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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
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
Introducing a Series on Large and Complex Banks
Morgan, Donald P. (2014-03-25)
The chorus of criticism levied against mega-banks has, in some cases, outrun the research needed to back the criticism. To help the research catch up with the rhetoric, financial economists here at the New York Fed have engaged in a systematic study of the economics of large and complex banks and their resolution in the event of failure. The result of those efforts is a collection of eleven papers, each of which was subject to review (internal and external). The papers are now online in our Economic Policy Review. Today, we begin a two-week series of posts that present the key findings of ...
Liberty Street Economics , Paper 201404325b

Discussion Paper
Fear of $10 Billion
Yang, Bryan; Morgan, Donald P. (2016-10-03)
Ten billion has become a big number in banking since the Dodd-Frank Act of 2010. When banks’ assets exceed that threshold, they face considerably heightened supervision and regulation, including exams by the Consumer Financial Protection Bureau, caps on interchange fees, and annual stress tests. There are plenty of anecdotes about banks avoiding the $10 billion threshold or waiting to cross with a big merger, but we’ve seen no systematic evidence of this avoidance behavior. We provide some supporting evidence below and then discuss the implications for size-based bank regulation—where ...
Liberty Street Economics , Paper 20161003

Discussion Paper
Does Corporate Hedging of Foreign Exchange Risk Affect Real Economic Activity?
Jung, Hyeyoon (2023-04-12)
Foreign exchange derivatives (FXD) are a key tool for firms to hedge FX risk and are particularly important for exporting or importing firms in emerging markets. This is because FX volatility can be quite high—up to 120 percent per annum for some emerging market currencies during stress episodes—yet the vast majority of international trades, almost 90 percent, are invoiced in U.S. dollars (USD) or euros (EUR). When such hedging instruments are in short supply, what happens to firms’ real economic activities? In this post, based on my related Staff Report, I use hand-collected FXD ...
Liberty Street Economics , Paper 20230412

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
Moving Out of a Flood Zone? That May Be Risky!
Blickle, Kristian S.; Engelman, Katherine; Linnemann, Theo; Santos, João A. C. (2023-04-20)
An often-overlooked aspect of flood-plain mapping is the fact that these maps designate stark boundaries, with households falling either inside or outside of areas designated as “flood zones.” Households inside flood zones must insure themselves against the possibility of disasters. However, costly insurance may have pushed lower-income households out of areas officially designated a flood risk and into physically adjacent areas. While not designated an official flood risk, Federal Emergency Management Agency (FEMA) and disaster data shows that these areas are still at considerable risk ...
Liberty Street Economics , Paper 20230420b

Discussion Paper
Assessing Contagion Risk in a Financial Network
Duarte, Fernando M.; Ruela, Francisco; Jones, Collin (2019-06-24)
Since the 2008 financial crisis, there has been an explosion of research trying to understand and quantify the default spillovers that can arise through counterparty risk. This first of two posts delves into the analysis of financial network contagion through this spillover channel. The authors introduce a framework, originally developed by Eisenberg and Noe, that is useful for thinking about default cascades.
Liberty Street Economics , Paper 20190624

Discussion Paper
Understanding the “Inconvenience” of U.S. Treasury Bonds
Du, Wenxin; Hébert, Benjamin; Li, Wenhao (2023-02-06)
The U.S. Treasury market is one of the most liquid financial markets in the world, and Treasury bonds have long been considered a safe haven for global investors. It is often believed that Treasury bonds earn a “convenience yield,” in the sense that investors are willing to accept a lower yield on them compared to other investments with the same cash flows owing to Treasury bonds’ safety and liquidity. However, since the global financial crisis (GFC), long-maturity U.S. Treasury bonds have traded at a yield consistently above the interest rate swap rate of the same maturity. The ...
Liberty Street Economics , Paper 20230206

Discussion Paper
Banking the Unbanked: The Past and Future of the Free Checking Account
Berre, Stein; Blickle, Kristian S.; Chakrabarti, Rajashri (2021-06-30)
About one in twenty American households are unbanked (meaning they do not have a demand deposit or checking account) and many more are underbanked (meaning they do not have the range of bank-provided financial services they need). Unbanked and underbanked households are more likely to be lower-income households and households of color. Inadequate access to financial services pushes the unbanked to use high-cost alternatives for their transactional needs and can also hinder access to credit when households need it. That, in turn, can have adverse effects on the financial health, educational ...
Liberty Street Economics , Paper 20210630a

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