Search Results
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.
Journal Article
Living Wills: A Tool for Curbing Too Big to Fail
Economist Arantxa Jarque and senior editor David A. Price explore an innovation of the Dodd-Frank Act of 2010, which requires the largest and most complex financial institutions to create resolution plans to follow if the institutions fall into severe financial distress. In these plans, or "living wills," the institutions must give regulators a roadmap for resolving them via the bankruptcy process -- without disrupting the financial system or resorting to public bailouts. Jarque and Price argue that living wills are a tool that regulators can use to curb the "too big to fail" problem ...
Journal Article
Gender Composition of the Boards of Directors of the Regional Federal Reserve Banks
Women have traditionally been underrepresented among governors of the Federal Reserve Board and among presidents of the regional Federal Reserve Banks. This lack of diversity may limit the representation of the interests of women, leave out valuable talent, and affect group dynamics and decision-making. These concerns are also relevant for the members of the Boards of Directors of the twelve regional banks of the Federal Reserve System. This article presents and analyzes hand-collected data on female representation on these twelve boards. Since 1977, when the first five women began serving as ...
Working Paper
On the Measurement of Large Financial Firm Resolvability
We say that a large financial institution is "resolvable" if policymakers would allow it to go through unassisted bankruptcy in the event of failure. The choice between bankruptcy or bailout trades off the higher loss imposed on the economy in a potentially disruptive resolution against the incentive for excessive risk-taking created by an assisted resolution or a bailout. The resolution plans ("living wills") of large financial institutions contain information needed to evaluate this trade-off. In this paper, we propose a tool to complement the living will review process: an impact score ...
Journal Article
Hidden effort, learning by doing, and wage dynamics
Many occupations are subject to learning by doing: Effort at the workplace early in the career of a worker results in higher productivity later on. In such occupations, if effort at work is unobservable, a moral hazard problem also arises. We study a particular specification of learning by doing in which the conditional distribution of output depends on the sum of undepreciated efforts. With this specification, we can overcome the technical difficulties for solving for the optimal contract that arise because of the persistent effects of effort in time. Our numerical example shows that effort ...
Briefing
Living Wills for Systemically Important Financial Institutions: Some Expected Benefits and Challenges
The Dodd-Frank Act requires systemically important financial institutions to create resolution plans, or living wills, that bankruptcy courts can follow if these institutions fall into severe financial distress. The plans must set out a path for resolution without public bailouts and with minimal disruption to the financial system. While living wills can, in this way, help to curb the "too big to fail" problem, regulators face a number of challenges in achieving this goal. The authority granted to regulators by the Act, including the power to make systemically important institutions change ...
Working Paper
The Complexity of CEO Compensation
I study firm characteristics that justify the use of options or refresher grants in the optimal compensation packages for CEOs in the presence of moral hazard. I model explicitly the determination of stock prices as a function of the output realizations of the firm: Symmetric learning by all parties about the exogenous quality of the firm makes stock prices sensitive to output observations. Compensation packages are designed to transform this sensitivity of prices-to-output into the sensitivity of consumption-to-output that is dictated by the optimal contract. Heterogeneity in the structure ...
Journal Article
Understanding Living Wills
The requirement for large financial institutions to file resolution plans, or "living wills," as mandated by the Dodd-Frank Act, may mitigate the commitment problem behind TBTF. Analyzing the equilibrium of the game between banks, regulators, and debtholders, is a first step to evaluate the effect of this new policy instrument. As an alternative to regulators tying their hands so that they are not able to intervene with a bailout in the event of financial distress, living wills are meant to make the outcomes from bankruptcy better for society. This is achieved by evaluating, and guiding, ...
Journal Article
CEO compensation : trends, market changes, and regulation
The average pay of a chief executive officer (CEO) in a top U.S. firm has increased six-fold in the last three decades. Simultaneously, the composition of pay has moved away from salary-based and increasingly toward performance-based compensation in the form of stock grants and stock option grants. This has strengthened the link between CEO pay and firm performance. Anecdotal evidence on the recent corporate fraud scandals suggests that some incentive problems remain unsolved. However, the academic literature reviewed in this article concludes that changes in market characteristics and the ...
Working Paper
Optimal bonuses and deferred pay for bank employees : implications of hidden actions with persistent effects in time
We present a sequence of two-period models of incentive-based compensation in order to understand how the properties of optimal compensation structures vary with changes in the model environment. Each model corresponds to a different occupation within a bank, such as credit line managers, loan originators, or traders. All models share a common trait: the effects of hidden actions are persistent, and hence are revealed over time. We characterize the corresponding optimal contracts that are consistent with prudent risk taking. We compare the contracts by ranking them according to the average ...