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Discussion Paper
New Accounting Framework Faces Its First Test: CECL During the Pandemic
On January 1, 2020, most large and mid-sized U.S. banks adopted Current Expected Credit Losses (CECL), a new accounting standard for estimating allowances. Allowance for credit losses is an estimate of the amount that a bank is unlikely to recover from a financial asset.
Working Paper
Updated Primer on the Forward-Looking Analysis of Risk Events (FLARE) Model: A Top-Down Stress Test Model
This is an updated technical note describes the Forward-Looking Analysis of Risk Events (FLARE) model, which is a top-down model that helps assess how well the banking system is positioned to weather exogenous macroeconomic shocks. FLARE estimates banking system capital under varying macroeconomic scenarios, time horizons, and other systemic shocks.
Working Paper
Bank Profitability and Debit Card Interchange Regulation: Bank Responses to the Durbin Amendment
The Durbin Amendment to the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 alters the competitive structure of the debit card payment processing industry and caps debit card interchange fees for banks with over $10 billion in assets. Market participants predicted that debit card issuers would offset the reduction in debit interchange revenue by increases in customer account fees. Some participants also predicted that banks would cut costs in response to the law by reducing staff and shutting down branches. Using a difference-in-differences testing strategy, we show that ...
Working Paper
The relationship between information asymmetry and dividend policy
This paper examines how the quality of firm information disclosure affects shareholders' use of dividends to mitigate agency problems. Managerial compensation is linked to firm value. However, because the manager and shareholders are asymmetrically informed, the manager can manipulate the firm's accounting information to increase perceived firm value. Dividends can limit such practices by adding to the cost faced by a manager manipulating earnings. Empirical tests match model predictions. Dividend-paying firms show less evidence of earnings management. Furthermore, nondividend payers changed ...
Discussion Paper
Post-Crisis Lending by Large Bank Holding Companies
This note analyzes recent trends in loan growth at domestic bank holding companies (hereafter, banks) and reviews factors related to bank loan growth such as capital and loan write-downs.
Working Paper
How Have Banks Been Managing the Composition of High-Quality Liquid Assets?
We study banks' post-crisis liquidity management. We construct time series of U.S. banks' holdings of high-quality liquid assets (HQLA) and examine how these assets have been managed in recent years to comply with the Liquidity Coverage Ratio (LCR) requirement. We find that, in becoming LCR compliant, banks initially ramped up their stock of reserve balances. However, once the requirement was met, some banks subsequently shifted the compositions of their liquid portfolios significantly. This raises the question: What drives the compositions of banks? HQLA? We show that a risk-return framework ...
Discussion Paper
Assessing the Resiliency of Non-DFAST Banks to a Financial Shock
Every year the Federal Reserve Board conducts stress tests on large bank holding companies (BHCs) to ensure that those institutions will remain healthy enough to lend to households and businesses even in a significant downturn. This note analyzes the resiliency of the banking industry by also stressing banks that are not subject to that annual Dodd-Frank Act stress test (DFAST).
Working Paper
The Impact of the Current Expected Credit Loss Standard (CECL) on the Timing and Comparability of Reserves
The new forward-looking credit loss provisioning standard, CECL, is intended to promote proactive provisioning as loan loss reserves can be conditioned on expectations of the economic cycle. We study the degree to which one modeling decision?expectations about the path of future house prices ? affects the size and timing of provisions for first-lien residential mortgage portfolios. While we find that provisions are generally less pro-cyclical compared to the current incurred loss standard, CECL may complicate the comparability of provisions across banks and time. Market participants will need ...
Journal Article
How Have Banks Been Managing the Composition of High-Quality Liquid Assets?
Banks? liquidity management practices are fundamental to understanding the implementation and transmission of monetary policy. Since the Global Financial Crisis of 2007-09, these practices have been shaped importantly by the liquidity coverage ratio requirement. Given the lack of public data on how banks have been meeting this requirement, we construct estimates of U.S. banks? high-quality liquid assets (HQLA) and examine how banks have managed these assets since the crisis. We find that banks have adopted a wide range of HQLA compositions and show that this empirical finding is consistent ...
Working Paper
Scenario-based Quantile Connectedness of the U.S. Interbank Liquidity Risk Network
We characterize the U.S. interbank liquidity risk network based on a supervisory dataset, using a scenario-based quantile network connectedness approach. In terms of methodology, we consider a quantile vector autoregressive model with unobserved heterogeneity and propose a Bayesian nuclear norm estimation method. A common factor structure is employed to deal with unobserved heterogeneity that may exhibit endogeneity within the network. Then we develop a scenario-based quantile network connectedness framework by accommodating various economic scenarios, through a scenario-based moving average ...