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Working Paper
Scenario-based Quantile Connectedness of the U.S. Interbank Liquidity Risk Network
We characterize the U.S. interbank liquidity risk network based on a supervisory dataset, using a scenario-based quantile network connectedness approach. In terms of methodology, we consider a quantile vector autoregressive model with unobserved heterogeneity and propose a Bayesian nuclear norm estimation method. A common factor structure is employed to deal with unobserved heterogeneity that may exhibit endogeneity within the network. Then we develop a scenario-based quantile network connectedness framework by accommodating various economic scenarios, through a scenario-based moving average ...
Working Paper
The Standards Are in the Mail: Comparing Credit Card Supply Indicators
We provide the first lender-level analysis linking two independently constructed credit supply measures: the Federal Reserve's Senior Loan Officer Opinion Survey (SLOOS) and credit card mail offers from Mintel Comperemedia. Using a matched panel of 73 banks from 2000 to 2019, we find that quarterly mail volume growth was 18 percent lower when banks reported tightening credit card lending standards, a relationship robust to including credit demand indicators. In addition, SLOOS responses on credit limits and interest rate spreads are also correlated with these terms observed in mail offers. ...
Working Paper
How Did CECL Affect Bank Lending?
Adoption of the current expected credit losses (CECL) methodology for loan loss provisioning significantly altered how banks recognize loan losses in their capital calculations. Because capital is a more costly funding source for banks, the accounting change affects banks' cost of funding loans. Using variation in the timing and effect of CECL implementation across firms and loan types, this paper finds that loan loss allowances have a similar causal effect on credit supply as capital requirements. Within our sample, the effect of CECL adoption on loan allowances reduced loan growth by ...
Working Paper
The relationship between information asymmetry and dividend policy
This paper examines how the quality of firm information disclosure affects shareholders' use of dividends to mitigate agency problems. Managerial compensation is linked to firm value. However, because the manager and shareholders are asymmetrically informed, the manager can manipulate the firm's accounting information to increase perceived firm value. Dividends can limit such practices by adding to the cost faced by a manager manipulating earnings. Empirical tests match model predictions. Dividend-paying firms show less evidence of earnings management. Furthermore, nondividend payers changed ...
Working Paper
Bank Profitability and Debit Card Interchange Regulation: Bank Responses to the Durbin Amendment
The Durbin Amendment to the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 alters the competitive structure of the debit card payment processing industry and caps debit card interchange fees for banks with over $10 billion in assets. Market participants predicted that debit card issuers would offset the reduction in debit interchange revenue by increases in customer account fees. Some participants also predicted that banks would cut costs in response to the law by reducing staff and shutting down branches. Using a difference-in-differences testing strategy, we show that ...
Working Paper
How Have Banks Been Managing the Composition of High-Quality Liquid Assets?
We study banks' post-crisis liquidity management. We construct time series of U.S. banks' holdings of high-quality liquid assets (HQLA) and examine how these assets have been managed in recent years to comply with the Liquidity Coverage Ratio (LCR) requirement. We find that, in becoming LCR compliant, banks initially ramped up their stock of reserve balances. However, once the requirement was met, some banks subsequently shifted the compositions of their liquid portfolios significantly. This raises the question: What drives the compositions of banks? HQLA? We show that a risk-return framework ...
Working Paper
Bank Failures, Capital Buffers, and Exposure to the Housing Market Bubble
We empirically document that banks with greater exposure to high home price-to-income ratio regions in 2005 and 2006 have higher mortgage delinquency and charge-off rates and significantly higher probabilities of failure during the last financial crisis even after controlling for capital, liquidity, and other standard bank performance measures. While high price-to-income ratios present a greater likelihood of house price correction, we find no evidence that banks managed this risk by building stronger capital buffers. Our results suggest that there is scope for improved measures of mortgage ...
Working Paper
The Impact of the Current Expected Credit Loss Standard (CECL) on the Timing and Comparability of Reserves
The new forward-looking credit loss provisioning standard, CECL, is intended to promote proactive provisioning as loan loss reserves can be conditioned on expectations of the economic cycle. We study the degree to which one modeling decision?expectations about the path of future house prices ? affects the size and timing of provisions for first-lien residential mortgage portfolios. While we find that provisions are generally less pro-cyclical compared to the current incurred loss standard, CECL may complicate the comparability of provisions across banks and time. Market participants will need ...
Working Paper
The Effects of Liquidity Regulation on Bank Demand in Monetary Policy Operations
We estimate the effects of the liquidity coverage ratio (LCR), a liquidity requirement for banks, on the tenders that banks submit in Term Deposit Facility operations, a Federal Reserve tool created to manage the quantity of bank reserves. We identify these effects using variation in LCR requirements across banks and a change over time that allowed term deposits to count toward the LCR. Banks subject to the LCR submit tenders more often and submit larger tenders than exempt banks when term deposits qualify for the LCR. These results suggest that liquidity regulation affects bank demand in ...
Working Paper
Primer on the Forward-Looking Analysis of Risk Events (FLARE) Model: A Top-Down Stress Test Model
This technical note describes the Forward-Looking Analysis of Risk Events (FLARE) model, which is a top-down model that helps assess how well the banking system is positioned to weather exogenous macroeconomic shocks. FLARE estimates banking system capital under varying macroeconomic scenarios, time horizons, and other systemic shocks.