Search Results
Briefing
Projecting the Evolution of the Fed's Balance Sheet
As the Fed embarks on balance sheet policy normalization, there is natural interest in understanding the projected evolution of the Fed's asset portfolio over the next three to four years. Several important assumptions are needed to be able to predict the path of the balance sheet. Based exclusively on public information, we use alternative sets of plausible assumptions to construct and analyze several different scenarios for the future of this critical policy-relevant lever.
Journal Article
The problem of small change in early Argentina
Working Paper
Money Market Fund Reform: Dealing with the Fundamental Problem
After the events in March 2020, it became clear to policymakers that the 2014 reform of the money market funds (MMFs) industry had not successfully addressed all associated stability concerns related to surges in withdrawals. In December 2021, the SEC proposed a new set of rules governing how money market funds can operate. A fundamental problem behind the instability of (some) money market funds is the expectation that backstop liquidity support will be provided by the government in the event of financial distress, along with the government's inability to credibly commit to not provide such ...
Journal Article
On the fundamental reasons for bank fragility
A substantial body of literature has now developed as a result of efforts to identify the fundamental reasons for the fragility of financial intermediaries in the Diamond-Dybvig theory of banking. Many of these articles focus on the interaction between sequential service and uncertainty about the aggregate need for liquidity in the economy. The articles in this literature are inevitably technical and focus somewhat narrowly on the implications of specific assumptions. Here, we provide a more accessible discussion of the main ideas and findings in this literature. Our discussion can be used as ...
Briefing
Bank Lending in the Time of COVID
We discuss the evolution of bank lending during the first several months of the COVID-19 pandemic. Large domestic banks and foreign-related banks increased significantly their lending to businesses during these months, much of it through existing lines of credit. Small domestic banks played an active role in providing paycheck protection loans. In terms of consumer credit, the stock of banks' residential mortgage loans did not change substantially, and the amount of bank credit flowing directly to consumers decreased.
Working Paper
Banking and the political support for dollarization
In this paper we study dollarization as a commitment device that the Central Bank could use to avoid getting involved in an undesirable banking-sector bailout. We show how a political process could induce an equilibrium outcome that differs from the one that a benevolent Central Bank would want to implement. Dollarization then could be used to restore the economy to the benevolent outcome. In so doing though, political support for dollarization becomes essential. For our benchmark case, dollarization does not have enough support to be actually implemented. But when we study the interaction ...
Working Paper
Bank runs and institutions : the perils of intervention
Governments typically respond to a run on the banking system by temporarily freezing deposits and by rescheduling payments to depositors. Depositors may even be required to demonstrate an urgent need for funds before being allowed to withdraw. We study ex post efficient policy responses to a bank run and the ex ante incentives these responses create. Given that a run is underway, the efficient response is typically not to freeze all remaining deposits, since this would impose heavy costs on individuals with urgent withdrawal needs. Instead, (benevolent) government institutions would allow ...
Journal Article
Recent Borrowing from the U.S. Discount Window: Some Cases
The Fed's discount window makes loans to depository institutions on a regular basis. Recent publicly available transaction-level data permit a closer look at the particular circumstances under which some of those loans happened. The analysis of nine specific cases produces some general insights that can be useful in evaluating whether the discount window should be open to making loans during periods of relatively calm financial conditions.
Briefing
Do Net Interest Margins and Interest Rates Move Together?
Many market participants assume that, as the Federal Reserve tightens monetary policy, and market rates increase in response, banks will be better off because their net interest margins will also increase. As a way to understand the origins of this expectation, in this Economic Brief we look at the relationship between the federal funds rate and the average net interest margin for U.S. banks since the mid-1980s. We find that the relationship is not as clear-cut as one might suspect.
Briefing
Fed Balance Sheet Normalization and the Minimum Level of Ample Reserves
The normalization process of the Fed's balance sheet is ongoing. Current plans for monetary policy implementation interact with this process. In particular, normalization is aimed at ultimately providing a minimum level of "ample" reserves. The timing for when that level of reserves will be reached depends on multiple factors. Based on assumptions reflecting current expectations of the evolution of those factors in the medium term, normalization will be completed by late 2025 or early 2026.