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Report
Trends in credit market arbitrage
Market participants and policymakers alike were surprised by the large, prolonged dislocations in credit market arbitrage trades during the second half of 2015 and the first quarter of 2016. In this paper, we examine three explanations proposed by market participants: increased idiosyncratic risks, strategic positioning by some market participants, and regulatory changes. We find some evidence of increased idiosyncratic risk during the relevant period but limited evidence of asset managers changing their positioning in derivative products. While we cannot quantify the contribution of these ...
Working Paper
Macroeconomic Effects of Banking Sector Losses across Structural Models
The macro spillover effects of capital shortfalls in the financial intermediation sector are compared across five dynamic equilibrium models for policy analysis. Although all the models considered share antecedents and a methodological core, each model emphasizes different transmission channels. This approach delivers "model-based confidence intervals" for the real and financial effects of shocks originating in the financial sector. The range of outcomes predicted by the five models is only slightly narrower than confidence intervals produced by simple vector autoregressions.
Working Paper
Bank Liquidity and Capital Regulation in General Equilibrium
We develop a nonlinear dynamic general equilibrium model with a banking sector and use it to study the macroeconomic impact of introducing a minimum liquidity standard for banks on top of existing capital adequacy requirements. The model generates a distribution of bank sizes arising from differences in banks' ability to generate revenue from loans and from occasionally binding capital and liquidity constraints. Under our baseline calibration, imposing a liquidity requirement would lead to a steady-state decrease of about 3 percent in the amount of loans made, an increase in banks' holdings ...
Report
Caught between Scylla and Charybdis? Regulating bank leverage when there is rent seeking and risk shifting
We consider a model in which banking is characterized by asset substitution moral hazard and managerial underprovision of effort in loan monitoring. The privately optimal bank leverage efficiently balances the benefit of debt in providing the discipline to ensure that the bank monitors its loans against the benefit of equity in attenuating asset-substitution moral hazard. However, when correlated bank failures impose significant social costs, regulators bail out bank creditors. Anticipation of this action generates multiple equilibria, including an equilibrium featuring systemic risk, in ...
Speech
The economic outlook and implications for monetary policy
Remarks before the New York Association for Business Economics, New York City.
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 — ...
Journal Article
US Bank Capital Regulation: History and Changes Since the Financial Crisis
Following the financial crisis of 2007-08, capital requirements were revised along a number of important dimensions with the intent of shoring up the banking system and reducing the likelihood of another crisis. Changes included new measures of capital and increased minimum requirements, with special emphasis on requirements for the largest and most systemically important banks. In this article, I survey the history of bank capital requirements and review the new capital rules.
Speech
Regulation and liquidity provision
Remarks at the SIFMA Liquidity Forum, New York City.
Speech
A perspective on supervisory objectives and trade-offs: keynote remarks at Conference on “Optimal Bank Capital Regulation”
Keynote Remarks at Columbia University?s School of International and Public Affairs and the Clearing House Association Conference on ?Optimal Bank Capital Regulation,? Columbia University, New York.
Working Paper
Centrality-based Capital Allocations
This paper looks at the effect of capital rules on a banking system that is connected through correlated credit exposures and interbank lending. Keeping total capital in the system constant, the reallocation rules, which combine individual bank characteristics and interconnectivity measures of interbank lending, are to minimize a measure of systemwide losses. Using the detailed German Credit Register for estimation, we find that capital rules based on eigenvectors dominate any other centrality measure, saving about 15 percent in expected bankruptcy costs.