Liberty Street Economics

Liberty Street Economics

Look for our next post on September 19.

March 7, 2018

Do Low Rates Encourage Yield Seeking by Money Market Funds?

Gabriele La Spada

The term “reach for yield” refers to investors’ tendency to buy riskier assets in hopes of securing higher returns. Do low rates on safe assets encourage such yield-seeking behavior, particularly among U.S. prime money market funds (MMFs)? In a paper forthcoming in the Journal of Financial Economics, I develop a model of MMF competition to understand whether competitive pressure leads these funds to reach for yield in a low-rate environment like the current one. I test the model’s predictions on the 2002-08 period and show that, after controlling for changes in risk premia, declines in risk-free rates actually reduced MMF risk-taking, leading to a “reach for safety.”

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Posted at 7:00 am in Financial Institutions | Permalink | Comments (2)
March 5, 2018

Did the Dodd‑Frank Act End ‘Too Big to Fail’?

Gara Afonso, Michael Blank, and João A.C. Santos

One goal of the Dodd-Frank Act of 2010 was to end “too big to fail.” Toward that goal, the Act required systemically important financial institutions to submit detailed plans for an orderly resolution (“living wills”) and authorized the FDIC to create an alternative resolution procedure. In response, the FDIC has developed a “single point of entry” (SPOE) strategy, under which healthy parent companies bear the losses of their failing subsidiaries. Since SPOE makes the parent company responsible for subsidiaries’ losses, we would expect parents to become riskier, relative to their subsidiaries, compared to before the announcement of the SPOE strategy in December 2013. Do bond raters and investors share this view?

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Posted at 7:00 am in Banks, Crisis, Regulation, Systemic Risk | Permalink | Comments (4)
February 28, 2018

Dealer Participation in the TSLF Options Program

Erin Denison, Michael J. Fleming, Warren B. Hrung, and Asani Sarkar

Our previous post described the workings of the Term Securities Lending Facility Options Program (TOP), which offered dealers options for obtaining short-term loans over month- and quarter-end dates during the global financial crisis of 2007-08. In this follow-up post, we examine dealer participation in the TOP, including the extent to which dealers bid for options, at what fees, and whether they exercised their options. We also provide evidence on how uncertainty in dealers’ funding positions was related to the demand for the liquidity options.

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Posted at 7:00 am in Financial Institutions, Financial Markets | Permalink | Comments (2)
February 26, 2018

Options of Last Resort

Erin Denison, Michael J. Fleming, Warren B. Hrung, and Asani Sarkar

During the global financial crisis of 2007-08, collateral markets became illiquid, making it difficult for dealers to obtain short-term funding to finance their positions. As lender of last resort, the Federal Reserve responded with various programs to promote liquidity in these markets, including the Primary Dealer Credit Facility and the Term Securities Lending Facility (TSLF). In this post, we discuss an additional and rarely discussed liquidity facility introduced by the Fed during the crisis: the TSLF Options Program (TOP). The TOP was unique among crisis-period liquidity facilities in its provision of options. A follow-up post will analyze dealer participation in the TOP.

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Posted at 7:00 am in Financial Institutions, Financial Markets | Permalink | Comments (3)
February 22, 2018

Just Released: Puerto Rico and the U.S. Virgin Islands after Hurricanes Irma and Maria

Jaison R. Abel, Jason Bram, Richard Deitz, and Jonathan Hastings

An examination of the fallout from Hurricanes Irma and Maria on the economies of Puerto Rico and the U.S. Virgin Islands was the focus of an economic press briefing today at the New York Fed. Both U.S. territories were suffering from significant economic downturns and fiscal stress well before the storms hit in September 2017, raising concerns about their paths to recovery.

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Posted at 10:17 am in Crisis, Human Capital, International Economics, Puerto Rico, Regional Analysis | Permalink
February 21, 2018

The Evolution of Mexico’s Merchandise Trade Balance

Thomas Klitgaard and Susannah Scanlan

Mexico runs a trade surplus with the United States owing to oil exports and cross-border supply chains, with imported U.S. components assembled in Mexico and then exported back to the United States. At the same time, Mexico runs a large trade deficit with Asia, the result of a surge of imports from that region over the past two decades. From Mexico’s perspective, this growing deficit with Asia has worked to offset an increasing trade surplus with the United States. More recently, the country’s merchandise balance suffered a substantial deterioration with the collapse of petroleum prices in late 2014. The balance has subsequently staged a modest recovery, as Mexico’s demand for Asian goods has cooled while the surplus with the United States (excluding petroleum trade) continues to trend higher. These developments have helped Mexico reduce its need to borrow more from the world to make up for lost petroleum export revenues.

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Posted at 7:00 am in Exports, International Economics, Tariffs | Permalink
February 16, 2018

Just Released: Very Favorable Business Climate Indicated in February Business Leaders Survey

Jason Bram and Richard Deitz

The region’s services sector continues to experience solid growth, according to the New York Fed’s February Business Leaders Survey. The survey’s business climate index reached a record high, and the activity, employment, and capital spending indexes were all fairly steady at high levels, indicating continued expansion. Firms were increasingly optimistic about future business conditions, and strong gains in employment were expected in the months ahead. Notably, price pressures picked up, with the prices paid index advancing to a level not seen since 2014, and the prices received measure reaching its highest mark in six years.

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Posted at 8:45 am in Regional Analysis | Permalink
February 14, 2018

Landing a Jumbo Is Getting Easier

Andreas Fuster, James Vickery, and Akhtar Shah

Andreas Fuster, James Vickery, and Akhtar Shah The United States relies heavily on securitization for funding residential mortgages. But for institutional reasons, large mortgages, or “jumbos,” are more difficult to securitize, and are instead usually held as whole loans by banks. How does this structure affect the pricing and availability of jumbo mortgages? In this […]

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Posted at 7:00 am in Credit, Household Finance, Housing | Permalink | Comments (2)
February 13, 2018

Just Released: Great Recession’s Impact Lingers in Hardest‑Hit Regions

Andrew F. Haughwout, Donghoon Lee, Joelle Scally, and Wilbert van der Klaauw

The New York Fed’s Center for Microeconomic Data today released our Quarterly Report on Household Debt and Credit for the fourth quarter of 2017. Along with this report, we have posted an update of state-level data on balances and delinquencies for 2017. Overall aggregate debt balances increased again, with growth in all types of balances except for home equity lines of credit. In our post on the first quarter of 2017 we reported that overall balances had surpassed their peak set in the third quarter of 2008—the result of a slow but steady climb from several years of sharp deleveraging during the Great Recession.

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Posted at 11:00 am in Credit, Household Finance, Housing, Recession, Regional Analysis | Permalink | Comments (2)
February 12, 2018

Does More “Skin in the Game” Mitigate Bank Risk‑Taking?

Haelim Anderson, Daniel Barth, and Dong Beom Choi

It is widely said that a lack of “skin in the game” would distort lenders’ incentives and cause a moral hazard problem, that is, excessive risk-taking. If so, does more skin in the game—in the form of extended liability—reduce bankers’ risk-taking? In order to examine this question, we investigate historical data prior to the Great Depression, when bank owners’ liability for losses in the event of bank failure differed by state and primary regulator. This post describes our preliminary findings.

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Posted at 7:00 am in Banks, Credit, Economic History, Financial Institutions, Regulation, Systemic Risk | Permalink | Comments (3)
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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.

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