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Author:Ashcraft, Adam B. 

MBS ratings and the mortgage credit boom

We study credit ratings on subprime and Alt-A mortgage-backed-securities (MBS) deals issued between 2001 and 2007, the period leading up to the subprime crisis. The fraction of highly rated securities in each deal is decreasing in mortgage credit risk (measured either ex ante or ex post), suggesting that ratings contain useful information for investors. However, we also find evidence of significant time variation in risk-adjusted credit ratings, including a progressive decline in standards around the MBS market peak between the start of 2005 and mid-2007. Conditional on initial ratings, we ...
Staff Reports , Paper 449

Working Paper
The Federal Home Loan Bank System: the lender of next-to-last resort?

The Federal Home Loan Bank (FHLB) System is a large, complex, and understudied government-sponsored liquidity facility that currently has more than $1 trillion in secured loans outstanding, mostly to commercial banks and thrifts. This paper first documents the significant role played by the FHLB System at the outset of the ongoing financial crisis and then provides evidence about the uses of these funds by their bank and thrift members. We then identify the trade-offs faced by FHLB member-borrowers when choosing between accessing the FHLB System or the Federal Reserve's discount window during ...
FRB Atlanta Working Paper , Paper 2009-04

Understanding the securitization of subprime mortgage credit

In this paper, we provide an overview of the subprime mortgage securitization process and the seven key informational frictions that arise. We discuss the ways that market participants work to minimize these frictions and speculate on how this process broke down. We continue with a complete picture of the subprime borrower and the subprime loan, discussing both predatory borrowing and predatory lending. We present the key structural features of a typical subprime securitization, document how rating agencies assign credit ratings to mortgage-backed securities, and outline how these agencies ...
Staff Reports , Paper 318

Conference Paper
Has the development of the structured credit market affected the cost of corporate debt?

The rapid development of structured credit markets permits investors to assume credit risk that in aggregate is frequently many times larger than the amount of debt actually issued by an underlying borrower. Given the apparent increased appetite for corporate credit risk by investors, and the additional information revealed in the structured credit markets, a natural question to ask is whether the development of these markets has been associated with a reduction in the cost of debt financing, giving firms an opportunity to operate with greater leverage. Using Markit data identifying when ...
Proceedings , Issue Nov

New evidence on the lending channel

Do banks play a special role in the transmission mechanism of monetary policy? I use the presence of internal capital markets in bank holding companies to isolate plausibly exogenous variation in the financial constraints faced by subsidiary banks. In particular, I demonstrate that affiliated bank loan growth is less sensitive to changes in the federal funds rate than that of unaffiliated banks, and that these relatively unconstrained banks are better able to smooth insured deposit outflows by issuing uninsured debt. State loan growth also becomes less sensitive to changes in the federal ...
Staff Reports , Paper 136

Shadow banking: a review of the literature

We provide an overview of the rapidly evolving literature on shadow credit intermediation. The shadow banking system consists of a web of specialized financial institutions that conduct credit, maturity, and liquidity transformation without direct, explicit access to public backstops. The lack of such access to sources of government liquidity and credit backstops makes shadow banks inherently fragile. Much of shadow banking activities is intertwined with the operations of core regulated institutions such as bank holding companies and insurance companies, thus creating a source of systemic ...
Staff Reports , Paper 580

The Bankruptcy Abuse Prevention and Consumer Protection Act: means-testing or mean spirited?

Thousands of U.S. households filed for bankruptcy just before the bankruptcy law changed in 2005. That rush-to-file was more pronounced, we find, in states with more generous bankruptcy exemptions and lower credit scores. We take that finding as evidence that the new law effectively reduces exemptions, which in turn should reduce the ?demand? for bankruptcy and the resulting losses to suppliers of consumer credit. We expect the savings to suppliers will be shared with borrowers by way of lower credit card rates, although credit card spreads have not yet fallen. If cheaper credit is the upside ...
Staff Reports , Paper 279

Shadow banking regulation

Shadow banks conduct credit intermediation without direct, explicit access to public sources of liquidity and credit guarantees. Shadow banks contributed to the credit boom in the early 2000s and collapsed during the financial crisis of 2007-09. We review the rapidly growing literature on shadow banking and provide a conceptual framework for its regulation. Since the financial crisis, regulatory reform efforts have aimed at strengthening the stability of the shadow banking system. We review the implications of these reform efforts for shadow funding sources including asset-backed commercial ...
Staff Reports , Paper 559

Precautionary reserves and the interbank market

Liquidity hoarding by banks and extreme volatility of the fed funds rate have been widely seen as severely disrupting the interbank market and the broader financial system during the 2007-08 financial crisis. Using data on intraday account balances held by banks at the Federal Reserve and Fedwire interbank transactions to estimate all overnight fed funds trades, we present empirical evidence on banks' precautionary hoarding of reserves, their reluctance to lend, and extreme fed funds rate volatility. We develop a model with credit and liquidity frictions in the interbank market consistent ...
Staff Reports , Paper 370

Defaults and losses on commercial real estate bonds during the Great Depression era

We employ a unique data set of public commercial real estate (CRE) bonds issued during the Great Depression era (1920-32) to determine their frequency of default and total loss given default. Default rates on these bonds far exceeded those originated in subsequent periods, driven in part by the greater economic stress of the Depression as well as the lower level of financial sophistication of investors and structures that prevailed in 1920-32. Our results confirm that making loans with higher loan-to-value ratios results in higher rates of default and loss. They also support the business ...
Staff Reports , Paper 544


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