Contingent capital: the trigger problem
Price triggers in contingent capital bonds are analyzed. Pervasiveness of multipleequilibria and nonexistence of equilibrium in theoretical models is illustrated. Evidence of these problems from market experiments is summarized. Possible solutions are evaluated.
Federal Reserve Structure, Economic Ideas, and Monetary and Financial Policy
The decentralized structure of the Federal Reserve System is evaluated as a mechanism for generating and processing new ideas on monetary and financial policy. The role of the Reserve Banks starting in the 1960s is emphasized. The introduction of monetarism in the 1960s, rational expectations in the 1970s, credibility in the 1980s, transparency, and other monetary policy ideas by Reserve Banks into the Federal Reserve System is documented. Contributions by Reserve Banks to policy on bank structure, bank regulation, and lender of last resort are also discussed. We argue that the Reserve Banks ...
A regional look at the role of house prices and labor market conditions in mortgage default
A linear fixed effects statistical model is used to study variations in foreclosure rates across metropolitan statistical areas in the Fifth Federal Reserve District. We find that variations in local labor market conditions and house prices do a remarkable job of capturing variation in foreclosure rates. We study the regional variation in foreclosure rates in more detail by examining two localities in our district: Prince William County, Virginia, and Charlotte, North Carolina. Finally, the model is used to provide forecasts of foreclosure rates conditioned on possible paths of labor market ...
Optimal bonuses and deferred pay for bank employees : implications of hidden actions with persistent effects in time
We present a sequence of two-period models of incentive-based compensation in order to understand how the properties of optimal compensation structures vary with changes in the model environment. Each model corresponds to a different occupation within a bank, such as credit line managers, loan originators, or traders. All models share a common trait: the effects of hidden actions are persistent, and hence are revealed over time. We characterize the corresponding optimal contracts that are consistent with prudent risk taking. We compare the contracts by ranking them according to the average ...
An experimental analysis of contingent capital triggering mechanisms
This paper reports an experiment that evaluates three regimes for triggering the conversion of contingent capital bonds into equity: (a) a ?regulator? regime, where socially motivated regulators make conversion decisions based on observed prices, (b) a ?fixed trigger? regime where a price threshold triggers a mandatory conversion, and (c) a ?prediction market? regime where we supplement the regulator?s information set with the results of a prediction market that elicits traders? perceived likelihood of a conversion. Consistent with theory, we observe informational and allocative ...
Macroprudential Policy: Results from a Tabletop Exercise
This paper presents a tabletop exercise designed to analyze macroprudential policy. Several senior Federal Reserve officials were presented with a hypothetical economy as of 2020:Q2 in which commercial real estate and nonfinancial debt valuations were very high. After analyzing the economy and discussing the use of monetary and macroprudential policy tools, participants were then presented with a hypothetical negative shock to commercial real estate valuations that occurred in the second half of 2020. Participants then discussed the use of the tools during an incipient downturn. Some of the ...
Too Big to Manage? Two Book Reviews
Roddy Boyd's Fatal Risk: A Cautionary Tale of AIG's Corporate Suicide and Greg Farrell's Crash of the Titans: Greed, Hubris and the Fall of Merrill Lynch and the Near Collapse of Bank of America are reviewed to analyze why AIG and Merrill Lynch nearly failed during the financial crisis of 2007--09. Both books argue that each firm collapsed because of failures of senior management. Using the accounts provided by the books, as well as other sources, the review goes further and argues that both firms were vulnerable to managerial failures because they were inefficiently large, complex, and ...
Can risk-based deposit insurance premiums control moral hazard?
Firms as clubs in Walrasian markets with private information : technical appendix
This paper proves the Welfare Theorems and the existence of a competitive equilibrium for the club economies with private information in Prescott and Townsend (2005). The proofs cover lottery economies with a finite number of goods and without free disposal. A mapping based on Negishi (1960) is used.
The costs and benefits of bank supervisory disclosure
Bank examinations, like the recent "stress test," yield information of interest to the market. Releasing those results may increase transparency. For routine annual bank exams, however, doing so could impede a supervisor's ability to collect information.