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Journal Article
Default rates on prime and subprime mortgages: differences & similarities
For the past several years, the news media have carried countless stories about soaring defaults among subprime mortgage borrowers. Although concern over this segment of the mortgage market is certainly justified, subprime mortgages only account for about onequarter of the total outstanding mortgages in the United States. The remaining 75 percent are prime loans that are made to borrowers with good credit, who fully document their income and make traditional down payments. While default rates on prime loans are significantly lower than those on subprime loans, they are also increasing ...
Newsletter
The Structure of Federal Reserve Liabilities
Throughout the financial crisis and its aftermath from late 2008 through October 2014, the Federal Reserve used asset purchases as a potent tool of monetary policy?buying longer-term Treasury and mortgage-backed securities to provide economic stimulus beyond what traditional policy approaches could produce. Consequently, the size and composition of the Fed?s balance sheet changed significantly over this period.
Working Paper
Measuring Interest Rate Risk in the Life Insurance Sector: The U.S. and the U.K.
We use a two factor model of life insurer stock returns to measure interest rate risk at U.S. and U.K. insurers. Our estimates show that interest rate risk among U.S. life insurers increased as interest rates decreased to historically low levels in recent years. For life insurers in the U.K., in contrast, interest rate risk remained low during this time, roughly unchanged from what it was in the period prior to the financial crisis when long-term interest rates were in their usual historical ranges. We attribute these differences to the heavier use of products that combine guarantees with ...
Newsletter
Enhancing financial stability: the case of financial market utilities
The sweeping overhaul of the nation?s financial regulatory system that was signed into law on July 21, 2010, will touch virtually every aspect of financial markets. This Chicago Fed Letter focuses on provisions in the Dodd?Frank Wall Street Reform and Consumer Protection Act that affect ?financial market utilities,? critical behind-the-scenes institutions and arrangements that ensure the smooth functioning of financial markets.
Working Paper
AIG in Hindsight
The near-failure on September 16, 2008, of American International Group (AIG) was an iconic moment in the financial crisis. The decision to rescue AIG was controversial at the time and remains so. Large bets on real estate pushed AIG to the brink of bankruptcy. In one case, AIG used securities lending to transform insurance company assets into residential mortgage-backed securities (RMBS) and collateralized debt obligations (CDOs), ultimately losing at least $21 billion and threatening the solvency of the life insurance companies. AIG also sold insurance on multi-sector CDOs, backed by real ...
Conference Paper
Prospects for immigrant-native wealth assimilation: evidence from financial market participation
Because financial transactions are important for wealth accumulation, and rely on trust and confidence in institutions, the financial market behavior of immigrants can provide important insights into the assimilation process. Compared to the native-born, immigrants are less likely to own savings and checking accounts and these differences tend to persist over time. Our results suggest that a large share of the immigrant-native gap in financial market participation is driven by group differences in education, income, and geographic location. For a given immigrant, the likelihood of financial ...
Journal Article
What Explains the Decline in Life Insurance Ownership?
Life insurance ownership has declined markedly over the past 30 years, continuing a trend that began as early as 1960. In 1989, 77 percent of households owned life insurance (see figure 1). By 2013, that share had fallen to 60 percent. This article analyzes factors that might have contributed to the decline in life insurance ownership from 1989 to 2013. The focus of our analysis is on two broad sources of potential change in the demand for life insurance: changes in the socioeconomic and demographic characteristics of the population and changes in how those same characteristics are associated ...
Working Paper
Central Clearing and Systemic Liquidity Risk
By stepping between bilateral counterparties, a central counterparty (CCP) transforms credit exposure. CCPs generally improve financial stability. Nevertheless, large CCPs are by nature concentrated and interconnected with major global banks. Moreover, although they mitigate credit risk, CCPs create liquidity risks, because they rely on participants to provide cash. Such requirements increase with both market volatility and default; consequently, CCP liquidity needs are inherently procyclical. This procyclicality makes it more challenging to assess CCP resilience in the rare event that one or ...
Working Paper
The Life Insurance Industry and Systemic Risk: A Bond Market Perspective
The 2008 financial crisis brought a focus on the potential for a large insurance firm to contribute to systemic risk. Among the concerns raised was that a negative shock to insurers could lead to a ?fire sale? of corporate bonds, a market where insurers are among the largest participants. This paper discusses the existing evidence on life insurance firms and systemic risk, with a focus on the investment grade corporate bond market. We provide some tentative evidence that life insurers tend to absorb liquidity risk by purchasing bonds when the bonds are less liquid than average. However, we do ...