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Jel Classification:G2 

Discussion Paper
China’s Continuing Credit Boom

Debt in China has increased dramatically in recent years, accounting for roughly one-half of all new credit created globally since 2005. The country?s share of total global credit is nearly 25 percent, up from 5 percent ten years ago. By some measures (as documented below), China?s credit boom has reached the point where countries typically encounter financial stress, which could spill over to international markets given the size of the Chinese economy. To better understand the associated risks, it is important to examine the drivers of China?s expansion in credit, the increasing complexity ...
Liberty Street Economics , Paper 20170227

Discussion Paper
Money Market Funds and the New SEC Regulation

On October 14, 2016, amendments to Securities and Exchange Commission (SEC) rule 2a-7, which governs money market mutual funds (MMFs), went into effect. The changes are designed to reduce MMFs? susceptibility to destabilizing runs and contain two principal requirements. First, institutional prime and muni funds?but not retail or government funds?must now compute their net asset values (NAVs) using market-based factors, thereby abandoning the fixed NAV that had been a hallmark of the MMF industry. Second, all prime and muni funds must adopt a system of gates and fees on redemptions, which can ...
Liberty Street Economics , Paper 20170320

Discussion Paper
Low Interest Rates and Bank Profits

The Fed?s December 2015 decision to raise interest rates after an unprecedented seven-year stasis offers a chance to assess the link between interest rates and bank profitability. A key determinant of a bank?s profitability is its net interest margin (NIM)?the gap between an institution?s interest income and interest expense, typically normalized by the average size of its interest-earning assets. The aggregate NIM for the largest U.S. banks reached historic lows in the fourth quarter of 2015, coinciding with the ?low for long? interest rate environment in place since the financial crisis. ...
Liberty Street Economics , Paper 20170621

Discussion Paper
Were Banks 'Boring' before the Repeal of Glass-Steagall?

Since the global financial crisis and Great Recession, many critics have called for regulatory and legislative reforms to restore a system of ?boring? banks constrained to traditional banking activities like deposit taking and lending. The narrative underlying this argument holds that the partial repeal of the Glass-Steagall Act in 1999 by the Gramm-Leach-Bliley Act enabled banks to expand into nontraditional activities such as securities trading and underwriting, thereby contributing to the financial crisis some ten years later. The implication is that if we could restore the Glass-Steagall ...
Liberty Street Economics , Paper 20170731

Discussion Paper
Were Banks Ever 'Boring'?

In a previous post, I documented that much of the expansion into nontraditional activities by U.S. banks began well before the passage of the Gramm-Leach-Bliley Act in 1999, the legislation that repealed much of the Glass-Steagall Act of 1933. The historical record actually contains many prior instances of the Glass-Steagall restrictions being circumvented, with nonbank firms allowed to operate as financial conglomerates and engage in activities that go beyond traditional banking. These broad industry dynamics might indicate that the business of banking tends to expand firm boundaries beyond ...
Liberty Street Economics , Paper 20170802

Discussion Paper
What Explains Shareholder Payouts by Large Banks?

On June 28, the Federal Reserve released the latest results of the Comprehensive Capital Analysis and Review (CCAR), the supervisory program that assesses the capital adequacy and capital planning processes of large, complex banking companies. The Fed did not object to any of the banks? capital plans, an outcome that was widely heralded as a signal that these banks would be able to increase payouts to their shareholders. And in fact, immediately following the release of the CCAR results, several large banks announced substantial increases in quarterly dividends and record-sized share ...
Liberty Street Economics , Paper 20171018

Discussion Paper
The ‘Banking Desert’ Mirage

Unbanked households are often imagined to live in urban neighborhoods devoid of banks, but is that really the case? Our map of U.S. banking deserts reveals that most are not in urban areas, where financial exclusion may be endemic, but in actual deserts?largely in the sparsely populated, rural West. Across states, we find that the share of the population in a banking desert is unrelated to the share that is unbanked. If distance from a bank is not what causes financial exclusion, then motivating banks to locate closer to the unbanked may not promote financial inclusion.
Liberty Street Economics , Paper 20180110

Discussion Paper
New Report Assesses Structural Changes in Global Banking

The Committee on the Global Financial System, made up of senior officials from central banks around the world and chaired by New York Fed President William Dudley, recently released a report on ?Structural Changes in Banking after the Crisis.? The report includes findings from a wide-ranging study documenting the significant structural adjustments in banking systems around the world in response to regulatory, technological, and market changes after the crisis, while also assessing their implications for financial stability, credit provision, and capital markets activity. It includes a new ...
Liberty Street Economics , Paper 20180202

Discussion Paper
Landing a Jumbo Is Getting Easier

The United States relies heavily on securitization for funding residential mortgages. But for institutional reasons, large mortgages, or ?jumbos,? are more difficult to securitize, and are instead usually held as whole loans by banks. How does this structure affect the pricing and availability of jumbo mortgages? In this post we show that the supply of jumbo mortgages has improved in recent years as banks have become more willing to take on mortgage credit risk on their own balance sheets.
Liberty Street Economics , Paper 20180214

Discussion Paper
Do Low Rates Encourage Yield Seeking by Money Market Funds?

The term ?reach for yield? refers to investors? tendency to buy riskier assets in hopes of securing higher returns. Do low rates on safe assets encourage such yield-seeking behavior, particularly among U.S. prime money market funds (MMFs)? In a forthcoming paper in the Journal of Financial Economics, I develop a model of MMF competition to understand whether competitive pressure leads these funds to reach for yield in a low-rate environment like the current one. I test the model?s predictions on the 2002-08 period and show that, after controlling for changes in risk premia, declines in ...
Liberty Street Economics , Paper 20180307

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