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Discussion Paper
On Fire-Sale Externalities, TARP Was Close to Optimal
Eisenbach, Thomas M.; Duarte, Fernando M. (2014-04-15)
Imagine that many large and levered banks suffer heavy losses and must quickly sell assets to reduce their leverage. We expect the market price of the assets sold to decline, at least temporarily. As a result, any other financial institutions that happen to hold the same assets will experience balance sheet losses through no fault of their own —a negative fire-sale externality. In this post, we show that the vulnerability to fire-sale externalities was high during the crisis and that the capital injections of the government’s Troubled Asset Relief Program (TARP) helped reduce it ...
Liberty Street Economics , Paper 20140415

Discussion Paper
The International Spillover of U.S. Monetary Policy via Global Production Linkages
di Giovanni, Julian (2021-01-06)
The recent era of globalization has witnessed growing cross-country trade integration as firms’ production chains have spread across the world, and with stock market returns becoming more correlated across countries. While research has predominantly focused on how financial integration impacts the propagation of shocks across international financial markets, trade also influences these cross-border spillovers. In particular, one important aspect, highlighted by the recent work of di Giovanni and Hale (2020), is how the global production network influences the transmission of U.S. monetary ...
Liberty Street Economics , Paper 20210106

Discussion Paper
Primary Dealer Participation in the Secondary U.S. Treasury Market
Keane, Frank M.; Schaumburg, Ernst; Fleming, Michael J. (2016-02-12)
The recent Joint Staff Report on October 15, 2014, exploring an episode of unprecedented volatility in the U.S. Treasury market, revealed that primary dealers no longer account for most trading volume on the interdealer brokerage (IDB) platforms. This shift is noteworthy because dealers contribute to long-term liquidity provision via their willingness to hold positions across days. However, a large share of Treasury security trading occurs elsewhere, in the dealer-to-customer (DtC) market. In this post, we show that primary dealers maintain a majority share of secondary market trading volume ...
Liberty Street Economics , Paper 20160212

Discussion Paper
Leverage Rule Arbitrage
Holcomb, Michael R.; Morgan, Donald P.; Choi, Dong Beom (2018-10-12)
Classic arbitrage involves the same asset selling at different prices; the leverage rule arbitrage we study here involves assets of different risk levels requiring the same amount of capital. The supplementary leverage ratio (SLR) rule, finalized by U.S. regulators in September 2014, requires a minimum ratio of capital to assets at the largest U.S. banks. The floor is higher for more systemically important banks, but not for banks with riskier assets. That non-risk-based aspect of SLR was intentional, since the leverage limit was meant to backstop (?supplement?) risk-based capital rules in ...
Liberty Street Economics , Paper 20181012

Discussion Paper
Sophisticated and Unsophisticated Runs
Cipriani, Marco; La Spada, Gabriele (2021-06-02)
In March 2020, U.S. prime money market funds (MMFs) suffered heavy outflows following the liquidity shock triggered by the COVID-19 crisis. In a previous post, we characterized the run on the prime MMF industry as a whole and the role of the liquidity facility established by the Federal Reserve (the Money Market Mutual Fund Liquidity Facility) in stemming the run. In this post, based on a recent Staff Report, we contrast the behaviors of retail and institutional investors during the run and explain the different reasons behind the run.
Liberty Street Economics , Paper 20210602

Discussion Paper
How Do Survey- and Market-Based Expectations of the Policy Rate Differ?
Morse, Ari; Fiorica, Joseph; Brodsky, Bonni; Rodrigues, Anthony P.; LeSueur, Eric; Del Negro, Marco (2016-04-07)
Over the past year, market pricing on interest rate derivatives linked to the federal funds rate has suggested a significantly lower expected path of the policy rate than responses to the New York Fed’s Survey of Primary Dealers (SPD) and Survey of Market Participants (SMP). However, this gap narrowed considerably from December 2015 to January 2016, before widening slightly at longer horizons in March. This post argues that the narrowing between December and January was mostly the result of survey respondents placing greater weight on lower rate outcomes, while the subsequent widening ...
Liberty Street Economics , Paper 20160407

Discussion Paper
How Does the Liquidity of New Treasury Securities Evolve?
Fleming, Michael J. (2020-08-26)
In a recent Liberty Street Economics post, we showed that the newly reintroduced 20-year bond trades less than other on-the-run Treasury securities and has similar liquidity to that of the more interest‑rate‑sensitive 30-year bond. Is it common for newly introduced securities to trade less and with higher transaction costs, and how does security trading behavior change over time? In this post, we look back at how liquidity evolved for earlier reintroductions of Treasury securities so as to gain insight into how liquidity might evolve for the new 20-year bond.
Liberty Street Economics , Paper 20200826

Working Paper
Estimation of the discontinuous leverage effect: Evidence from the NASDAQ order book
Winkelmann, Lars; Neely, Christopher J.; Bibinger, Markus (2017-04-26)
An extensive empirical literature documents a generally negative correlation, named the ?leverage effect,? between asset returns and changes of volatility. It is more challenging to establish such a return-volatility relationship for jumps in high-frequency data. We propose new nonparametric methods to assess and test for a discontinuous leverage effect ? i.e. a relation between contemporaneous jumps in prices and volatility ? in high-frequency data with market microstructure noise. We present local tests and estimators for price jumps and volatility jumps. Five years of transaction data from ...
Working Papers , Paper 2017-12

Discussion Paper
A Peek behind the Curtain of Bank Supervision
Goldsmith-Pinkham, Paul; Lucca, David O.; Hirtle, Beverly (2016-04-14)
Since the financial crisis, bank regulatory and supervisory policies have changed dramatically both in the United States (Dodd-Frank Wall Street Reform and Consumer Protection Act) and abroad (Third Basel Accord). While these shifts have occasioned much debate, the discussion surrounding supervision remains limited because most supervisory activity? both the amount of supervisory attention and the demands for corrective action by supervisors?is confidential. Drawing on our recent staff report ?Parsing the Content of Bank Supervision,? this post provides a peek behind the scenes of bank ...
Liberty Street Economics , Paper 20160414

Discussion Paper
What Drives International Bank Credit?
McGuire, Patrick M.; Amiti, Mary; Weinstein, David E. (2017-09-06)
A major question facing policymakers is how to deal with slumps in bank credit. The policy prescriptions are very different depending on whether the decline is a result of global forces, domestic demand, or supply problems in a particular banking system. We present findings from new research that exactly decompose the growth in banks? aggregate foreign credit into these three factors. Using global banking data for the period 2000-16, we uncover some striking patterns in bilateral credit relationships between consolidated banking systems and borrowers in more than 200 countries. The most ...
Liberty Street Economics , Paper 20170906

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