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Discussion Paper
What Happens When Regulatory Capital Is Marked to Market?
Vickery, James; Fuster, Andreas (2018-10-11)
Minimum equity capital requirements are a key part of bank regulation. But there is little agreement about the right way to measure regulatory capital. One of the key debates is the extent to which capital ratios should be based on current market values rather than historical ?accrual? values of assets and liabilities. In a new research paper, we investigate the effects of a recent regulatory change that ties regulatory capital directly to the market value of the securities portfolio for some banks.
Liberty Street Economics , Paper 20181011

Discussion Paper
How the LIBOR Transition Affects the Supply of Revolving Credit
Harry, Cooperman; Duffie, Darrell; Kang-Landsberg, Alena; Luck, Stephan; Wang, Zachry; Yang, Yilin (2023-02-03)
In the United States, most commercial and industrial (C&I) lending takes the form of revolving lines of credit, known as revolvers or credit lines. For decades, like other U.S. C&I loans, credit lines were typically indexed to the London Interbank Offered Rate (LIBOR). However, since 2022, the U.S. and other developed-market economies have transitioned from credit-sensitive reference rates such as LIBOR to new risk-free rates, including the Secured Overnight Financing Rate (SOFR). This post, based on a recent New York Fed Staff Report, explores how the provision of revolving credit is likely ...
Liberty Street Economics , Paper 20230203

Report
Credit market choice
Boyarchenko, Nina; Shachar, Or; Costello, Anna M. (2018-08-01)
Which markets do institutions use to change exposure to credit risk? Using a unique data set of transactions in corporate bonds and credit default swaps (CDS) by large financial institutions, we show that simultaneous transactions in both markets are rare, with an average institution having an 11 percent probability of transacting in both the CDS and bond markets in the same entity in an average week. When institutions do transact in both markets simultaneously, they increase their speculative positions in CDS by 13 cents per dollar of bond transactions, and their hedging positions by 13 ...
Staff Reports , Paper 863

Working Paper
Banks' search for yield in the low interest rate environment: a tale of regulatory adaptation
Wang, J. Christina (2017-06-01)
This paper examines whether the low interest rate environment that has prevailed since the Great Recession has compelled banks to reach for yield. It is important to recognize that banks can take on a variety of risks that offer higher yields today but incur different forms of future losses. Some losses, such as mark-to-market losses due to yield increases, can be avoided with accounting treatments whereas others, chiefly credit losses, cannot. A simple model shows that a bank?s incentive to take on risks for which potential future losses can be managed, such as interest rate risk, is ...
Working Papers , Paper 17-3

Discussion Paper
Breaking Down the Market for Misinformation
Cisternas, Gonzalo; Vásquez, Jorge (2022-11-28)
The spread of misinformation online has been recognized as a growing social problem. In responding to the issue, social media platforms have (i) promoted the services of third-party fact-checkers; (ii) removed producers of misinformation and downgraded false content; and (iii) provided contextual information for flagged content, empowering users to determine the veracity of information for themselves. In a recent staff report, we develop a flexible model of misinformation to assess the efficacy of these types of interventions. Our analysis focuses on how well these measures incentivize users ...
Liberty Street Economics , Paper 20221128

Newsletter
2015 Conference on Central Counterparty Risk Management: Resolution
Steigerwald, Robert; Duey, Zachary (2015)
The Federal Reserve Bank of Chicago hosted its second annual Conference on Central Counterparty Risk Management on November 3, 2015. Panelists from regulatory authorities, central counterparties (CCPs), CCP service providers, financial institutions, and resolution authorities discussed initiating CCP resolution proceedings, managing a CCP in resolution, and consultation and coordination during CCP resolution proceedings.
Chicago Fed Letter

Working Paper
Banking on the Boom, Tripped by the Bust: Banks and the World War I Agricultural Price Shock
Wheelock, David C.; Jaremski, Matthew (2017-11-03)
How do banks respond to asset booms? This paper examines i) how U.S. banks responded to the World War I farmland boom; ii) the impact of regulation; and iii) how bank closures exacerbated the post-war bust. The boom encouraged new bank formation and balance sheet expansion (especially by new banks). Deposit insurance amplified the impact of rising crop prices on bank portfolios, while higher minimum capital requirements dampened the effects. Banks that responded most aggressively to the asset boom had a higher probability of closing in the bust, and counties with more bank closures ...
Working Papers , Paper 2017-36

Journal Article
Banking Trends: Skin in the Game in the CMBS Market
DiSalvo, James; Johnston, Ryan (2018-01)
Issuers of commercial mortgage-backed securities must now retain a portion on their own books. What evidence is there that the rule will reduce risky lending?
Banking Trends , Issue Q1 , Pages 11-17

Banks See Challenges from Fintech Disruption
White, Carl (2021-04-29)
While banks have lost market share to fintech firms, they have also benefited from new financial technology—such as the use of RegTech and SupTech.
On the Economy

Newsletter
The Winds of Change for Community Banking: Headwinds, Tailwinds, and Regulation
Marquart, Blake; Nashar, Joseph; Bonilla, Romel; Emmerich, Adam; Cooper, Jenna; Hembd, Theresa; Kennedy, Pamela (2018)
The 12th annual Community Bankers Symposium, cosponsored by the Federal Reserve Bank of Chicago, the Federal Deposit Insurance Corporation (FDIC), and the Office of the Comptroller of the Currency (OCC), was held at the Chicago Fed on November 17, 2017. During a full day of speeches and panels, a group of 125 community banking executives, financial industry practitioners, and supervisory agency professionals who work in the Seventh Federal Reserve District1 explored the changing landscape for community banking. This article summarizes the event?s key presentations and discussions.
Chicago Fed Letter

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