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Journal Article
Banks’ Real Estate Exposure and Resilience
Real estate has hit record high prices and elevated valuations in some markets. Do bank lenders have sufficient capital to withstand a large price drop? While their portfolios have a similar concentration in real estate as they did before the global financial crisis, both underwriting standards and capitalization have improved significantly since then. Estimates using the Federal Reserve?s stress test scenarios suggest that, although a few small banks would be undercapitalized, the banking sector overall appears resilient enough to weather a steep decline in real estate prices.
Journal Article
Financial modernization and regulation
Journal Article
Banking consolidation
Until this year, Citigroup was the only $1 trillion banking organization in the U.S. Now, there are two more?Bank of America has merged with FleetBoston, and J.P. Morgan Chase is about to complete its merger with Bank One. These megamergers are notable not only for their size but also for the geographic scope that the new institutions will serve. Indeed, they may signal the beginning of a process for building a truly national banking franchise. As mergers continue to shape the structure of the banking industry in the U.S., this Economic Letter looks at the economic drivers behind them and ...
Working Paper
The 2007-09 financial crisis and bank opaqueness
Doubts about the accuracy with which outside investors can assess a banking firm?s value motivate many government interventions in the banking market. The recent financial crisis has reinforced concerns about the possibility that banks are unusually opaque. Yet the empirical evidence, thus far, is mixed. This paper examines the trading characteristics of bank shares over the period from January 1990 through September 2009. We find that bank share trading exhibits sharply different features before vs. during the crisis. Until mid-2007, large (NYSE-traded) banking firms appear to be no more ...
Working Paper
The temporal relationship between individual stocks and individual bonds
This paper investigates the comovements of stocks and bonds at the individual firm level. Based on a sample of 702 corporate bonds, individual stock returns and bond yield changes are found to be negatively correlated, suggesting that the comovements of individual stocks and bonds are largely driven by information about the mean value of the firms' assets, rather than the variance of asset returns. Furthermore, lagged stock returns are found to have explanatory power for current bond yield changes, but current stock returns are unrelated to lagged bond yield changes, indicating that stocks ...
Journal Article
An analysis of inefficiencies in banking: a stochastic cost frontier approach
This paper examines the properties of X-inefficiency and the relations of X-inefficiency with risk-taking and stock returns for U.S. banking firms. After controlling for scale differences, the average small size banking firm is found to be relatively less efficient than the average large firm. Small firms also exhibit higher variations in X-inefficiencies than their larger counterparts. While the average X-inefficiency appears to be declining over time, the rank orderings of X-inefficiency are found to be quite persistent. Furthermore, less efficient banking firms are found to be associated ...
Working Paper
The Transmission of Negative Nominal Interest Rates in Finland
Despite the implementation of negative nominal interest rates by several advanced economies in the last decade and the many papers that have been written about this novel policy tool, there is still much we do not know about the effectiveness of this instrument. The pass-through of negative policy rates to loan rates is one of the main points of contention. In this paper, we analyze the pass-through of the ECB’s changes in the deposit facility rate to mortgage rates in Finland between 2005 and 2020. We use monthly data and three different empirical methodologies: correlational event ...
Journal Article
On forecasting future monetary policy: has forward-looking language mattered?
This Economic Letter reviews the changes in the content of the FOMC statements over the past several years and examines how the accuracy of market forecasts of monetary policy has evolved. The analysis complements prior research showing that, as the FOMC took steps to foster greater transparency, the accuracy of the fed funds futures market in predicting future fed funds rates has improved. In recent years, the level of precision improved further as forward-looking language was included in the FOMC statements.
Working Paper
Tracking Financial Fragility
In constructing an indicator of financial fragility, the choice of which filter (or transformation) to apply to the data series that appear to trend in sample is often considered a technicality, but in fact turns out to matter a great deal. The fundamental assumption about the likely nature of observed trends in the data, for example, the ratio of credit to GDP, has direct effects on the measured gap or vulnerability. We discuss shortcomings of the most common filters used in the literature and policy circle, and propose a fairly simple and intuitive alternative - the local level filter. To ...
Journal Article
Has bank performance peaked?