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Report
The risk of fire sales in the tri-party repo market
McAndrews, James J.; Martin, Antoine; McLaughlin, Susan; Begalle, Brian (2013-05-01)
This paper studies the risk of "fire sales" in the tri-party repo market, a large and important market where securities dealers find short-term funding for a substantial portion of their own and their clients' assets. We distinguish between fire sales of assets by a dealer who, facing a run that could lead to default, sells securities to generate liquidity, and fire sales of assets by repo investors after a dealer's default has occurred. While fire sales do cause damage no matter how they arise, the tools available to lessen the harm from the two types of fire sales are different. We find ...
Staff Reports , Paper 616

Journal Article
Understanding risk management in emerging retail payments
Sullivan, Richard J.; Roberds, William; McAndrews, James J.; Braun, Michele (2008-09)
New technologies used in payment methods can reduce risk, but they can also lead to new risks. Emerging retail payments are prone to operational and fraud risks, especially security breaches and potential use in illicit transactions. This article describes an economic framework for understanding risk control in retail payments. Risk control is a special type of good because it can protect one payment participant without diminishing the protection of other participants. As a result, the authors' economic framework emphasizes risk containment, primarily through the establishment and enforcement ...
Economic Policy Review , Volume 14 , Issue Sep , Pages 137-159

Working Paper
A model of check exchange
McAndrews, James J.; Roberds, William (1997)
The authors construct and simulate a model of check exchange to examine the incentives a bank (or a bank clearinghouse) has to engage in practices that limit access to its payment facilities, in particular delaying the availability of check payment. The potentially disadvantaged bank has the option of directly presenting checks to the first bank. The authors find that if the retail banking market is highly competitive, the first bank will not engage in such practices, but if the retail banking market is imperfectly competitive, it will find it advantageous to restrict access to its ...
Working Papers , Paper 97-16

Report
Precautionary reserves and the interbank market
Skeie, David R.; McAndrews, James J.; Ashcraft, Adam B. (2009)
Liquidity hoarding by banks and extreme volatility of the fed funds rate have been widely seen as severely disrupting the interbank market and the broader financial system during the 2007-08 financial crisis. Using data on intraday account balances held by banks at the Federal Reserve and Fedwire interbank transactions to estimate all overnight fed funds trades, we present empirical evidence on banks' precautionary hoarding of reserves, their reluctance to lend, and extreme fed funds rate volatility. We develop a model with credit and liquidity frictions in the interbank market consistent ...
Staff Reports , Paper 370

Journal Article
Changes in the timing distribution of Fedwire funds transfers
Armantier, Olivier; Arnold, Jeffrey; McAndrews, James J. (2008-09)
The Federal Reserve's Fedwire funds transfer service - the biggest large-value payments system in the United States - has long displayed a peak of activity in the late afternoon. Theory suggests that the concentration of late-afternoon Fedwire activity reflects coordination among participating banks to reduce liquidity costs, delay costs, and credit risk; as these costs and risk change over time, payment timing most likely will be affected. This article seeks to quantify how the changing environment in which Fedwire operates has affected the timing of payment value transferred within the ...
Economic Policy Review , Volume 14 , Issue Sep , Pages 83-112

Report
The payment system benefits of high reserve balances
Kroeger, Alexander; McAndrews, James J. (2016-06-01)
The policy measures taken since the financial crisis have greatly expanded the size of the Federal Reserve?s balance sheet and have thus raised the level of aggregate bank reserves as well. Over the same period there has been a significant shift in the timing of payments made over the Federal Reserve?s Fedwire Funds Service toward earlier settlement. This paper documents this timing change and presents regression results suggesting that the increase in overall reserve balances explains the vast majority of this development. The paper also discusses the benefits of high aggregate reserve ...
Staff Reports , Paper 779

Journal Article
Making payments on the Internet
McAndrews, James J. (1997-01)
To become an active market in goods and services, the Internet must overcome a fundamental hurdle: a way must be devised for buyers and sellers to securely and conveniently exchange payment over the Internet. Software companies and financial institutions are now developing methods that will allow people to pay over the Internet. James McAndrews reviews these efforts and looks at the importance of security, authenticity, and privacy--factors often taken for granted in other types of payment
Business Review , Issue Jan , Pages 1-12

Working Paper
Settlement risk under gross and net settlement
Roberds, William; Kahn, Charles M.; McAndrews, James J. (1999)
Previous comparative analyses of gross and net settlement have focused on the credit risk of the central counterparty in net settlement arrangements and on the incentives for participants to alter the risk of the portfolio under net settlement. By modeling the trading economy that generates the demand for payment services, we are able to show some largely unexplored advantages of net settlement. We find that net settlement can prevent certain gridlock situations, which may arise in gross settlement in the absence of delivery versus payment requirements. In addition, we show that net ...
FRB Atlanta Working Paper , Paper 99-10

Report
Should there be intraday money markets?
McAndrews, James J.; Martin, Antoine (2008)
In this paper, we consider the case for an intraday market for reserves. We discuss the separate roles of intraday and overnight reserves and argue that an intraday market could be organized in the same way as the overnight market. We present arguments for and against a market for intraday reserves when the marginal cost of overnight reserves is positive. We also consider how reserves should be supplied when the cost of overnight reserves is zero. In that case, the distinction between overnight and intraday reserves becomes blurred, raising an important question: What is the role of the ...
Staff Reports , Paper 337

Journal Article
What makes large bank failures so messy and what should be done about it?
Morgan, Donald P.; Yorulmazer, Tanju; Santos, Joao A. C.; McAndrews, James J. (2014-12)
This study argues that the defining feature of large and complex banks that makes their failures messy is their reliance on runnable financial liabilities. These liabilities confer liquidity or money-like services that may be impaired or destroyed in bankruptcy. To make large bank failures more orderly, the authors recommend that systemically important bank holding companies be required to issue ?bail-in-able? long-term debt that converts to equity in resolution. This reassures holders of uninsured liabilities that their claims will be honored in resolution, making them less likely to run. In ...
Economic Policy Review , Issue Dec , Pages 229-244

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