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Jel Classification:G20 

Working Paper
ENDOGENOUS/EXOGENOUS SEGMENTATION IN THE A-IRB FRAMEWORK AND THE PRO-CYCLICALITY OF CAPITAL: AN APPLICATION TO MORTGAGE PORTFOLIOS

This paper investigates the pro-cyclicality of capital in the advanced internal ratings-based (A-IRB) Basel approach for retail portfolios and identifies the fundamental assumptions required for stable A-IRB risk weights over the economic cycle. Specifically, it distinguishes between endogenous and exogenous segmentation risk drivers and, through application to a portfolio of first mortgages, shows that risk weights remain stable over the economic cycle when the segmentation scheme is derived using exogenous risk drivers, while segmentation schemes that include endogenous risk drivers are ...
Working Papers , Paper 17-9

Working Paper
The Replacement of Safe Assets: Evidence from the U.S. Bond Portfolio

The expansion in financial sector "safe" assets, largely in the form of structured products from the U.S. and the Caribbean, in the lead-up to the global financial crisis has by now been fairly well documented. Using a unique dataset derived from security-level data on U.S. portfolio holdings of foreign securities, we show that since the crisis, it is mostly the foreign financial sector that appears to have met U.S. demand for safe and liquid investment assets by expanding its supply of debt securities. We also find a strong negative correlation between the foreign share of the U.S. ...
International Finance Discussion Papers , Paper 1123

Working Paper
Forecasting credit card portfolio losses in the Great Recession: a study in model risk

Credit card portfolios represent a significant component of the balance sheets of the largest US banks. The charge?off rate in this asset class increased drastically during the Great Recession. The recent economic downturn offers a unique opportunity to analyze the performance of credit risk models applied to credit card portfolios under conditions of economic stress. Specifically, we evaluate three potential sources of model risk: model specification, sample selection, and stress scenario selection. Our analysis indicates that model specifications that incorporate interactions between policy ...
Working Papers , Paper 14-10

Working Paper
The Hedging Channel of Exchange Rate Determination

We document the exchange rate hedging channel that connects country-level measures of net external financial imbalances with exchange rates. In times of market distress, countries with large positive external imbalances (e.g. Japan) experience domestic currency appreciation, and crucially, forward exchange rates appreciate relatively more than the spot after adjusting for interest rate differentials. Countries with large negative foreign asset positions experience the opposite currency movements. We present a model demonstrating that exchange rate hedging coupled with intermediary constraints ...
International Finance Discussion Papers , Paper 1283

Working Paper
Institutional Herding and Its Price Impact : Evidence from the Corporate Bond Market

Among growing concerns about potential financial stability risks posed by the asset management industry, herding has been considered as an important risk amplification channel. In this paper, we examine the extent to which institutional investors herd in their trading of U.S. corporate bonds and quantify the price impact of such herding behavior. We find that, relative to what is documented for the equity market, the level of institutional herding is much higher in the corporate bond market, particularly among speculative-grade bonds. In addition, mutual funds have become increasingly likely ...
Finance and Economics Discussion Series , Paper 2016-091

Working Paper
Trade partner diversification and growth: how trade links matter

We use network centrality measures to capture the trade partner diversification (TPD) of countries as revealed by their position in the international trade network. These measures are shown to enter long-run growth regressions positively and significantly, on top of trade openness and other control variables. Historical evidence based on threshold analyses shows that countries can use their trade networks to compensate for their low levels of financial depth, high levels of inflation, and low levels of human capital. This result is important especially for developing economies where, on ...
Globalization Institute Working Papers , Paper 192

Report
Watering a lemon tree: heterogeneous risk taking and monetary policy transmission

We build a general equilibrium model with financial frictions that impede monetary policy transmission. Agents with heterogeneous productivity can increase investment by levering up, which increases liquidity risk due to maturity transformation. In equilibrium, more productive agents choose higher leverage than less productive agents, which exposes the more productive agents to greater liquidity risk and makes their investment less responsive to interest rate changes. When monetary policy reduces interest rates, aggregate investment quality deteriorates, which blunts the monetary stimulus and ...
Staff Reports , Paper 724

Report
Local banks, credit supply, and house prices

I study the effects of an increase in the supply of local mortgage credit on local house prices and employment by exploiting a natural experiment from Switzerland. In mid-2008, losses in U.S. security holdings triggered a migration of dissatisfied retail customers from a large, universal bank, UBS, to homogeneous local mortgage lenders. Mortgage lenders located close to UBS branches experienced larger inflows of deposits, regardless of their investment opportunities. Using variation in the geographic distance between UBS branches and local mortgage lenders as an instrument for deposit growth, ...
Staff Reports , Paper 874

Working Paper
Transparency and Collateral : Central versus Bilateral Clearing

Bilateral financial contracts typically require an assessment of counterparty risk. Central clearing of these financial contracts allows market participants to mutualize their counterparty risk, but this insurance may weaken incentives to acquire and to reveal information about such risk. When considering this trade-off, participants would choose central clearing if information acquisition is incentive compatible. If it is not, they may prefer bilateral clearing, when this choice prevents strategic default while economizing on costly collateral. In either case, participants independently ...
Finance and Economics Discussion Series , Paper 2018-017

Journal Article
Stability of funding models: an analytical framework

With the recent financial crisis, many financial intermediaries experienced strains created by declining asset values and a loss of funding sources. In reviewing these stress events, one notices that some arrangements appear to have been more stable?that is, better able to withstand shocks to their asset values and/or funding sources?than others. Because the precise determinants of this stability are not well understood, gaining a better grasp of them is a critical task for market participants and policymakers as they try to design more resilient arrangements and improve financial regulation. ...
Economic Policy Review , Issue Feb , Pages 29-47

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