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Report
Bond market discipline of banks: is the market tough enough?
Morgan, Donald P.; Stiroh, Kevin J. (1999-12-01)
As the banking business grows more complex, government supervisors of banks seem increasingly willing to share the role of policing bank risk with private investors, especially bondholders. This paper investigates the disciplinary role of markets using bond spreads, ratings, and bank portfolio data on over 4,100 new bonds issued between 1993 and 1998, including almost 600 bond issues by banks and bank holding companies. We find that the bond spread/rating relationship is the same for the bank issues as for nonbank issues, especially among the investment grade issues. This suggests that the ...
Staff Reports , Paper 95

Discussion Paper
Why Large Bank Failures Are So Messy and What to Do about It?
Morgan, Donald P.; Yorulmazer, Tanju; Santos, João A. C.; McAndrews, James J. (2014-04-04)
If the Lehman Brothers failure proved anything, it was that large, complex bank failures are messy; they destroy value and can destabilize financial markets. We certainly don’t mean to trivialize matters by calling large bank failures “messy,” as it their messiness, particularly the destabilizing aspect, that creates the “too-big-to-fail” problem. In our contribution to the Economic Policy Review volume, we venture an explanation about why large bank failures are so messy and discuss a policy that can make them less so.
Liberty Street Economics , Paper 20140404a

Report
Bank leverage limits and regulatory arbitrage: new evidence on a recurring question
Choi, Dong Beom; Holcomb, Michael R.; Morgan, Donald P. (2018-06-01)
Banks are regulated more than most firms, making them good subjects to study regulatory arbitrage (avoidance). Their latest arbitrage opportunity may be the new leverage rule covering the largest U.S. banks; leverage rules require equal capital against assets with unequal risks, so banks can effectively relax the leverage constraint by increasing asset risk. Consistent with that conjecture, we find that banks covered by the new rule shifted to riskier, higher yielding securities relative to control banks. The shift began almost precisely when the rule was finalized in 2014, well before it ...
Staff Reports , Paper 856

Discussion Paper
Climate Change and Financial Stability: The Weather Channel
Blickle, Kristian S.; Morgan, Donald P. (2022-04-04)
Climate change could affect banks and the financial systems they anchor through various channels: increasingly extreme weather is one (Financial Stability Board, Basel Committee on Bank Supervision). In our recent staff report, we size up this channel by studying how U.S. banks, large and small, fared against disasters past. We find even the most destructive disasters had insignificant or small effects on bank stability and small and positive effects on bank income. We conjecture that recovery lending after disasters helps stabilize larger banks while smaller, local banks’ knowledge of ...
Liberty Street Economics , Paper 20220404

Report
Judging the risk of banks: what makes banks opaque?
Morgan, Donald P. (1998)
We argue that the risk of banks is hard for outsiders to judge because the risk of their mostly financial assets is either hard to measure (opaque) or easy to change. We report evidence that bond rating agencies seem to disagree more over banks than over other types of firms. Among banks, bond raters disagree more over opaque assets, like loans, and easily substitutable assets, like cash and trading assets. Fixed assets, like premises, reduce disagreement. Capital also reduces disagreement, but only at trading banks, where the risk of asset shifting may be most severe.
Research Paper , Paper 9805

Discussion Paper
Crisis Chronicles: The Crisis of 1816, the Year without a Summer, and Sunspot Equilibira
Narron, James; Morgan, Donald P. (2014-10-03)
In 1815, England emerged victorious after what had been nearly a quarter century of war with France. And during those years, encouraged by high prices and profits, England greatly expanded its agricultural and industrial capacity in terms of land and new machinery, with these activities often financed on credit. Improved harvests from 1812 to 1815 coincided with an export market boom in 1814, as the continent began to reopen for trade and speculation in South America increased. But the speculation turned to frenzy compared to the boom of 1810 as everything that could be shipped was ...
Liberty Street Economics , Paper 20141003

Discussion Paper
Hold the Check: Overdrafts, Fee Caps, and Financial Inclusion
Dlugosz, Jennifer L.; Melzer, Brian T.; Morgan, Donald P. (2021-06-30)
The 25 percent of low-income Americans without a checking account operate in a separate but unequal financial world. Instead of paying for things with cheap, convenient debit cards and checks, they get by with “fringe” payment providers like check cashers, money transfer, and other alternatives. Costly overdrafts rank high among reasons why households “bounce out” of the banking system and some observers have advocated capping overdraft fees to promote inclusion. Our recent paper finds unintended (if predictable) effects of overdraft fee caps. Studying a case where fee caps were ...
Liberty Street Economics , Paper 20210630b

Discussion Paper
Banks versus Hurricanes
Fischl-Lanzoni, Natalia; Morgan, Ladd; Chan, Benjamin; Bram, Jason; Suarez, Ivelisse; Anagnostakos, Peter; Mahoney, James M.; Morgan, Donald P.; Latif, Hasan (2023-11-20)
The impacts of hurricanes analyzed in the previous post in this series may be far-reaching in the Second District. In a new Staff Report, we study how banks in Puerto Rico fared after Hurricane Maria struck the island on September 17, 2017. Maria makes a worst case in some respects because the economy and banks there were vulnerable beforehand, and because Maria struck just two weeks after Hurricane Irma flooded the island. Despite the immense destruction and disruption Maria caused, we find that the island’s economy and banks recovered surprisingly quickly. We discuss the various ...
Liberty Street Economics , Paper 20231120

Journal Article
What makes large bank failures so messy and what should be done about it?
Morgan, Donald P.; Yorulmazer, Tanju; Santos, Joao A. C.; McAndrews, James J. (2014-12)
This study argues that the defining feature of large and complex banks that makes their failures messy is their reliance on runnable financial liabilities. These liabilities confer liquidity or money-like services that may be impaired or destroyed in bankruptcy. To make large bank failures more orderly, the authors recommend that systemically important bank holding companies be required to issue ?bail-in-able? long-term debt that converts to equity in resolution. This reassures holders of uninsured liabilities that their claims will be honored in resolution, making them less likely to run. In ...
Economic Policy Review , Issue Dec , Pages 229-244

Report
Seismic effects of the bankruptcy reform
Botsch, Matthew; Morgan, Donald P.; Iverson, Benjamin (2008)
We argue that the 2005 bankruptcy abuse reform (BAR) contributed to the surge in subprime foreclosures that followed its passage. Before BAR, distressed mortgagors could free up income by filing bankruptcy and having their unsecured debts discharged. BAR blocks that maneuver for better-off filers by way of a means test. We identify the effects of BAR using state home equity bankruptcy exemptions; filers in low-exemption states were not very protected before BAR, so they would be less affected by the reform. Difference-in-difference regressions confirm four predictions implied by that ...
Staff Reports , Paper 358

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