Search Results
Working Paper
What Drives Bank Funding Spreads?
We use matched, bank-level panel data on Libor submissions and credit default swaps to decompose bank-funding spreads at several maturities into components reflecting counterparty credit risk and funding-market liquidity. To account for the possibility that banks may strategically misreport their funding rates in the Libor survey, we nest our decomposition within a model of the costs and benefits of lying. We find that Libor spreads typically consist mostly of a liquidity premium and that this premium declined at short maturities following Federal Reserve interventions in bank funding ...
Working Paper
Securities Financing and Asset Markets: New Evidence
This paper presents new evidence on bilateral securities financing based on the Federal Reserve's Senior Credit Officer Opinion Survey, which was launched in the wake of the financial crisis to provide a window into this otherwise opaque market. The survey asks large broker-dealers about terms at which they fund client positions, and the demand for such funding, across several different collateral types. Within asset classes, reported changes in spreads, haircuts, and other financing terms move closely together, and we show that they also covary with the state of the underlying cash ...
Newsletter
How Have Banks Responded to Changes in the Yield Curve?
Between December 2015 and September 2018, a cumulative increase in the federal funds rate of 200 basis points was accompanied by a compression of 125 basis points in the difference between the yields on three-month and ten-year U.S. Treasury securities. In this Chicago Fed Letter, we examine some of the effects of the flatter yield curve on the banking sector and how they compare with the effects of similar interest rate configurations in the past.
Working Paper
Discipline and liquidity in the market for federal funds
I find that high-risk banks pay more for federal funds and are less likely to utilize them as a source of liquidity. The extent of this discipline has risen in recent years, following legislation designed to impose more of the costs of bank failure on uninsured creditors. However, the risk-pricing remains imperfect, and additional results suggest that information problems persist in the fed-funds market. The findings have implications for interest-rate determination, risk contagion in the financial system, the use of market data in banking supervision, and recent efforts to reform Discount ...
Working Paper
Did FDICIA enhance market discipline on community banks? a look at evidence from the jumbo-CD market
The Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA) directed the FDIC to resolve bank failures in the least costly manner, shifting more of the failure-resolution burden to jumbo-CD holders. We examine the sensitivity of jumbo-CD yields and runoffs to failure risk before and after FDICIA. We also examine the economic significance of estimated risk sensitivities before and after the Act, looking at the implied impact of risk on bank funding costs and profits. The evidence indicates that yields and runoff were sensitive to risk before and after FDICIA, but that this ...
Working Paper
One Asset Does Not Fit All: Inflation Hedging by Index and Horizon
We examine the inflation-hedging properties of various financial assets and portfolios by estimating simple time-series models of the joint dynamics of each asset-inflation pair, for multiple inflation indices and at horizons from one month to 30 years. There is no one-size-fits-all approach to inflation hedging: the optimal hedge depends on the particular types of prices that an investor is exposed to and at which horizons. For example, food and energy prices are easy to hedge with commodities and certain stock portfolios, while non-housing service prices and wages are not highly correlated ...
Working Paper
In search of the natural rate of unemployment
The natural rate of unemployment can be measured as the time-varying steady state of a structural vector autoregression. For post-War U.S. data, the natural rate implied by this approach is more volatile than most previous estimates, with its movements accounting for the bulk of the variation in the unemployment rate, as well as substantial portions of the variation in aggregate output and inflation. These movements, in turn, can be related to variables associated with labor-market search theory, including unemployment benefits, labor productivity, real wages, and sectoral shifts in the labor ...
Working Paper
What Does Anticipated Monetary Policy Do?
Forward rate guidance, which has been used with increasing regularity by monetary policymakers, relies on the manipulation of expectations of future short-term interest rates. We identify shocks to these expectations at short and long horizons since the early 1980s and examine their effects on contemporaneous macroeconomic outcomes. Our identification uses sign restrictions on survey forecasts incorporated in a structural VAR model to isolate expected deviations from the monetary policy rule. We find that expectations of future policy easing that materialize over the subsequent four quarters ...
Journal Article
Profits and balance sheet developments at U.S. commercial banks in 2007
Reviews recent developments in the balance sheets and in the profitability of U.S. commercial banks. The article discusses how developments in the U.S. banking industry in 2007 and early 2008 were related to changes in financial markets and in the broader economy.
Working Paper
Expectation and Duration at the Effective Lower Bound
I study unconventional monetary policy in a structural model of risk-averse arbitrage, augmented with an effective lower bound (ELB) on nominal rates. The model exposes nonlinear interactions among short-rate expectations, bond supply, and term premia that are absent from models that ignore the ELB, and these features help it replicate the recent behavior of long-term yields, including event-study evidence on the responses to unconventional policy. When the model is calibrated to long-run moments of the yield curve and subjected to shocks approximating the size of the Federal Reserve?s ...