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Journal Article
Supervising large, complex financial institutions: what do supervisors do?
Lucca, David O.; Haughwout, Andrew F.; Hirtle, Beverly; Eisenbach, Thomas M.; Kovner, Anna; Plosser, Matthew (2017-23-01)
The supervision of large, complex financial institutions is one of the most important, but least understood, activities of the Federal Reserve. Supervision entails monitoring and oversight to assess whether firms are engaged in unsafe or unsound practices, and to ensure that firms take appropriate action to correct such practices. It is distinct from regulation, which involves the development and promulgation of the rules under which firms operate. This article brings greater transparency to the Federal Reserve?s supervisory activities by considering how they are structured, staffed, and ...
Economic Policy Review , Issue 23-1 , Pages 57-77

Report
Bank-intermediated arbitrage
Van Tassel, Peter; Boyarchenko, Nina; Gupta, Pooja; Eisenbach, Thomas M.; Shachar, Or (2018-06-01)
We argue that post-crisis banking regulations pass through from regulated institutions to unregulated arbitrageurs. We document that, once post-crisis regulations bind post 2014, hedge funds use a larger number of prime brokers and diversify away from GSIB-affiliated prime brokers, and that the match to such prime brokers is more fragile. Tighter regulatory constraints disincentivize regulated institutions not only to engage in arbitrage activity themselves but also to provide leverage to other arbitrageurs. Indeed, we show that the maximum leverage allowed and the implied return on basis ...
Staff Reports , Paper 858

Discussion Paper
Banking System Vulnerability: 2024 Update
Crosignani, Matteo; Eisenbach, Thomas M.; Fringuellotti, Fulvia (2024-11-12)
After a period of relative stability, a series of bank failures in 2023 renewed questions about the fragility of the banking system. As in previous years, we provide in this post an update of four analytical models aimed at capturing different aspects of the vulnerability of the U.S. banking system using data through 2024:Q2 and discuss how these measures have changed since last year.
Liberty Street Economics , Paper 20241112

Report
When It Rains, It Pours: Cyber Risk and Financial Conditions
Kovner, Anna; Eisenbach, Thomas M.; Lee, Michael Junho (2022-06-01)
We analyze how systemic cyber risk relates to the financial cycle and show that the potential impact of a cyber attack is systematically greater during stressed financial conditions. This is true over the past two decades and particularly at the onset of the COVID-19 pandemic, when changes in payment activity increased vulnerability by approximately 50 percent relative to the rest of 2020 through more concentration and intraday liquidity stress. We evaluate the effectiveness of policy interventions used to stabilize markets at mitigating cyber vulnerability. We argue that cyber and other ...
Staff Reports , Paper 1022

Discussion Paper
Stablecoins and Crypto Shocks: An Update
Anadu, Kenechukwu E.; Azar, Pablo D.; Cipriani, Marco; Eisenbach, Thomas M.; Huang, Catherine; Landoni, Mattia; La Spada, Gabriele; Macchiavelli, Marco; Malfroy-Camine, Antoine; Wang, J. Christina (2025-04-23)
Stablecoins are crypto assets whose value is pegged to that of a fiat currency, usually the U.S. dollar. In our first Liberty Street Economics post, we described the rapid growth of stablecoins, the different types of stablecoin arrangements, and the May 2022 run on TerraUSD, the fourth largest stablecoin at the time. In a subsequent post, we estimated the impact of large declines in the price of bitcoin on cumulative net flows into stablecoins and showed the existence of flight-to-safety dynamics similar to those observed in money market mutual funds during periods of stress. In this post, ...
Liberty Street Economics , Paper 20250423

Discussion Paper
Factors that Affect Bank Stability
Yorulmazer, Tanju; Eisenbach, Thomas M. (2014-02-26)
In a previous Liberty Street Economics post, we introduced a framework for thinking about the risks banks face. In particular, we distinguished between asset return risk and funding risk that can interact and cause a bank to fail. In our framework, a bank can fail for two reasons: 1-Low asset returns: Fundamental insolvency due to erosion of equity by low asset returns that don’t cover a bank’s debt burden. 2-Loss of funding: Costly liquidation of assets that erode equity.
Liberty Street Economics , Paper 20140226

Discussion Paper
What Makes a Bank Stable? A Framework for Analysis
Yorulmazer, Tanju; Eisenbach, Thomas M. (2014-02-24)
One of the major roles of banks and other financial intermediaries is to channel funds from savings into valuable projects. In doing so, banks engage in “liquidity and maturity transformation,” since they finance long-term, illiquid projects while funding themselves with short-term, liquid liabilities. By performing this important role, banks expose themselves to the risk of runs: If depositors or other short-term creditors worry about their claims, they may withdraw funds en masse and cause the bank to fail. The recent financial crisis once again highlighted the fragility associated with ...
Liberty Street Economics , Paper 20140224

Discussion Paper
Bank-Intermediated Arbitrage
Boyarchenko, Nina; Gupta, Pooja; Eisenbach, Thomas M.; Van Tassel, Peter; Shachar, Or (2018-10-18)
Since the 2007-09 financial crisis, the prices of closely related assets have shown persistent deviations—so-called basis spreads. Because such disparities create apparent profit opportunities, the question arises of why they are not arbitraged away. In a recent Staff Report, we argue that post-crisis changes to regulation and market structure have increased the costs to banks of participating in spread-narrowing trades, creating limits to arbitrage. In addition, although one might expect hedge funds to act as arbitrageurs, we find evidence that post-crisis regulation affects not only the ...
Liberty Street Economics , Paper 20181018

Report
The term structure of the price of variance risk
Eisenbach, Thomas M.; Kahn, R. Jay; Schmalz, Martin C.; Andries, Marianne (2015-08-01)
We empirically investigate the term structure of variance risk pricing and how it varies over time. We estimate the aversion to variance risk in a stochastic-volatility option pricing model separately for options of different maturities and find that variance risk pricing decreases in absolute value with maturity but remains significantly different from zero up to the nine-month horizon. We find consistent non-parametric results using estimates from Sharpe ratios of delta-neutral straddles. We further show that the term structure is downward sloping both during normal times and in times of ...
Staff Reports , Paper 736

Report
Fire-sale spillovers and systemic risk
Eisenbach, Thomas M.; Duarte, Fernando M. (2013-10-01)
We reveal and track over time the factors making the financial system vulnerable to fire sales by constructing an index of aggregate vulnerability. The index starts increasing in 2004, before any other major systemic risk measure, more than doubling by 2008. The fire-sale-specific factors of delevering speed and concentration of illiquid assets account for the majority of this increase. Individual banks? contributions to aggregate vulnerability are an excellent five-year-ahead predictor of SRISK, one of the most prominent systemic risk measures. Had our estimates been available at the time, ...
Staff Reports , Paper 645

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