Search Results
Report
The Theory of Financial Stability Meets Reality
A large literature at the intersection of economics and finance offers prescriptions for regulating banks to increase financial stability. This literature abstracts from the discretion that accounting standards give banks over financial reporting, creating a gap between the information assumed to be available to regulators in models of optimal regulation and the information available to regulators in reality. We bridge insights from the economics, finance, and accounting literatures to synthesize knowledge about the design and implementation of bank regulation and identify areas where more ...
Discussion Paper
Fear of $10 Billion
Ten billion has become a big number in banking since the Dodd-Frank Act of 2010. When banks’ assets exceed that threshold, they face considerably heightened supervision and regulation, including exams by the Consumer Financial Protection Bureau, caps on interchange fees, and annual stress tests. There are plenty of anecdotes about banks avoiding the $10 billion threshold or waiting to cross with a big merger, but we’ve seen no systematic evidence of this avoidance behavior. We provide some supporting evidence below and then discuss the implications for size-based bank regulation—where ...
Report
Where Do Banks End and NBFIs Begin?
In recent years, assets of nonbank financial intermediaries (NBFIs) have grown significantly relative to those of banks. These two sectors are commonly viewed either as operating in parallel, performing different activities, or as substitutes, performing substantially similar activities, with banks inside and NBFIs outside the perimeter of banking regulation. We argue instead that NBFI and bank businesses and risks are so interwoven that they are better described as having transformed over time, rather than as having migrated from banks to NBFIs. These transformations are at least in part a ...
Discussion Paper
Banks and Nonbanks Are Not Separate, but Interwoven
In our previous post, we documented the significant growth of nonbank financial institutions (NBFIs) over the past decade, but also argued for and showed evidence of NBFIs’ dependence on banks for funding and liquidity support. In this post, we explain that the observed growth of NBFIs reflects banks optimally changing their business models in response to factors such as regulation, rather than banks stepping away from lending and risky activities and being substituted by NBFIs. The enduring bank-NBFI nexus is best understood as an ever-evolving transformation of risks that were hitherto ...
Working Paper
How Do Banks Respond to Capital Regulation? — The Impact of the Basel III Reforms in the United States
Understanding banks’ responses to capital regulation is essential for regulators to use this key tool of modern banking regulation effectively. We study how and when US banks responded to changes to the way capital ratios are measured, changes that were introduced as part of the adoption of Basel III. We find that small banks — those below USD 10bn — responded neither before nor after the release of the new rules to the change in measured capital they experienced under the new rules. In contrast, we show that regional banks — those with total assets between USD 10bn and USD 50bn — ...
Report
Stablecoins vs. Tokenized Deposits: The Narrow Banking Debate Revisited
We study how the type of money used in blockchain-based trade affects interest rates, investment, and welfare. Stablecoins in our model are backed by safe assets, while banks issue deposits (both traditional and tokenized) to fund a portfolio of safe and risky assets. Deposit insurance creates a risk-shifting incentive for banks, and regulation increases banks’ costs. If regulatory costs are large and risk-shifting is limited, we show that allowing only tokenized deposits to be used in crypto trade raises welfare by expanding bank credit. If regulation is lighter and the risk-shifting ...
Working Paper
Sovereign Debt Crises
Sovereign debt crises have been recurrent events over the past two centuries. In recent years, the timing of sovereign crises has coincided or has directly followed banking crises. The link between sovereigns and banks tightened as the contingent liability that the banking sector represents for the sovereign grew, as financial "safety nets" became more common. This chapter analyzes the transmission channels between sovereigns and banks, with a focus on the effect of sovereign distress on bank solvency and financing. It then highlights the notable cost to the real economy of the close ...
Working Paper
Bank Failure, Relationship Lending, and Local Economic Performance
Whether bank failures have adverse effects on local economies is an important question for which there is conflicting and relatively scarce evidence. In this study, I use county-level data to examine the effect of bank failures and resolutions on local economies. Using quasi-experimental techniques as well as cross-sectional variation in bank failures, I show that recent bank failures lead to lower income and compensation growth, higher poverty rates, and lower employment. Additionally, I find that the structure of bank resolution appears to be important. Resolutions that include loss-sharing ...
Discussion Paper
Banks Develop a Nonbank Footprint to Better Manage Liquidity Needs
In a previous post, we documented how, over the past five decades, the typical U.S. bank has evolved from an entity mainly focused on deposit taking and loan making to a more diversified conglomerate also incorporating a variety of nonbank activities. In this post, we show that an important driver of the evolution of this new organizational form is the desire of banks to efficiently manage liquidity needs.
Speech
Opening remarks at the Conference on Supervising Large, Complex Financial Institutions: Defining Objectives and Measuring Effectiveness
Remarks at the Conference on Supervising Large, Complex Financial Institutions: Defining Objectives and Measuring Effectiveness, Federal Reserve Bank of New York, New York City.