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Journal Article
Systemic risk and deposit insurance premiums
Professor Viral Acharya of the London Business School and New York University collaborates with New York Fed economists Joo Santos and Tanju Yorulmazer to analyze various ways to incorporate systemic risk into deposit insurance premiums. Presented at "Central Bank Liquidity Tools and Perspectives on Regulatory Reform" a conference sponsored by the Federal Reserve Bank of New York, February 19-20, 2009.
Discussion Paper
Investor Diversity and Liquidity in the Secondary Loan Market
Over the last two decades, the U.S. secondary loan market has evolved from a relatively sleepy market dominated by banks and insurance companies that trade only occasionally to a more active market comprising a diversified set of institutional investors, including collateralized loan obligations (CLOs), loan mutual funds, hedge funds, pension funds, brokers, and private equity firms. This shift resulted from the growing presence of these investors in the syndicates of corporate loans, as shown in the chart below. In 1991 the average term loan had just two different types of investors; by 2013 ...
Report
Why do banks target ROE?
Historically, nonfinancial corporations relied on performance targets linked to their EPS. Up until the 1970s, banks also appeared to follow a similar practice, but since then they have favored ROE. Equity investors seem to be aware of these differences because EPS growth is better at explaining nonfinancials? stock market value while ROE is better at explaining banks? market values. In this paper we present a model of a bank with fixed-rate deposit insurance that faces increasing competition that erodes its charter value. When under these conditions the bank chooses its capital to maximize ...
Conference Paper
Banking and commerce: an approach based on liquidity synergies
Discussion Paper
What Do Rating Agencies Think about “Too-Big-to-Fail” since Dodd-Frank
Did the Dodd-Frank Act end ??too-big-to-fail?? (TBTF)? In this series of two posts, we look at this question through the lens of rating agencies and financial markets. Today we begin by discussing rating agencies? views on this topic.
Working Paper
Evidence on the costs and benefits of bond IPOs
This paper investigates whether it is costly for nonfinancial firms to enter the public bond market, and whether firms benefit from their bond IPOs. We find that both gross spreads and ex ante credit spreads are higher for IPO bonds, suggesting that firms pay higher underwriting costs on their first public bond. We also find that underpricing in the secondary market is higher for IPO bonds, further suggesting that it is costly to enter the public bond market. The costs of entering the public bond market are economically meaningful and are higher for risky firms. We investigate the benefits ...
Conference Paper
The importance of bank seniority for relationship lending
Discussion Paper
Did the Supervisory Guidance on Leveraged Lending Work?
Financial regulatory agencies issued guidance intended to curtail leveraged lending?loans to firms perceived to be risky?in March of 2013. In issuing the guidance, the Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System, and the Federal Deposit Insurance Corporation highlighted several facts that were reminiscent of the mortgage market in the years preceding the financial crisis: rapid growth in the volume of leveraged lending, increased participation by unregulated investors, and deteriorating underwriting standards. Our post shows that banks, in ...
Journal Article
What makes large bank failures so messy and what should be done about it?
This study argues that the defining feature of large and complex banks that makes their failures messy is their reliance on runnable financial liabilities. These liabilities confer liquidity or money-like services that may be impaired or destroyed in bankruptcy. To make large bank failures more orderly, the authors recommend that systemically important bank holding companies be required to issue ?bail-in-able? long-term debt that converts to equity in resolution. This reassures holders of uninsured liabilities that their claims will be honored in resolution, making them less likely to run. In ...
Journal Article
Review of New York Fed studies on the effects of post-crisis banking reforms
In 2017, the Federal Reserve Bank of New York initiated a project to examine the effects of post-crisis reforms on bank performance and vulnerability. The project, which was completed in June 2018, consisted of twelve studies evaluating a wide set of regulatory changes. The primary focus was how these regulatory changes affected the risk taking, funding costs, and profitability of banks, as well as their impact on liquidity. In this article, the authors survey the twelve papers that make up the project and place the principal findings in the context of the current academic and policymaking ...