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Working Paper
Embedded Supervision: How to Build Regulation into Blockchain Finance
Auer, Raphael (2019-10-01)
The spread of distributed ledger technology (DLT) in finance could help to improve the efficiency and quality of supervision. This paper makes the case for embedded supervision, i.e., a regulatory framework that provides for compliance in tokenized markets to be automatically monitored by reading the market?s ledger, thus reducing the need for firms to actively collect, verify and deliver data. After sketching out a design for such schemes, the paper explores the conditions under which distributed ledger data might be used to monitor compliance. To this end, a decentralized market is modelled ...
Globalization Institute Working Papers , Paper 371

Report
Climate Regulatory Risks and Corporate Bonds
Starks, Laura; Seltzer, Lee; Zhu, Qifei (2022-04-01)
Investor and policymaker concerns about climate risks suggest these risks should affect the risk assessment and pricing of corporate securities, particularly for firms facing stricter regulatory enforcement. Using corporate bonds, the authors find support for this hypothesis. Employing a shock to expected climate regulations, they show climate regulatory risks causally affect bond credit ratings and spreads. A structural credit model indicates that the increased spreads for high carbon issuers, especially those located in stricter regulatory environments, are driven by changes in firms' asset ...
Staff Reports , Paper 1014

Report
Payout Restrictions and Bank Risk-Shifting
Fringuellotti, Fulvia; Kroen, Thomas (2024-09-01)
This paper studies the effects of regulatory payout restrictions on bank risk-shifting. Using policies imposed during the Covid-crisis on U.S. banks as a natural experiment and a high frequency differences-in-differences approach, we show that, when payouts are restricted, banks’ equity prices fall while their debt values appreciate. Moreover, banks that are ex-ante more exposed to the payout restrictions decrease risk-taking in lending relative to less exposed banks. Consistent with a risk-shifting channel, these effects revert once restrictions are lifted. These results indicate that ...
Staff Reports , Paper 1123

Working Paper
Is Lending Distance Really Changing? Distance Dynamics and Loan Composition in Small Business Lending
Brevoort, Kenneth P.; Adams, Robert M.; Driscoll, John C. (2021-02-16)
Has information technology improved small businesses' access to credit by hardening the information used in loan underwriting and reducing the importance of proximity to lenders? Previous research, pointing to increasing average lending distances, suggests that it has. But this conclusion can obscure differences across loans and lenders. Using over 20 years of Community Reinvestment Act data on small business lending, we find that while average distances have increased substantially, distances at individual banks remain unchanged. Instead, average distance has increased because a small group ...
Finance and Economics Discussion Series , Paper 2021-011

Journal Article
Bank corporate governance: a proposal for the post-crisis world
Macey, Jonathan R.; O'Hara, Maureen (2016-08)
The corporate governance problems of banks are qualitatively and quantitatively different from those of other firms. The authors argue that a key factor contributing to this difference is the growing opacity and complexity of bank activities, a trend that has increased the difficulty of managing risk in financial firms. They also cite the governance challenges posed by the holding company organization of banks, in which two boards of directors?the bank?s own board and the board of the holding company that owns the bank?monitor the bank. This paradigm results in significant confusion about the ...
Economic Policy Review , Issue Aug , Pages 85-105

Journal Article
Assisting Firms during a Crisis: Benefits and Costs
Wall, Larry D. (2020-08-10)
Public and private efforts to reduce COVID-19 infection levels have led to a sharp drop in economic activity around the world. In an attempt to mitigate the damage to businesses, governments around the world have implemented a variety of financial programs to help firms. These programs have been criticized as interfering with markets, providing bailouts, and creating adverse incentives. In this article, I review both the rationale for government-provided assistance and the costs of providing that assistance from the perspective of how that aid effects the likely level and volatility of ...
Policy Hub , Volume 2020 , Issue 10 , Pages 18

Working Paper
Risk-Shifting, Regulation, and Government Assistance
Sharma, Padma (2019-11-26)
This paper examines an episode when policy response to a financial crisis effectively incentivized financial institutions to reallocate their portfolios toward safe assets. Following a shift to a regime of enhanced regulation and scaled-down public assistance during the savings and loan crisis in 1989, I find that thrifts with a high probability of failure increased their composition of safe assets relative to thrifts with a low probability of failure. The findings also show a shift to safe assets among stock thrifts relative to mutual thrifts, thereby providing evidence of risk-shifting from ...
Research Working Paper , Paper RWP 19-10

Working Paper
Assessing Regulatory Responses to Banking Crises
Sharma, Padma (2022-05-10)
During banking crises, regulators must decide between bailouts or liquidations, neither of which are publicly popular. However, making a comprehensive assessment of regulators requires examining all their decisions against their dual objectives of preserving financial stability and discouraging moral hazard. I develop a Bayesian latent class model to assess regulators on these competing objectives and evaluate banking and savings and loan (S&L) regulators during the 1980s crises. I find that the banking authority (FDIC) conformed to these objectives whereas the S&L regulator (FSLIC), which ...
Research Working Paper , Paper RWP 22-04

Discussion Paper
Do Payout Restrictions Reduce Bank Risk?
Fringuellotti, Fulvia; Kroen, Thomas (2025-01-08)
In June 2020, the Federal Reserve issued stringent payout restrictions for the largest banks in the United States as part of its policy response to the COVID-19 crisis. Similar curbs on share buybacks and dividend payments were adopted in other jurisdictions, including in the eurozone, the U.K., and Canada. Payout restrictions were aimed at enhancing banks’ resiliency amid heightened economic uncertainty and concerns about the risk of large losses. But besides being a tool to build capital buffers and preserve bank equity, payout restrictions may also prevent risk-shifting. This post, which ...
Liberty Street Economics , Paper 20250108

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