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Journal Article
Criteria for central bank assets: lessons from pre-ECB Germany
The Deutsche Bundesbank was formed in July 1957, when the two-tier central bank system set up following World War II was consolidated. That previous system had been established by the Allies in imitation of the Federal Reserve System and consisted of independent regional banks (the Land Central Banks) and a governing body. Under the new system, the Land Central Banks became offices of the Bundesbank. As was true under the previous system, the Bundesbank was made independent of the federal cabinet by law and was particularly proscribed from lending to the public sector except for short terms. ...
Journal Article
Criteria for central bank assets: lessons from pre-ECB France
The Banque de France was founded in 1800 to discount bills and issue currency. Initially, it was a private institution run by its stockholders. The Banque was nationalized in 1936 and its governing council was staffed by officials with a mandate to represent various interests in society. The Banque's autonomy was largely restored in 1973, and the Banque became officially independent in 1994. Whereas the Banque had originally lent appreciable sums to the Treasury, such lending was scheduled to be eliminated beginning in 1993 as part of the move toward monetary union. At that time the monetary ...
Working Paper
Using policy intervention to identify financial stress
This paper describes the construction of a financial stress index. This stress index differs from other indexes in that it incorporates the co-movement and volatility of financial series as well as the levels of the series. Our index also uses past experience more than others to guide the assessment about which characteristics of the data suggest financial stress exists. In addition to describing the construction of our financial stress index, we spend some time discussing issues relevant to the general construction of stress indexes.
Working Paper
The aggregate change in shares and the level of stock prices
The average change in shares of equity is negatively correlated with estimates of the equity premium calculated using the dividend-ratio model of Campbell and Shiller, as well as with a variant of the model written in terms of the earnings-price ratio. This correlation is consistent with corporations issuing equity when it is a relatively inexpensive source of finance and repurchasing equity when it is a relatively good investment. However, when the retirement of shares resulting from mergers are included, the average change in shares is no longer significantly correlated with the equity ...
Working Paper
Evidence of excess returns on firms that issue or repurchase equity
Between 1927 and 1992, portfolios of the stock of the 5 percent of firms with the lowest annual growth in shares outstanding (generally a reduction in shares outstanding) posted returns over the subsequent five years that averaged 12 percentage points more per year than the returns to portfolios of the 5 percent of firms with the highest annual growth in shares. The difference in returns is greater in more recent years and was positive for all of the final 33 years of the sample. The difference is apparent for portfolios of firms of all sizes and industries. The market beta of the returns to ...
Working Paper
Why does the change in shares predict stock returns?
The stock of firms that issue equity has, on average, performed poorly in subsequent years, while the stock of firms that repurchase has typically done well. One explanation for this pattern is that firms are exploiting their superior knowledge about the value of their stock by buying it when it is undervalued and selling it when it is overvalued. This paper presents supporting evidence for this explanation of the excess returns: The change in shares outstanding is positively correlated with proxies for the deviation of current stock prices from fundamental value; the excess returns following ...
Working Paper
Bank risk rating of business loans
In recent years many banks have attempted to improve the measurement and management of credit risk by assigning risk ratings to business loans. Virtually all large banks now assign such ratings. However, until recently there has been little information on the use of risk ratings by smaller banks. Recent revisions to the Federal Reserve's Survey of Terms of Business Lending and telephone consultations with more than 100 banks on the survey panel provide data on the prevalence and precision of risk rating systems at banks of all sizes. We find that the use of risk rating systems is quite ...
Working Paper
Securitization markets and central banking: an evaluation of the term asset-backed securities loan facility
In response to the near collapse of US securitization markets in 2008, the Federal Reserve created the Term Asset-Backed Securities Loan Facility, which offered non-recourse loans to finance investors' purchases of certain highly rated asset-backed securities. We study the effects of this program and find that it lowered interest rate spreads for some categories of asset-backed securities but had little impact on the pricing of individual securities. These findings suggest that the program improved conditions in securitization markets but did not subsidize individual securities. We also find ...
Working Paper
The Demand for Short-Term, Safe Assets and Financial Stability: Some Evidence and Implications for Central Bank Policies
A number of researchers have recently argued that the growth of the shadow banking system in the years preceding the recent U.S. financial crisis was driven by rising demand for "money-like" claims--short-term, safe instruments (STSI)--from institutional investors and nonfinancial firms. These instruments carry a money premium that lowers their yields. While government securities are an important part of the supply of STSI, financial intermediaries also take advantage of this money premium when they issue certain types of low-risk, short-term debt, such as asset-backed commercial paper or ...