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Discussion Paper
Quantifying Potential Spillovers from Runs on High-Yield Funds
On December 9, 2015, Third Avenue Focused Credit Fund (FCF) announced a “Plan of Liquidation,” effectively halting investor redemptions. This announcement followed a period of poor performance and large outflows. Assets at the fund had declined from a peak of $2.5 billion in May of 2015 to $942 million in November. Investors had redeemed more than $1.1 billion in shares since April 2015, and the fund’s year-to-date performance as of November had fallen below -21 percent. The FCF “run” highlights the need to quantify the potential for systemic risk among open-end mutual funds and the ...
Working Paper
Financial Fire Sales: Evidence from Bank Failures
Theory suggests the reduction in financing capacity after the failure of a financial intermediary can reduce the value of financial assets. Forced sales of the intermediary's assets could consume liquidity, depressing the liquidation value of the assets of healthy intermediaries and causing contagious runs. These financial fire sales can both cause, and exacerbate, real fire sales, the focus of previous studies. This paper investigates the relevance of financial fire sales using new datasets covering bank failures during the farm depression in the United States just before the Great ...
Speech
Economic research and stress testing
Remarks at the Fourth Annual Stress Test Modeling Symposium, Federal Reserve Bank of Boston, Boston, Massachusetts.
Discussion Paper
Banking System Vulnerability: 2022 Update
To assess the vulnerability of the U.S. financial system, it is important to monitor leverage and funding risks—both individually and in tandem. In this post, we provide an update of four analytical models aimed at capturing different aspects of banking system vulnerability with data through 2022:Q2, assessing how these vulnerabilities have changed since last year. The four models were introduced in a Liberty Street Economics post in 2018 and have been updated annually since then.
Working Paper
Non-Bank Financial Institutions and Banks’ Fire-Sale Vulnerabilities
Banks carry significant exposures to nonbanks from direct dealings, but they can also be exposed, indirectly, through losses in asset values resulting from fire-sale events. We assess the vulnerability of U.S. banks to fire sales potentially originating from any of twelve separate non-bank segments and identify network-like externalities driven by the interconnectedness across non-bank types in terms of asset holdings. We document that such network externalities can contribute to very large multiples of an original fire sale, thus suggesting that conventional assessments of fire-sale ...
Report
Cournot Fire Sales
In standard Walrasian macro-finance models, pecuniary externalities due to fire sales lead to excessive borrowing and insufficient liquidity holdings. We investigate whether imperfect competition (Cournot) improves welfare through internalizing the externality and find that this is far from guaranteed. Cournot competition can overcorrect the inefficiently high borrowing in a standard model of levered real investment. In contrast, Cournot competition can exacerbate the inefficiently low liquidity in a standard model of financial portfolio choice. Implications for welfare and regulation are ...
Speech
Modern recipes for financial crises
Remarks at the University of Iowa, December 4, 2015.
Discussion Paper
How Has COVID-19 Affected Banking System Vulnerability?
The COVID-19 pandemic has led to significant changes in banks’ balance sheets. To understand how these changes have affected the stability of the U.S. banking system, we provide an update of four analytical models that aim to capture different aspects of banking system vulnerability.
Discussion Paper
Banking System Vulnerability: 2023 Update
The bank failures that occurred in March 2023 highlighted how unrealized losses on securities can make banks vulnerable to a sudden loss of funding. This risk, which materialized following the rapid rise in interest rates that began in early 2022, underscores the importance of monitoring the vulnerabilities of the banking system. In this post, as in previous years, we provide an update of four analytical models aimed at capturing different aspects of vulnerability of the U.S. banking system, with data through the second quarter of 2023. In addition, we discuss changes made to the methodology ...
Discussion Paper
Magnifying the Risk of Fire Sales in the Tri-Party Repo Market
The fragility inherent in the tri-party repo market came to light during the 2008-09 financial crisis. One of the main vulnerabilities is the risk of fire sales, which can be enhanced by the response of some investors to stress events. Money market mutual funds (MMFs) and the agents investing cash collateral obtained from securities lending (SLs) are thought to behave, in times of stress, in ways that exacerbate fire-sale risks in the tri-party repo market. Based on detailed investor data, we find that MMFs and SLs constitute almost half of the investor market, making it crucial for tri-party ...