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Working Paper
Quantitative Easing and Bank Risk Taking: Evidence from Lending
We empirically assess the effect of reserve accumulation as a result of quantitative easing (QE) on bank-level lending and risk taking activity. To overcome the endogeneity of bank-level reserve holdings to banks' other portfolio decisions, we employ instruments made available by a regulatory change that strongly influenced the distribution of reserves in the banking system. Consistent with theories of the portfolio substitution channel in which the transmission of QE depends in part on reserve creation itself, we document that reserves created in two distinct QE programs led to higher total ...
Discussion Paper
An Analysis of the Interest Rate Risk of the Federal Reserve’s Balance Sheet, Part 2: Projections under Alternative Interest Rate Paths
As discussed in the first note of this two-note series, net income of the Federal Reserve (Fed) and its remittances to the U.S. Treasury along with the unrealized gain or loss position of the System Open Market Account (SOMA) portfolio are affected by fluctuations in interest rates. The need for the Fed to increase the policy rate expeditiously to address the inflationary pressures is projected to result in the Fed's net income turning negative temporarily.
Working Paper
The Federal Reserve's balance sheet and overnight interest rates
This paper provides a comprehensive study of the interplay between the Federal Reserve's balance sheet and overnight interest rates. We model both the supply of and the demand for excess reserves, treating assets of the Federal Reserve as policy tools, and estimate the effects of conventional and unconventional monetary policy on overnight funding rates. We find that, in the current environment with quite elevated levels of reserves, the effect of further monetary policy accommodation on overnight interest rates is limited. Further, assuming a path for removing monetary policy accommodation ...
Working Paper
Issues in the Use of the Balance Sheet Tool
This paper considers various ways of using balance sheet policy (BSP) to provide monetary policy stimulus, including the BSPs put in place by the Federal Reserve in the wake of the Global Financial Crisis, the choice between fixed-size and flow-based asset purchase programs, policies targeting interest rate levels rather than the quantity of asset purchases, and programs aimed at increasing more direct lending to households and firms. For each of these BSP options, we evaluate benefits and costs. We conclude by observing that BSPs’ relative effectiveness and thus optimal configuration will ...
Working Paper
The Effect of Bank Supervision on Risk Taking : Evidence from a Natural Experiment
In this paper, we exploit a natural experiment in which thrifts in several states witnessed an exogenous reduction in supervisory attention to assess the effect of supervision on financial institutions' willingness to take risk. We show that the affected institutions took on much more risk than their unaffected counterparts in other districts that were subject to identical regulations. Subsequent to the emergency enlistment of examiners and supervisors from other parts of the country two years later, additional risk taking by the affected thrifts ceased. We find that the expansion in risk ...
Working Paper
Monetary Policy Options at the Effective Lower Bound : Assessing the Federal Reserve's Current Policy Toolkit
We simulate the FRB/US model and a number of statistical models to quantify some of the risks stemming from the effective lower bound (ELB) on the federal funds rate and to assess the efficacy of adjustments to the federal funds rate target, balance sheet policies, and forward guidance to provide monetary policy accommodation in the event of a recession. Over the next decade, our simulations imply a roughly 20 to 50 percent probability that the federal funds rate will be constrained by the ELB at some point. We also find that forward guidance and balance sheet polices of the kinds used in ...
Discussion Paper
Confidence Interval Projections of the Federal Reserve Balance Sheet and Income
In response to the financial crisis of 2008 and the subsequent recession, the Federal Reserve employed large-scale asset purchases (LSAPs) and a maturity extension program (MEP) with the purpose of reducing longer-term interest rates, and thereby promoting more accommodative financial conditions at a time when the conventional monetary policy tool, the federal funds rate, was at its effective lower bound. In this note, we presented the implications for the Federal Reserve's balance sheet and income arising from a range of future potential macroeconomic outcomes.
Discussion Paper
Balance Sheet Policies in an Evolving Economy: Some Modelling Advances and Illustrative Simulations
Once considered "unconventional," balance sheet policies have become an integral part of the toolkit of many central banks. Increased reliance on balance sheet policies reflects in part a decline in the neutral level of interest rates, which limits central banks' ability to cut their policy rates to support the economy during downturns, and many observers expect that neutral level to remain low relative to its historical average in the coming decades.
Discussion Paper
An Analysis of the Interest Rate Risk of the Federal Reserve’s Balance Sheet, Part 1: Background and Historical Perspective
As part of its implementation of monetary policy, the Federal Reserve (Fed) holds Treasury securities and agency mortgage-backed securities (MBS) in the System Open Market Account (SOMA). The market value of these securities and the Fed's income fluctuate with changes in interest rates. As such, the ongoing increases in policy rates to address inflationary pressures are expected to put downward pressure on the Fed's net income.
Working Paper
Arbitrage Capital of Global Banks
We show that the role of unsecured, short-term wholesale funding for global banks has changed significantly in the post-financial-crisis regulatory environment. Global banks mainly use such funding to finance liquid, near risk-free arbitrage positions---in particular, the interest on excess reserves arbitrage and the covered interest rate parity arbitrage. In this environment, we examine the response of global banks to a large negative wholesale funding shock as a result of the U.S. money market mutual fund reform implemented in 2016. In contrast to past episodes of wholesale funding dry-ups, ...