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Report
Parsing the content of bank supervision
We measure bank supervision using the database of supervisory issues, known as matters requiring attention or immediate attention, raised by Federal Reserve examiners to banking organizations. The volume of supervisory issues increases with banks? asset size, especially for the largest and most complex banks, and decreases with profitability and the quality of the loan portfolio. Stressed banks are faster at resolving issues, but all else equal, resolving new issues takes longer the more issues a bank faces, which may suggest capacity constraints in addressing multiple supervisory issues. ...
Speech
Opening remarks at the Conference on Supervising Large, Complex Financial Institutions: Defining Objectives and Measuring Effectiveness
Remarks at the Conference on Supervising Large, Complex Financial Institutions: Defining Objectives and Measuring Effectiveness, Federal Reserve Bank of New York, New York City.
Journal Article
The Failure of the Bank of the Commonwealth: An Early Example of Interest Rate Risk
This Economic Commentary describes the collapse and subsequent bailout of the Detroit-headquartered Bank of the Commonwealth in 1972. Commonwealth failed because it invested heavily in long-duration, fixed-rate municipal securities in the mid-1960s in a bet that interest rates would decline. Instead, with the beginning of the Great Inflation of 1965–1980, rates rose. Liquidity problems then ensued, and the bank approached failure. Unable to find an acquirer because of Michigan’s banking restrictions, regulators instead bailed out the bank because of fears of contagion. This article also ...
Journal Article
The Evolution of US Bank Capital around the Implementation of Basel III
Following the Global Financial Crisis of 2007–2008, the capital standards for banks operating in the United States were tightened as US banking regulators implemented the Basel III framework. This Economic Commentary briefly presents the key elements of Basel III relevant to bank capital and analyzes the timing of the evolution of regulatory capital ratios for US bank holding companies during that time. It shows that, on average, banks’ capital ratios increased notably between 2009 and 2012, plateauing before the new rules came into force. While larger and better-capitalized banks ...
Journal Article
Why Do Supervisors Rate Banking Organizations?
This article addresses a question that at first may appear simple: why do supervisors rate banking organizations? Prudential supervisors have a long-standing practice of confidentially rating the condition of the firms that they supervise. These ratings are used for a variety of purposes and can have important consequences. The authors analyze the history and evolution of this practice and consider how the use of ratings advances the statutory and regulatory goals of supervision of banking organizations. They conclude with a discussion of the implications for the design and implementation of ...
Report
Bank-intermediated arbitrage
We argue that post-crisis banking regulations pass through from regulated institutions to unregulated arbitrageurs. We document that, once post-crisis regulations bind post 2014, hedge funds use a larger number of prime brokers and diversify away from GSIB-affiliated prime brokers, and that the match to such prime brokers is more fragile. Tighter regulatory constraints disincentivize regulated institutions not only to engage in arbitrage activity themselves but also to provide leverage to other arbitrageurs. Indeed, we show that the maximum leverage allowed and the implied return on basis ...
Speech
Financial Stability and Regulatory Policy in a Low Interest Rate Environment
I would suggest that the potential costs of the excessive leverage that arise in a low interest rate environment deserve more research and, I suspect, more focused and proactive policy actions.
Discussion Paper
Bank-Intermediated Arbitrage
Since the 2007-09 financial crisis, the prices of closely related assets have shown persistent deviations—so-called basis spreads. Because such disparities create apparent profit opportunities, the question arises of why they are not arbitraged away. In a recent Staff Report, we argue that post-crisis changes to regulation and market structure have increased the costs to banks of participating in spread-narrowing trades, creating limits to arbitrage. In addition, although one might expect hedge funds to act as arbitrageurs, we find evidence that post-crisis regulation affects not only the ...
Working Paper
REGULATING A MODEL
REVISED: 5/2018: We study a situation in which a regulator relies on models produced by banks in order to regulate them. A bank can generate more than one model and choose which models to reveal to the regulator. The regulator can find out the other models by monitoring the bank, but, in equilibrium, monitoring induces the bank to produce less information. We show that a high level of monitoring is desirable when the bank's private gain from producing more information is either sufficiently high or sufficiently low (e.g., when the bank has a very little or very large amount of debt). When ...
Discussion Paper
How Does Supervision Affect Banks?
Supervisors monitor banks to assess the banks? compliance with rules and regulations but also to ensure that they engage in safe and sound practices (see our earlier post What Do Banking Supervisors Do?). Much of the work that bank supervisors do is behind the scenes and therefore difficult for outsiders to measure. In particular, it is difficult to know what impact, if any, supervisors have on the behavior of banks. In this post, we describe a new Staff Report in which we attempt to measure the impact that supervision has on bank performance. Does more attention by supervisors lead to lower ...