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Managing Stigma during a Financial Crisis
How should regulators design effective emergency lending facilities to mitigate stigma during a financial crisis? I explore this question using data from an unexpected disclosure of partial lists of banks that secretly borrowed from the lender of last resort during the Great Depression. I find evidence of stigma in that depositors withdrew more deposits from banks included on the lists in comparison with banks left off the lists. However, stigma dissipated for banks that were revealed earlier after subsequent banks were revealed. Overall, the results suggest that an emergency lending facility that never reveals bank identities would mitigate stigma.
AUTHORS: Anbil, Sriya
Does Hedging with Derivatives Reduce the Market's Perception of Credit Risk?
Risk management is the most widely-cited reason that non-financial corporations use derivatives. If hedging programs are effective, then firms using derivatives should have lower credit risk than those that do not. Surprisingly, we find that firms with derivative positions without a hedge accounting designation (typically higher basis risk) have higher CDS spreads than firms that do not hedge at all. We do not find evidence that these non-designated positions are associated with future credit realizations. We examine alternative explanations and find evidence that is consistent with a market penalty for high basis risk positions when overall market conditions are poor.
AUTHORS: Anbil, Sriya; Saretto, Alessio; Tookes, Heather
The Regulatory and Monetary Policy Nexus in the Repo Market
We examine the interaction of regulatory reforms and changes in monetary policy in the U.S. repo market. Using a proprietary data set of repo transactions, we find that differences in regional implementation of Basel III capital reforms intensified European dealers' window-dressing by 80%. Money funds eligible to use the Fed's reverse repo (RRP) facility cut their private lending almost by half and instead lent to the Fed when European dealers withdraw, contributing to smooth implementation of Basel III. In a difference-in-differences setting, we show that ineligible funds lent 15% less to European dealers as they find their withdrawal for reporting purposes inconvenient. We find that intermediation through the RRP led to quantity and not pricing adjustments in the market, which is consistent with the RRP facility anchoring market rates.
AUTHORS: Anbil, Sriya; Senyuz, Zeynep
Liquidity from Two Lending Facilities
During financial crises, the lender of last resort (LOLR) uses lending facilities to inject critical funding into the banking sector. The facilities need to be designed in such a way that banks are not reluctant to seek assistance due to stigma and that banks with liquidity concerns are attracted rather than those prone to risk-taking and moral hazard incentives. We use an unexpected disclosure that introduced stigma at one of two similar LOLRs during the Great Depression to evaluate whether banks used LOLR assistance to improve their liquidity needs using a novel trivariate model with recursive endogeneity. We find evidence that banks that approached the facility with stigma were less liquid and reduced their position of safe assets in comparison with banks that approached the facility with no stigma. Thus, stigma forced the pool of LOLR borrowers to separate into different groups of banks that ex-post revealed their liquidity preferences. This finding sheds light on why and when banks approach their LOLR.
AUTHORS: Anbil, Sriya; Vossmeyer, Angela
The Re-emergence of the Federal Reserve Funds Market in the 1950s
In this note, we highlight the re-emergence of the federal funds market in the 1950s.
AUTHORS: Anbil, Sriya; Carlson, Mark A.