty. In our recent Staff Report, we empirically show that the marginal propensity to consume (MPC) is increasing and concave in perceived uncertainty. This novel empirical evidence poses a challenge for the conventional consumption-savings model with incomplete markets.

Posted at 7:00 am in Expectations, Household Finance, Microeconomics | Permalink

October 9, 2025

End‑of‑Month Activity Across the Treasury Market

Michael J. Fleming, Jonathan Palash-Mizner, and Or Shachar

Photo: Partial calendar with a green pin on the 31st.

In a 2024 post, we showed that interdealer trading in benchmark U.S. Treasury notes and bonds concentrates on the last trading day of the month, likely due to passive investment funds’ turn-of-month portfolio rebalancing. In this post, we extend our trading activity analysis to the full range of Treasury securities and market segments. We find that trading is even more concentrated on the last trading day of the month for other types of Treasury securities and in the dealer-to-customer segment of the market, with trading volume in off-the-run Treasuries twice as high as on other days, on average.

Posted at 7:00 am in Financial Markets | Permalink

October 8, 2025

The Rise of Sponsored Service for Clearing Repo

Adam Copeland and R. Jay Kahn

Recently instituted rule amendments have initiated a large migration of dealer-to-client Treasury repurchase trades to central clearing. To date, the main avenue used to access central clearing is Sponsored Service, a clearing product that has, until now, received little attention. This post highlights the results from a recent Staff Report which presents a deep dive into Sponsored Service. Here, we summarize the description of the institutional details of this service and its costs and benefits. We then document some basic facts on how market participants use this service, based on confidential data.

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

October 7, 2025

Dutch Treat: The Netherlands’ Exorbitant Privilege in the Eighteenth Century

Stein Berre and Asani Sarkar

Photo: Old Dutch coins from the province of Holland with ancient Dutch banknotes.

The term “exorbitant privilege” emerged in the 1960s to describe the advantages derived by the U.S. economy from the dollar’s status as the de facto global reserve currency. In this post, we examine the exorbitant privilege that accrued to the Netherlands in the eighteenth century, when the Dutch guilder enjoyed global reserve currency status. We show how the private actions of financial institutions created and maintained this privilege, even in the absence of a central bank. While privilege benefited the Dutch financial system in many ways, it also laid the seeds of later financial crisis.

Posted at 7:00 am in Economic History, International Economics, Nonbank (NBFI) | Permalink

Markets & Policy Implementation

Liberty Street Economics

U.S. Banks Have Developed a Significant Nonbank Footprint

How Has Treasury Market Liquidity Fared in 2025?

Economic Capital: A Better Measure of Bank Failure?

Banking System Vulnerability: 2025 Update

The Shadow Value of Central Bank Lending

A Danger to Self and Others: Consequences of Involuntary Hospitalization

Consumption Sensitivity of Uncertain Households

End‑of‑Month Activity Across the Treasury Market

The Rise of Sponsored Service for Clearing Repo

Dutch Treat: The Netherlands’ Exorbitant Privilege in the Eighteenth Century

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