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22 posts on "Systemic Risk"

September 30, 2020

Did Too-Big-To-Fail Reforms Work Globally?



Did Too-Big-To-Fail Reforms Work Globally?

Once a bank grows beyond a certain size or becomes too complex and interconnected, investors often perceive that it is “too big to fail” (TBTF), meaning that if the bank were to fail, the government would likely bail it out. Following the global financial crisis (GFC) of 2008, the G20 countries agreed on a set of reforms to eliminate the perception of TBTF, as part of a broader package to enhance financial stability. In June 2020, the Financial Stability Board (FSB), a sixty-eight-member international advisory body set up in 2009, published the results of a year-long evaluation of the effectiveness of TBTF reforms. In this post, we discuss the main conclusions of the report—in particular, the finding that implicit funding subsidies to global banks have decreased since the implementation of reforms but remain at levels comparable to the pre-crisis period.

Continue reading "Did Too-Big-To-Fail Reforms Work Globally?" »

Posted by Blog Author at 7:00 AM in Banks, Systemic Risk | Permalink | Comments (2)

May 21, 2020

What Do Financial Conditions Tell Us about Risks to GDP Growth?



What Do Financial Conditions Tell Us about Risks to GDP Growth?

The economic fallout from the COVID-19 pandemic has been sharp. Real U.S. GDP growth in the first quarter of 2020 (advance estimate) was -4.8 percent at an annual rate, the worst since the global financial crisis in 2008. Most forecasters predict much weaker growth in the second quarter, ranging widely from an annual rate of -15 percent to -50 percent as the economy pauses to allow for social distancing. Although growth is expected to begin its rebound in the third quarter absent a second wave of the pandemic, the speed of the recovery is highly uncertain. In this post, we estimate the risks around the modal forecast of GDP growth as a function of financial conditions. Tighter financial conditions led to a widening in the left tail of the distribution of 2020 growth before weekly economic indicators showed any deterioration. The Federal Reserve and the U.S. Department of the Treasury took aggressive actions to reduce financial stresses and support credit flows—moves aimed at stemming long-lasting impacts from steep economic losses. While GDP growth will depend primarily on the speed with which many activities can be resumed safely, the improved financial conditions in April have reduced the likelihood that financial conditions and real growth will jointly deteriorate in the next few quarters.

Continue reading "What Do Financial Conditions Tell Us about Risks to GDP Growth?" »

Posted by Blog Author at 7:00 AM in Forecasting, Pandemic, Systemic Risk | Permalink | Comments (1)

May 19, 2020

The Primary Dealer Credit Facility



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.

Continue reading "The Primary Dealer Credit Facility" »

April 08, 2020

How Does Supervision Affect Bank Performance during Downturns?



LSE_How Does Supervision Affect Bank Performance during Downturns?

Supervision and regulation are critical tools for the promotion of stability and soundness in the financial sector. In a prior post, we discussed findings from our recent research paper which examines the impact of supervision on bank performance (see earlier post How Does Supervision Affect Banks?). As described in that post, we exploit new supervisory data and develop a novel strategy to estimate the impact of supervision on bank risk taking, earnings, and growth. We find that bank holding companies (BHCs or “banks”) that receive more supervisory attention have less risky loan portfolios, but do not have lower growth or profitability. In this post, we examine the benefits of supervision over time, and especially during banking industry downturns.

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February 24, 2020

Understanding Heterogeneous Agent New Keynesian Models: Insights from a PRANK



Understanding Heterogeneous Agent New Keynesian Models: Insights from a PRANK

In recent years there has been a lot of interest in the effect of income inequality (heterogeneity) on the economy, from both academics and policymakers. Researchers have developed Heterogeneous Agent New Keynesian (HANK) models that incorporate heterogeneity and uninsurable idiosyncratic risk into the New Keynesian models that have become a cornerstone of monetary policy analysis. This research has argued that heterogeneity and idiosyncratic risk change many features of New Keynesian models – the transmission of conventional monetary policy, the forward guidance puzzle, fiscal multipliers, the efficacy of targeted transfers and automatic stabilizers, among others. However, the source of the difference between HANK and representative agent New Keynesian (RANK) models remains unclear. This is because HANK models are typically not analytically tractable, leaving it unclear what exactly is driving the results. To shed light on the macroeconomic consequences of heterogeneity, we develop a stylized HANK model that contains key features present in more complicated HANK models.

Continue reading "Understanding Heterogeneous Agent New Keynesian Models: Insights from a PRANK" »

February 03, 2020

Have the Risk Profiles of Large U.S. Bank Holding Companies Changed?



Have the Risk Profiles of Large U.S. Bank Holding Companies Changed?

After the global financial crisis, regulatory changes were implemented to support financial stability, with some changes directly addressing capital and liquidity in bank holding companies (BHCs) and others targeting BHC size and complexity. Although the overall size of the largest U.S. BHCs has not decreased since the crisis, the organizational complexity of these same organizations has declined, with less notable changes being observed in their range of businesses and geographic scope (Goldberg and Meehl, forthcoming). In this post, we explore how different types of BHC risks—risks that can influence the probability that a BHC is stressed, as well as the chance of systemic implications—have changed over time. The results are mixed: Levels of most BHC risks tend to be higher than in the years immediately preceding the crisis, but are markedly lower than the levels seen during and immediately following the crisis.

Continue reading "Have the Risk Profiles of Large U.S. Bank Holding Companies Changed?" »

December 18, 2019

Banking System Vulnerability: Annual Update



Banking System Vulnerability: Annual Update

A key part of understanding the stability of the U.S. financial system is to monitor leverage and funding risks in the financial sector and the way in which these vulnerabilities interact to amplify negative shocks. In this post, we provide an update of four analytical models, introduced in a Liberty Street Economics post last year, that aim to capture different aspects of banking system vulnerability. Since their introduction, vulnerabilities as indicated by these models have increased moderately, continuing the slow but steady upward trend that started around 2016. Despite the recent increase, the overall level of vulnerabilities according to this analysis remains subdued and is still significantly smaller than before the financial crisis of 2008-09.

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June 26, 2019

How Large Are Default Spillovers in the U.S. Financial System?



Second of two posts
How Large Are Default Spillovers in the U.S. Financial System?

When a financial firm suffers sufficiently high losses, it might default on its counterparties, who may in turn become unable to pay their own creditors, and so on. This “domino” or “cascade” effect can quickly propagate through the financial system, creating undesirable spillovers and unnecessary defaults. In this post, we use the framework that we discussed in “Assessing Contagion Risk in a Financial Network,” the first part of this two-part series, to answer the question: How vulnerable is the U.S. financial system to default spillovers?

Continue reading "How Large Are Default Spillovers in the U.S. Financial System?" »

June 24, 2019

Assessing Contagion Risk in a Financial Network



First of two posts
Assessing Contagion Risk in a Financial Network


In compiling a list of key takeaways of the 2008 financial crisis, surely the dangers of counterparty risk would be near the top. During the crisis, speculation on which financial institution would be next to default on its obligations to creditors, and which one would come after that, dominated news cycles. Since then, there has been an explosion in research trying to understand and quantify the default spillovers that can arise through counterparty risk. This is the first of two posts delving into the analysis of financial network contagion through this spillover channel. Here we introduce a framework that is useful for thinking about default cascades, originally developed by Eisenberg and Noe.

Continue reading "Assessing Contagion Risk in a Financial Network" »

May 17, 2019

Understanding Cyber Risk: Lessons from a Recent Fed Workshop



Understanding Cyber Risk: Lessons from a Recent Fed Workshop

Cyber risk poses a major threat to financial stability, yet financial institutions still lack consensus on the definition of and terminology around cyber risk and have no common framework for confronting these hazards. This impedes efforts to measure and manage such risk, diminishing institutions’ individual and collective readiness to handle system-level cyber threats. In this blog post, we describe the proceedings of a recent workshop where leading risk managers, academics, and policy makers gathered to discuss proposals for countering cyber risk. This workshop is part of a joint two-phase initiative run by the Federal Reserve Banks of Richmond and New York and the Fed’s Board of Governors to harmonize cyber risk identification, classification, and measurement practices.

Continue reading "Understanding Cyber Risk: Lessons from a Recent Fed Workshop" »

Posted by Blog Author at 7:00 AM in Banks, Central Bank, Federal Reserve, Systemic Risk | Permalink | Comments (0)
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