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Showing results 1 to 10 of approximately 14.
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Working Paper
Climate-related Financial Stability Risks for the United States: Methods and Applications
This report has two objectives: 1. Review the available literature on Climate-Related Financial Stability Risks (CRFSRs) as it pertains to the United States. Specifically, the literature review considers several modeling approaches and aims to 1.1 Identify financial market vulnerabilities (e.g., bank leverage), 1.2 Provide an assessment of those vulnerabilities (high/medium/low) as identified by the current literature, and 1.3 Evaluate the uncertainty surrounding these assessments based on interpretation of the findings and coverage of existing literature (high/low). 2. Identify methodologies ...
Discussion Paper
Cyberattacks and Supply Chain Disruptions
Cybercrime is one of the most pressing concerns for firms. Hackers perpetrate frequent but isolated ransomware attacks mostly for financial gains, while state-actors use more sophisticated techniques to obtain strategic information such as intellectual property and, in more extreme cases, to disrupt the operations of critical organizations. Thus, they can damage firms’ productive capacity, thereby potentially affecting their customers and suppliers. In this post, which is based on a related Staff Report, we study a particularly severe cyberattack that inadvertently spread beyond its ...
Report
Exorbitant Privilege? Quantitative Easing and the Bond Market Subsidy of Prospective Fallen Angels
We document capital misallocation in the U.S. investment-grade (IG) corporate bond market, driven by quantitative easing (QE). Prospective fallen angels—risky firms just above the IG rating cutoff—enjoyed subsidized bond financing since 2009, especially when the scale of QE purchases peaked and from IGfocused investors that held more securities purchased in QE programs. The benefitting firms used this privilege to fund risky acquisitions and increase market share, exploiting the sluggish adjustment of credit ratings in downgrading after M&A and adversely affecting competitors' employment ...
Discussion Paper
Banking System Vulnerability: 2022 Update
To assess the vulnerability of the U.S. financial system, it is important to monitor leverage and funding risks—both individually and in tandem. In this post, we provide an update of four analytical models aimed at capturing different aspects of banking system vulnerability with data through 2022:Q2, assessing how these vulnerabilities have changed since last year. The four models were introduced in a Liberty Street Economics post in 2018 and have been updated annually since then.
Working Paper
Why Are Banks Not Recapitalized During Crises?
I develop a model where the sovereign debt capacity depends on the capitalization of domestic banks. Low-capital banks optimally tilt their government bond portfolio toward domestic securities, linking their destiny to that of the sovereign. If the sovereign risk is sufficiently high, low-capital banks reduce private lending to further increase their holdings of domestic government bonds, lowering sovereign yields and supporting the home sovereign debt capacity. The model rationalizes, in the context of the eurozone periphery, the increase in domestic government bond holdings, the reduction ...
Discussion Paper
How Has COVID-19 Affected Banking System Vulnerability?
The COVID-19 pandemic has led to significant changes in banks’ balance sheets. To understand how these changes have affected the stability of the U.S. banking system, we provide an update of four analytical models that aim to capture different aspects of banking system vulnerability.
Discussion Paper
How Does Zombie Credit Affect Inflation? Lessons from Europe
Even after the unprecedented stimulus by central banks in Europe following the global financial crisis, Europe’s economic growth and inflation have remained depressed, consistently undershooting projections. In a striking resemblance to Japan’s “lost decades,” the European economy has been recently characterized by persistently low interest rates and the provision of cheap bank credit to impaired firms, or “zombie credit.” In this post, based on a recent staff report, we propose a “zombie credit channel” that links the rise of zombie credit to dis-inflationary pressures.
Discussion Paper
Banking System Vulnerability through the COVID-19 Pandemic
More than a year into the COVID-19 pandemic, the U.S. banking system has remained stable and seems to have weathered the crisis well, in part because of effects of the policy actions undertaken during the early stages of the pandemic. In this post, we provide an update of four analytical models that aim to capture different aspects of banking system vulnerability and discuss their perspective on the COVID pandemic. The four models, introduced in a Liberty Street Economics post in November 2018 and updated annually since then, monitor vulnerabilities of U.S. banking firms and the way in which ...
Report
Zombie Credit and (Dis-)Inflation: Evidence from Europe
We show that “zombie credit”—cheap credit to impaired firms—has a disinflationary effect. By helping distressed firms to stay afloat, such credit creates excess production capacity, thereby putting downward pressure on product prices. Granular European data on inflation, firms, and banks confirm this mechanism. Industry-country pairs affected by a rise of zombie credit show lower firm entry and exit rates, markups, and product prices, as well as a misallocation of capital and labor, which results in lower productivity, investment, and value added. Without a rise in zombie credit, ...
Working Paper
The (Unintended?) Consequences of the Largest Liquidity Injection Ever
The design of lender-of-last-resort interventions can exacerbate the bank-sovereign nexus. During sovereign crises, central bank provision of long-term liquidity incentivizes banks to purchase high yield eligible collateral securities matching the maturity of the central bank loans. Using unique security level data, we find that the European Central Bank's 3-year Long-Term Refinancing Operation caused Portuguese banks to purchase short-term domestic government bonds, equivalent to 10.6% of amounts outstanding, and pledge them to obtain central bank liquidity. The steepening of Eurozone ...