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Discussion Paper
Do Low Rates Encourage Yield Seeking by Money Market Funds?
La Spada, Gabriele (2018-03-07)
The term “reach for yield” refers to investors’ tendency to buy riskier assets in hopes of securing higher returns. Do low rates on safe assets encourage such yield-seeking behavior, particularly among U.S. prime money market funds (MMFs)? In a forthcoming paper in the Journal of Financial Economics, I develop a model of MMF competition to understand whether competitive pressure leads these funds to reach for yield in a low-rate environment like the current one. I test the model’s predictions on the 2002-08 period and show that, after controlling for changes in risk premia, declines ...
Liberty Street Economics , Paper 20180307

Discussion Paper
The Effects of Post-Crisis Banking Reforms
Crump, Richard K.; Santos, Joao A. C. (2018-10-01)
The financial crisis of 2007-08 exposed many limitations of the regulatory architecture of the U.S. financial system. In an attempt to mitigate these limitations, there has been a wave of regulatory reforms in the post-crisis period, especially in the banking sector. These include tighter bank capital and liquidity rules; new resolution procedures for failed banks; the creation of a stand-alone consumer protection agency; greater transparency in money market funds; and a move to central clearing of derivatives, among other measures. As these reforms have been finalized and implemented, a ...
Liberty Street Economics , Paper 20181001b

Discussion Paper
The Impact of the Corporate Credit Facilities
Boyarchenko, Nina; Kovner, Anna; Shachar, Or (2020-10-01)
American companies have raised almost $1 trillion in the U.S. corporate bond market since March. If companies had been unable to refinance those bonds, their inability to repay may have led to an immediate default on all of their obligations, creating a cascade of defaults and layoffs. Based on Compustat data, an inability to access public bond markets could have affected companies employing more than 16 million people. In this post, we document the impact of the Primary Market and Secondary Market Corporate Credit Facilities (PMCCF and SMCCF) on bond market functioning, summarizing a ...
Liberty Street Economics , Paper 20201001

Discussion Paper
Cash Assets of Foreign Banks: An Example of Seasonal Adjustment Gone Awry
Sastry, Parinitha; Keister, Todd; Copeland, Adam (2012-01-09)
Federal Reserve Statistical Release H.8 provides aggregate data on the assets and liabilities of commercial banks in the United States. Two types of data are provided: one in which each series is adjusted to offset regular, seasonal movements, and another in which no adjustment is made. Recently, a striking pattern has emerged in one particular data series: the cash assets of foreign-related banking institutions.[1] In the seasonally adjusted data, this value has fallen 36 percent since its peak in June 2011?a sharp movement that has generated concern among market observers. The nonseasonally ...
Liberty Street Economics , Paper 20120109

Discussion Paper
Enhancing Monitoring of NBFI Exposure: The Case of Open-End Funds
Cetorelli, Nicola; Sarkar, Debashish (2023-04-18)
Non-bank financial institutions (NBFIs) have grown steadily over the last two decades, becoming important providers of financial intermediation services. As NBFIs naturally interact with banking institutions in many markets and provide a wide range of services, banks may develop significant direct exposures stemming from these counterparty relationships. However, banks may be also exposed to NBFIs indirectly, simply by virtue of commonality in asset holdings. This post and its companion piece focus on this indirect form of exposure and propose ways to identify and quantify such ...
Liberty Street Economics , Paper 20230418a

Discussion Paper
Banks’ Balance-Sheet Costs and ON RRP Investment
Afonso, Gara; Cipriani, Marco; Huang, Catherine; La Spada, Gabriele (2023-05-18)
Daily investment at the Federal Reserve’s Overnight Reverse Repo (ON RRP) facility increased from a few billion dollars in March 2021 to more than $2.3 trillion in June 2022 and has stayed above $2 trillion since then. In this post, which is based on a recent staff report, we discuss two channels—a deposit channel and a wholesale short-term debt channel—through which banks’ balance-sheet costs have increased investment by money market mutual funds (MMFs) in the ON RRP facility.
Liberty Street Economics , Paper 20230518

Discussion Paper
Why Do Banks Fail? Bank Runs Versus Solvency
Correia, Sergio A.; Luck, Stephan; Verner, Emil (2024-11-25)
Evidence from a 160-year-long panel of U.S. banks suggests that the ultimate cause of bank failures and banking crises is almost always a deterioration of bank fundamentals that leads to insolvency. As described in our previous post, bank failures—including those that involve bank runs—are typically preceded by a slow deterioration of bank fundamentals and are hence remarkably predictable. In this final post of our three-part series, we relate the findings discussed previously to theories of bank failures, and we discuss the policy implications of our findings.
Liberty Street Economics , Paper 20241125

Working Paper
Wages and human capital in finance: international evidence, 1970-2005
Reshef, Ariell; Grant, Everett; Boustanifar, Hamid (2016-02-01)
We study the allocation and compensation of human capital in the finance industry in a set of developed economies in 1970-2005. Finance relative skill intensity and skilled wages generally increase but not in all countries, and to varying degrees. Skilled wages in finance account for 36% of increases in overall skill premia, although finance only accounts for 5.4% of skilled private sector employment, on average. Financial deregulation, financial globalization and bank concentration are the most important factors driving wages in finance. Differential investment in information and ...
Globalization Institute Working Papers , Paper 266

Discussion Paper
Banking the Unbanked: The Past and Future of the Free Checking Account
Berre, Stein; Blickle, Kristian S.; Chakrabarti, Rajashri (2021-06-30)
About one in twenty American households are unbanked (meaning they do not have a demand deposit or checking account) and many more are underbanked (meaning they do not have the range of bank-provided financial services they need). Unbanked and underbanked households are more likely to be lower-income households and households of color. Inadequate access to financial services pushes the unbanked to use high-cost alternatives for their transactional needs and can also hinder access to credit when households need it. That, in turn, can have adverse effects on the financial health, educational ...
Liberty Street Economics , Paper 20210630a

Discussion Paper
Why Large Bank Failures Are So Messy and What to Do about It?
Morgan, Donald P.; Yorulmazer, Tanju; Santos, João A. C.; McAndrews, James J. (2014-04-04)
If the Lehman Brothers failure proved anything, it was that large, complex bank failures are messy; they destroy value and can destabilize financial markets. We certainly don’t mean to trivialize matters by calling large bank failures “messy,” as it their messiness, particularly the destabilizing aspect, that creates the “too-big-to-fail” problem. In our contribution to the Economic Policy Review volume, we venture an explanation about why large bank failures are so messy and discuss a policy that can make them less so.
Liberty Street Economics , Paper 20140404a

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