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Author:Hirtle, Beverly 

Discussion Paper
Are BHCs Mimicking the Fed's Stress Test Results?
In March, the Federal Reserve and thirty-one large bank holding companies (BHCs) disclosed their annual Dodd-Frank Act stress test (DFAST) results. This is the third year in which both the BHCs and the Fed have published their projections. In a previous post, we looked at whether the Fed?s and the BHCs? stress test results are converging in the aggregate and found mixed results. In this post, we look at stress test projections made by individual BHCs. If the Fed?s projections are very different from a BHC?s in one year, do the BHC projections change in the following year to close this gap? Or are year-to-year changes in BHC stress test projections driven more by changes in underlying risk factors? Evidence of BHCs mimicking the Fed would be problematic if it meant that the BHCs are not really independently modelling their own risks. Convergence poses a potential risk to the financial system, since a financial system with monoculture in risk measurement models could be less stable than one in which firms use diverse models that collectively might be more likely to identify emerging risks.
AUTHORS: Hirtle, Beverly; Kovner, Anna; Angela Deng
DATE: 2015-09-21

Journal Article
Bank holding company capital ratios and shareholder payouts
Last year's sharp drop in the capital ratios of bank holding companies could cast doubt on the companies' future capital strength, especially if credit quality eroded significantly or if profitability weakened. However, an analysis linking the drop in ratios to bank efforts to increase shareholder payouts in a period of strong profitability suggests that these concerns are premature.
AUTHORS: Hirtle, Beverly
DATE: 1998-09

Journal Article
The evolution of U.S. bank branch networks: growth, consolidation, and strategy
Bank branches have become steadily more concentrated within large and midsized branch networks over the past decade. A look at branching trends between 2001 and 2003 reveals that banks with large networks grew slowly and strategically during this period as they adjusted their branch holdings within existing markets, while institutions with midsized branch networks expanded more aggressively.
AUTHORS: Hirtle, Beverly; Metli, Christopher
DATE: 2004-07

Journal Article
Using credit risk models for regulatory capital: issues and options
The authors describe the issues and options that would be associated with the development of regulatory minimum capital standards for credit risk based on banks' internal risk measurement models. Their goal is to provide a sense of the features that an internal-models (IM) approach to regulatory capital would likely incorporate, and to stimulate discussion among financial institutions, supervisors, and other interested parties about the many practical and conceptual issues involved in structuring a workable IM regulatory capital regime for credit risk. The authors focus on three main areas: prudential standards defining the risk estimate to be used in the capital requirements, model standards describing the essential components of a comprehensive credit risk model, and validation techniques that could be used by supervisors and banks to assess model accuracy. The discussion highlights a range of alternatives for each of these areas.
AUTHORS: Saidenberg, Marc R.; Levonian, Mark E.; Wright, David M.; Walter, Stefan; Hirtle, Beverly
DATE: 2001-03

Journal Article
Bank capital requirements for market risk: the internal models approach
The increases prominence of trading activities at many large banking companies has highlighted bank exposure to market risk-the risk of loss from adverse movements in financial market rates and prices. In response, bank supervisors in the United States and abroad have developed a new set of capital requirements to ensure that banks have adequate capital resources to address market risk. This paper offers an overview of the new requirements, giving particular attention to their most innovative feature: a capital charge calculated for each bank using the output of that bank's internal risk measurement model. The authors contend that the use of internal models should lead to regulatory capital charges that conform more closely to banks' true risk exposures. In addition, the information generated by the models should allow supervisors and market participants to compare risk exposures over time and across institutions.
AUTHORS: Hirtle, Beverly; Hendricks, Darryll
DATE: 1997-12

Journal Article
The challenges of risk management in diversified financial companies
In recent years, financial institutions and their supervisors have placed increased emphasis on the importance of measuring and managing risk on a firmwide basis?a coordinated process referred to as consolidated risk management. Although the benefits of this type of risk management are widely acknowledged, few if any financial firms have fully developed systems in place today, suggesting that significant obstacles have led them to manage risk in a more segmented fashion. In this article, the authors examine the economic rationale behind consolidated risk management. Their goal is to detail some of the key issues that supervisors and practitioners have confronted in assessing and developing consolidated risk management systems. In doing so, the authors clarify why implementing consolidated risk management involves significant conceptual and practical difficulties. They also suggest areas in which additional research could help resolve some of these difficulties.
AUTHORS: Cumming, Christine M.; Hirtle, Beverly
DATE: 2001-03

Journal Article
Trends in financial market concentration and their implications for market stability
The link between financial market concentration and stability is a topic of great interest to policymakers and other market participants. Are concentrated markets - those where a relatively small number of firms hold large market shares - inherently more prone to disruption? This article considers that question by drawing on academic studies as well as introducing new analysis. Like other researchers, the authors find an ambiguous relationship between concentration and instability when a large firm in a concentrated market fails. In a complementary review of concentration trends across a number of specific markets, the authors document that most U.S. wholesale credit and capital markets are only moderately concentrated, and that concentration trends are mixed - rising in some markets and falling in others. The article also identifies market characteristics that might lead to greater, or less, concern about the consequences of a large firm's exit. It argues that the ease of substitution by other firms in concentrated markets is a critical factor supporting market resiliency.
AUTHORS: Santos, Joao A. C.; Peristiani, Stavros; Hirtle, Beverly; Cetorelli, Nicola; Morgan, Donald P.
DATE: 2007-03

Journal Article
The role of retail banking in the U.S. banking industry: risk, return, and industry structure
The U.S. banking industry is experiencing a renewed interest in retail banking, broadly defined as the range of products and services provided to consumers and small businesses. This article documents the ?return to retail? in the U.S. banking industry and offers some insight into why the shift has occurred. At the bank level, the principal attraction of retail banking seems to be the belief that its revenues are stable and thus can offset volatility in nonretail businesses. At the industry level, the authors show that interest in retail activities fluctuates in rather predictable ways with the performance of nonretail banking and financial market activities. They document the features that the recent ?return to retail? has in common with past cycles, but also identify factors suggesting that this episode may be more persistent. The most important of these factors is the role of large banks: this retail banking cycle is being driven almost entirely by the very largest U.S. banking firms. The key role of very large banks gives extra weight to this retail banking episode.
AUTHORS: Stiroh, Kevin J.; Clark, Timothy; Dick, Astrid A.; Hirtle, Beverly; Williams, Robard
DATE: 2007-12

Journal Article
Supervising large, complex financial institutions: what do supervisors do?
The supervision of large, complex financial institutions is one of the most important, but least understood, activities of the Federal Reserve. Supervision entails monitoring and oversight to assess whether firms are engaged in unsafe or unsound practices, and to ensure that firms take appropriate action to correct such practices. It is distinct from regulation, which involves the development and promulgation of the rules under which firms operate. This article brings greater transparency to the Federal Reserve?s supervisory activities by considering how they are structured, staffed, and implemented on a day-to-day basis at the Federal Reserve Bank of New York as part of the broader Systemwide supervisory program. The goal of the article is to generate insight into what supervisors do and how they do it. While the authors do not undertake to evaluate the effectiveness of the activities they describe, they note that understanding how supervision works is a critical precursor to determining how to measure its impact.
AUTHORS: Kovner, Anna; Lucca, David O.; Eisenbach, Thomas M.; Hirtle, Beverly; Haughwout, Andrew F.; Plosser, Matthew
DATE: 2017

Journal Article
Commentary on 3 papers on issues in value-at-risk modeling and evaulation
AUTHORS: Hirtle, Beverly
DATE: 1998-10

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