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Discussion Paper
Regulatory Changes and the Cost of Capital for Banks
Zborowski, Brandon; Van Tassel, Peter; Kovner, Anna (2018-10-01)
In response to the financial crisis nearly a decade ago, a number of regulations were passed to improve the safety and soundness of the financial system. In this post and our related staff report, we provide a new perspective on the effect of these regulations by estimating the cost of capital for banks over the past two decades. We find that, while banks? cost of capital soared during the financial crisis, after the passage of the Dodd-Frank Act (DFA), banks experienced a greater decrease in their cost of capital than nonbanks and nonbank financial intermediaries (NBFI).
Liberty Street Economics , Paper 20181001a

Discussion Paper
Do Big Banks Have Lower Operating Costs?
Zhou, Lily; Kovner, Anna; Vickery, James (2014-03-25)
Despite recent financial reforms, there is still widespread concern that large banking firms remain “too big to fail.” As a solution, some reformers advocate capping the size of the largest banking firms. One consideration, however, is that while early literature found limited evidence for economies of scale, recent academic research has found evidence of scale economies in banking, even for the largest banking firms, implying that such caps could impose real costs on the economy. In our contribution to the volume on large and complex banks, we extend this line of research by studying the ...
Liberty Street Economics , Paper 201404325a

Discussion Paper
Weathering the Storm: Who Can Access Credit in a Pandemic?
Luck, Stephan; Cooperman, Harry; Plosser, Matthew; Chodorow-Reich, Gabriel; Darmouni, Olivier M. (2020-10-13)
Credit enables firms to weather temporary disruptions in their business that may impair their cash flow and limit their ability to meet commitments to suppliers and employees. The onset of the COVID recession sparked a massive increase in bank credit, largely driven by firms drawing on pre-committed credit lines. In this post, which is based on a recent Staff Report, we investigate which firms were able to tap into bank credit to help sustain their business over the ensuing downturn.
Liberty Street Economics , Paper 20201013a

Working Paper
The impact of unconventional monetary policy on firm financing constraints: evidence from the maturity extension program
Yu, Edison; Ramcharan, Rodney; Foley-Fisher, Nathan (2015-08-13)
This paper investigates the impact of unconventional monetary policy on firm financing constraints. It focuses on the Federal Reserve?s maturity extension program (MEP), which was intended to lower longer-term rates and flatten the yield curve by reducing the supply of long-term government debt. Consistent with those models that emphasize bond market segmentation and limits to arbitrage, around the MEP?s announcement, stock prices rose most sharply for those firms that are more dependent on longer-term debt. These firms also issued more long-term debt during the MEP and expanded employment ...
Working Papers , Paper 15-30

Discussion Paper
Credit Market Choice
Boyarchenko, Nina; Shachar, Or; Costello, Anna M. (2018-10-17)
Credit default swaps (CDS) are frequently credited with being the cause of AIG’s collapse during the financial crisis. A Reuters article from September 2008, for example, notes “[w]hen you hear that the collapse of AIG […] might lead to a systemic collapse of the global financial system, the feared culprit is, largely, that once-obscure […] instrument known as a credit default swap.” Yet, despite the prominent role that CDS played during the financial crisis, little is known about how individual financial institutions utilize CDS contracts on individual companies. In a recent New ...
Liberty Street Economics , Paper 20181017

Discussion Paper
Flood Risk and Firm Location Decisions in the Fed’s Second District
Hannaoui, Oliver Zain; Jung, Hyeyoon; Santos, João A. C.; Seltzer, Lee (2023-11-14)
The intensity, duration, and frequency of flooding have increased over the past few decades. According to the Federal Emergency Management Agency (FEMA), 99 percent of U.S. counties have been impacted by a flooding event since 1999. As the frequency of flood events continues to increase, the number of people, buildings, and agriculture exposed to flood risk is only likely to grow. As a previous post points out, measuring the geographical accuracy of such risk is important and may impact bank lending. In this post, we focus on the distribution of flood risk within the Federal Reserve’s ...
Liberty Street Economics , Paper 20231114

Discussion Paper
The Making of Fallen Angels—and What QE and Credit Rating Agencies Have to Do with It
Acharya, Viral V.; Banerjee, Ryan N.; Crosignani, Matteo; Eisert, Tim; Spigt, Renée (2022-02-16)
Riskier firms typically borrow at higher rates than safer firms because investors require compensation for taking on more risk. However, since 2009 this relationship has been turned on its head in the massive BBB corporate bond market, with risky BBB-rated firms borrowing at lower rates than their safer BBB-rated peers. The resulting risk materialized in an unprecedented wave of “fallen angels” (or firms downgraded below the BBB investment-grade threshold) at the onset of the COVID-19 pandemic. In this post, based on a related Staff Report, we claim that this anomaly has been driven by a ...
Liberty Street Economics , Paper 20220216a

Discussion Paper
The Costs of Corporate Debt Overhang Following the COVID-19 Outbreak
Santos, Joao A. C.; Blickle, Kristian S. (2020-12-01)
Leading up to the COVID-19 outbreak, there were growing concerns about corporate sector indebtedness. High levels of borrowing may give rise to a “debt overhang” problem, particularly during downturns, whereby firms forego good investment opportunities because of an inability to raise additional funding. In this post, we show that firms with high levels of borrowing at the onset of the Great Recession underperformed in the following years, compared to similar—but less indebted—firms. These findings, together with early data on the revenue contractions following the COVID-19 outbreak, ...
Liberty Street Economics , Paper 20201201

Discussion Paper
Did Investor Sentiment Affect Credit Risk around the 2016 Election?
Sarkar, Asani (2017-11-29)
Immediately following the presidential election of 2016, both consumer and investor sentiments were buoyant and financial markets boomed. That these sentiments affect financial asset prices is not so surprising, given past stock market evidence and episodes such as the dot-com bubble. Perhaps more surprising, the risk of corporate default—which is driven mainly by firms’ financial health but also by bond liquidity—also fell following the election, as indicated by lower yield spreads. In this post, I show that, although expectations of better corporate and macroeconomic conditions were ...
Liberty Street Economics , Paper 20171129

Report
Physical Climate Risk Factors and an Application to Measuring Insurers’ Climate Risk Exposure
Zeng, Xuran; Jung, Hyeyoon; Ge, Shan; Engle, Robert (2023-07-01)
We construct a novel physical risk factor using a portfolio of REITs, long on those with properties highly exposed to climate risk and short on those with less exposure. Combined with a transition risk factor, we assess U.S. insurers’ climate risk through operations and $13 trillion in asset holdings. Estimating dynamic climate betas, we find higher stock return sensitivity to the physical risk among insurers operating in riskier regions and to transition risk among those holding more brown assets. Using these betas, we calculate capital shortfalls under climate stress scenarios, offering ...
Staff Reports , Paper 1066

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