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Discussion Paper
The Dodd-Frank Act’s Potential Effects on the Credit Rating Industry
Credit rating agencies have been widely criticized in recent years for the poor performance of their ratings on mortgage-backed securities (MBS) and other structured-finance bonds. In response to the concerns of investors and other market participants, the 2010 Dodd-Frank Act incorporates a range of reforms likely to significantly reshape the rating industry. In this post, we discuss these reforms and their implications for investors, regulators, and the rating agencies themselves.
Discussion Paper
Liquidity Policies and Systemic Risk
One of the most innovative and potentially far-reaching consequences of regulatory reform since the financial crisis has been the development of liquidity regulations for the banking system. While bank regulation traditionally focuses on requiring a minimum amount of capital, liquidity requirements impose a minimum amount of liquid assets. In this post, we provide a conceptual framework that allows us to evaluate the impact of liquidity requirements on economic growth, the creation of systemic risk, and household welfare. Importantly, the framework addresses both liquidity requirements and ...
Discussion Paper
The Dominant Role of Banks in Asset Securitization
As the previous posts have discussed, financial intermediation has evolved over the last few decades toward shadow banking. With that evolution, the traditional roles of banks as intermediaries between savers and borrowers are increasingly performed by more specialized entities involved in asset securitization. In this post, we summarize our published contribution to the series, in which we provide a comprehensive quantitative mapping of the primary roles in securitization. We document that banks were responsible for the majority of these activities. Their dominance indicates that the modern ...
Discussion Paper
Do Payday Lenders Target Minorities
Payday lenders make small, short-term loans to millions of households across the country. Though popular with users, the credit is controversial in part because payday lenders are accused of targeting their seemingly high-priced credit at minority households. In this post, we look at whether black and Hispanic households are in fact more likely to use payday credit. We find that, unconditionally, they are, but once we control for financial characteristics?such as past delinquency, debt-to-income ratios, and credit availability, blacks and Hispanics are not significantly more likely than ...
Discussion Paper
What Do Bond Markets Think about \\"Too-Big-to-Fail\\" Since Dodd-Frank?
As we discussed in our post on Monday, the Dodd-Frank Act includes provisions to address whether banks remain ?too big to fail.? Title II of the Act creates an orderly liquidation mechanism for the Federal Deposit Insurance Corporation (FDIC) to resolve failed systemically important financial institutions (SIFIs). In December 2013, the FDIC outlined a ?single point of entry? (SPOE) strategy for resolving failing SIFIs that, in principle, should obviate bailouts. Under the SPOE, the FDIC will be appointed receiver of the top-tier parent holding company, and losses of a subsidiary bank will be ...
Discussion Paper
Liquidity Risk, Liquidity Management, and Liquidity Policies
During the 2007-09 financial crisis, banks experienced widespread funding shortages, with shortfalls even hindering adequately capitalized banks. The Federal Reserve responded to the funding shortages by creating liquidity backstops to insulate the real economy from the banking sector?s liquidity crisis. The regulatory reforms initiated by the Dodd-Frank Act and Basel III introduced systematic liquidity risk management into bank regulations. In the past year, research economists from the Federal Reserve Bank of New York have undertaken a number of research projects to further the conceptual ...
Discussion Paper
Magnifying the Risk of Fire Sales in the Tri-Party Repo Market
The fragility inherent in the tri-party repo market came to light during the 2008-09 financial crisis. One of the main vulnerabilities is the risk of fire sales, which can be enhanced by the response of some investors to stress events. Money market mutual funds (MMFs) and the agents investing cash collateral obtained from securities lending (SLs) are thought to behave, in times of stress, in ways that exacerbate fire-sale risks in the tri-party repo market. Based on detailed investor data, we find that MMFs and SLs constitute almost half of the investor market, making it crucial for tri-party ...
Discussion Paper
Information on Dealer Activity in Specific Treasury Issues Now Available
The New York Fed has long collected market information from its primary dealer trading counterparts and released these data in aggregated form to the public. Until recently, such data have only been available for broad categories of securities (for example, Treasury bills as a group) and not for specific securities. In April 2013, the Fed began releasing data on some specific Treasury issues, allowing for a more refined understanding of market conditions and dealer behavior.
Discussion Paper
The Transformation of Banking: Tying Loan Interest Rates to Borrowers' Credit Default Swap Spreads
Banks? practice of tying loan interest rates to borrowers? credit default swap (CDS) spreads constitutes one of the most recent financial innovations. In this post, I discuss evidence from a research project, undertaken with Ivan Ivanov and Thu Vo, showing that this practice has lowered the cost of bank credit. I also discuss some potential drawbacks of this innovation.