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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
Does Bank Monitoring Affect Loan Repayment?
Branzoli, Nicola; Fringuellotti, Fulvia (2022-12-02)
Banks monitor borrowers after originating loans to reduce moral hazard and prevent loan losses. While monitoring represents an important activity of bank business, evidence on its effect on loan repayment is scant. In this post, which is based on our recent paper, we shed light on whether bank monitoring fosters loan repayment and to what extent it does so.
Liberty Street Economics , Paper 20221202

Discussion Paper
Are Asset Managers Vulnerable to Fire Sales?
Cetorelli, Nicola; Eisenbach, Thomas M.; Duarte, Fernando M. (2016-02-18)
According to conventional wisdom, an open-ended investment fund that has a floating net asset value (NAV) and no leverage will never experience a run and hence never have to fire-sell assets. In that view, a decline in the value of the fund’s assets will just lead to a commensurate and automatic decline in the fund’s equity—end of story. In this post, we argue that the conventional wisdom is incomplete and then explore some of the systemic risk consequences of investment funds’ vulnerabilities to fire-sale spillovers.
Liberty Street Economics , Paper 20160218

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

Discussion Paper
What Drives Buyout Booms and Busts?
Haddad, Valentin; Plosser, Matthew; Loualiche, Erik (2015-06-01)
Buyout activity by financial investors fluctuates substantially over time. In the United States, peak years result in close to one hundred public-to-private buyout transactions and trough years in as few as ten. The typical buyout is primarily funded by debt, hence the term 'leveraged buyout' (or LBO). As a result, analysis of buyout fluctuations has focused on the availability and cost of debt financing. However, in a recent staff report, we find that the overall cost of capital, rather than debt alone, is the primary driver of buyout activity. We argue that it is the common changes in both ...
Liberty Street Economics , Paper 20150601

Discussion Paper
Insider Networks
Erol, Selman; Lee, Michael Junho (2020-06-25)
Modern-day financial systems are highly complex, with billions of exchanges in information, assets, and funds between individuals and institutions. Though daunting to operationalize, regulating these transmissions may be desirable in some instances. For example, securities regulators aim to protect investors by tracking and punishing insider trading. Recent evidence shows that insiders have formed sophisticated networksthat enable them to pursue activities outside the purview of regulatory oversight. In understanding the cat-and-mouse game between regulators and insiders, a key consideration ...
Liberty Street Economics , Paper 20200625

Discussion Paper
Physical Climate Risk and Insurers
Jung, Hyeyoon; Engle, Robert; Ge, Shan; Zeng, Xuran (2024-04-03)
As the frequency and severity of natural disasters increase with climate change, insurance—the main tool for households and businesses to hedge natural disaster risks—becomes increasingly important. Can the insurance sector withstand the stress of climate change? To answer this question, it is necessary to first understand insurers’ exposure to physical climate risk, that is, risks coming from physical manifestations of climate change, such as natural disasters. In this post, based on our recent staff report, we construct a novel factor to measure the aggregate physical climate risk in ...
Liberty Street Economics , Paper 20240403

Discussion Paper
Cyberattacks and Supply Chain Disruptions
Crosignani, Matteo; Macchiavelli, Marco; Silva, André F. (2021-06-22)
Cybercrime is one of the most pressing concerns for firms. Hackers perpetrate frequent but isolated ransomware attacks mostly for financial gains, while state-actors use more sophisticated techniques to obtain strategic information such as intellectual property and, in more extreme cases, to disrupt the operations of critical organizations. Thus, they can damage firms’ productive capacity, thereby potentially affecting their customers and suppliers. In this post, which is based on a related Staff Report, we study a particularly severe cyberattack that inadvertently spread beyond its ...
Liberty Street Economics , Paper 20210622

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

Working Paper
Claim Dilution in the Municipal Debt Market
Zimmermann, Thomas; Ivanov, Ivan T. (2018-02-05)
Using loan-level municipal bank lending data, we examine the debt structure of municipalities and its response to exogenous income shocks. We show that small, more indebted, low-income, and medium credit quality counties are particularly reliant on private bank financing. Low income counties are more likely to increase bank debt share after an adverse permanent income shock while high income counties do not shift their debt structure in response. In contrast, only high income counties draw on their credit lines after adverse transitory income shocks. Overall, our paper raises concerns about ...
Finance and Economics Discussion Series , Paper 2018-011

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