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Report
Banks versus Hurricanes: A Case Study of Puerto Rico after Hurricanes Irma and Maria
We study Puerto Rico’s experience after the severe hurricane season of 2017 to better understand how extreme weather disasters affect bank stability and their ability to lend. Despite the devastation wrought by two category 5 hurricanes in a single month, we find relatively modest and transitory impacts on bank performance with no evident decline in lending capacity. We discuss various mitigants that help limit bank exposure to extreme weather and whether these mitigants may be vulnerable given the potential for more severe and more impactful climate events.
Discussion Paper
When the Household Pie Shrinks, Who Gets Their Slice?
When households face budgetary constraints, they may encounter bills and debts that they cannot pay. Unlike corporate credit, which typically includes cross-default triggers, households can be delinquent on a specific debt without repercussions from their other lenders. Hence, households can choose which creditors are paid. Analyzing these choices helps economists and investors better understand the strategic incentives of households and the risks of certain classes of credit.
Report
Investor Attention to Bank Risk During the Spring 2023 Bank Run
We examine how investors’ perceptions of bank balance sheet risk evolved before and during the bank run in March-April 2023. To do so, we estimate the covariance (“beta”) of bank excess stock returns with returns on factors constructed from long-short portfolios sorted on shares of uninsured deposits and unrealized losses on securities. We find that investor perception of bank risk shifted, as the factor betas are insignificant before the bank run but become positive and significant during the run. In the crosssection, increases in the betas occurred for a limited set of banks and ...
Discussion Paper
Banks versus Hurricanes
The impacts of hurricanes analyzed in the previous post in this series may be far-reaching in the Second District. In a new Staff Report, we study how banks in Puerto Rico fared after Hurricane Maria struck the island on September 17, 2017. Maria makes a worst case in some respects because the economy and banks there were vulnerable beforehand, and because Maria struck just two weeks after Hurricane Irma flooded the island. Despite the immense destruction and disruption Maria caused, we find that the island’s economy and banks recovered surprisingly quickly. We discuss the various ...
Discussion Paper
Reading the Panic: How Investors Perceived Bank Risk During the 2023 Bank Run
The bank run that started in March 2023 in the U.S. occurred at an unusually rapid pace, suggesting that depositors were surprised by these events. Given that public data revealed bank vulnerabilities as early as 2022:Q1, were other market participants also surprised? In this post, based on a recent paper, we develop a new, high-frequency measure of bank balance sheet risk to examine how stock market investors’ risk sensitivity evolved around the run. We find that stock market investors only became attentive to bank risk after the run and only to the risk of a limited number (less than ...
Discussion Paper
Calming the Panic: Investor Risk Perceptions and the Fed’s Emergency Lending during the 2023 Bank Run
In a companion post, we showed that during the bank run of spring 2023 investors were seemingly not concerned about bank risk broadly but rather became sensitized to the risk of only about a third of all publicly traded banks. In this post, we investigate how the Federal Reserve’s liquidity support affected investor risk perceptions during the run. We find that the announcement of the Fed’s novel Bank Term Funding Program (BTFP), and subsequent borrowings from the program, substantially reduced investor risk perceptions. However, borrowings from the Fed’s traditional discount window ...