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Journal Article
Volatility-selling strategies carry potential systemic cost
Investors have increasingly turned to stock market volatility-selling strategies based on the idea of selling implied volatility and buying it back later when it falls to a level more consistent with realized volatility.
AUTHORS: Chen, Jiaqi; Tindall, Michael
DATE: 2013

Working Paper
Liquidity backstops and dynamic debt runs
Liquidity backstops have important implications for financial stability. In this paper, we provide a microfoundation for the important role of liquidity backstops in mitigating runs (or, conversely, the role of the lack of liquidity backstops in exacerbating runs) based on a dynamic model of debt runs. We focus on the municipal bond markets for variable rate demand obligations (VRDOs) and auction rate securities (ARS). The different experiences in these markets during the recent financial crisis of 2007?09 provide a natural experiment to identify the value of a liquidity backstop in mitigating runs. Through structural estimation of the model, we show that the value of a liquidity backstop is about 14.5 basis points per annum. The results in this paper shed light on one central difference between shadow banks and traditional banks in terms of their differential access to public liquidity backstops.
AUTHORS: Wei, Bin; Yue, Vivian Z.
DATE: 2015-12-01

Working Paper
The Optimal Response of Bank Capital Requirements to Credit and Risk in a Model with Financial Spillovers
This paper studies optimal bank capital requirements in an economy where bank losses have financial spillovers. The spillovers amplify the effects of shocks, making the banking system and the economy less stable. The spillovers increase with banks? financial distortions, which in turn increase with banks? credit risk. Higher capital requirements dampen the current supply of banks? credit, but mitigate banks? future financial distortions. Capital requirements should be raised in response to both an expansion of banks? credit supply and an increase in the expected future credit risk of banks. They should be lowered close to one-to-one in response to bank losses.
AUTHORS: Occhino, Filippo
DATE: 2017-06-06

Working Paper
Tracing Out Capital Flows: How Financially Integrated Banks Respond to Natural Disasters
Multi-market banks reallocate capital when local credit demand increases after natural disasters. Following such events, credit in unaffected but connected markets declines by about 50 cents per dollar of additional lending in shocked areas, but most of the decline comes from loans in areas where banks do not own branches. Moreover, banks increase sales of more-liquid loans in order to lessen the impact of the demand shock on credit supply. Larger, multi-market banks appear better able than smaller ones to shield credit supplied to their core markets (those with branches) by aggressively cutting back lending outside those markets.
AUTHORS: Cortes, Kristle Romero; Strahan, Philip E.
DATE: 2014-09-18

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 decreases asset liquidation values. This, in turn, reduces loan demand, decreasing the interest rate further and generating a negative spiral. Overall, the allocation of credit is distorted and monetary stimulus can become ineffective even with significant interest rate drops.
AUTHORS: Choi, Dong Beom; Eisenbach, Thomas M.; Yorulmazer, Tanju
DATE: 2015-04-01

Discussion Paper
The financing experiences of nonemployer firms: evidence from the 2014 joint small business credit survey
Businesses without employees?or nonemployer firms?make up the majority of small businesses in the United States, but little is known about their financial lives, including their business financing needs and experiences. In this paper, we discuss findings from data on nonemployer firms in the 2014 Joint Small Business Credit Survey, a new annual survey by the Federal Reserve Banks of Atlanta, Cleveland, New York, and Philadelphia. Our results indicate that nonemployers use financing less than employers do. They hold less debt and apply for financing at lower rates, even when controlling for revenue size. The lower demand for credit appears to be a combination of a preference to avoid debt and a perception that nonemployers will be denied if they apply. Nonemployer applicants have more difficulty being approved and are likelier to seek financing from online lenders than are employer firms. We believe that the higher denial rates that nonemployers experience are at least partially explained by the differing attributes of the group. Nonemployers are younger, likelier to cite their poor credit score as a reason for denial, and less likely to be turning a profit than are employer firms.
AUTHORS: Rosoff, Stephanie; Terry, Ellie
DATE: 2015-07-01

Working Paper
Consumer risk appetite, the credit cycle, and the housing bubble
We explore the role of consumer risk appetite in the initiation of credit cycles and as an early trigger of the U.S. mortgage crisis. We analyze a panel data set of mortgages originated between the years 2000 and 2009 and follow their performance up to 2014. After controlling for all the usual observable effects, we show that a strong residual vintage effect remains. This vintage effect correlates well with consumer mortgage demand, as measured by the Federal Reserve Board?s Senior Loan Officer Opinion Survey, and correlates well to changes in mortgage pricing at the time the loan was originated. Our findings are consistent with an economic environment in which the incentives of low-risk consumers to obtain a mortgage decrease when the cost of obtaining a loan rises. As a result, mortgage originators generate mortgages from a pool of consumers with changing risk profiles over the credit cycle. The unobservable component of the shift in credit risk, relative to the usual underwriting criteria, may be thought of as macroeconomic adverse selection.
AUTHORS: Canals-Cerda, Jose J.; Breeden, Joseph L.
DATE: 2016-02-18

Working Paper
Debt Collection Agencies and the Supply of Consumer Credit
This paper ﬁnds that stricter laws regulating third-party debt collection reduce the number of third-party debt collectors, lower the recovery rates on delinquent credit card loans, and lead to a modest decrease in the openings of new revolving lines of credit. Further, stricter third-party debt collection laws are associated with fewer consumer lawsuits against third-party debt collectors but not with a reduction in the overall number of consumer complaints. Overall, stricter third-party debt collection laws appear to restrict access to new revolving credit but have an ambiguous eﬀect on the nonpecuniary costs that the debt collection process imposes on borrowers.
AUTHORS: Fedaseyeu, Viktar
DATE: 2020-02-12

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 highly pro cyclical. Also analyzed is the sensitivity of the A-IRB framework to model risk resulting from the selection, at the quantification stage, of a data sample period that does not include a period of significant economic downturn. The analysis illustrates important limitations and sensitivities of the A IRB framework and sheds light on the implicit restrictions embedded in recent regulatory guidance that underscore the importance of rating systems that remain stable over time and throughout business cycles.
AUTHORS: Canals-Cerda, Jose J.
DATE: 2017-04-19

Working Paper
Debt collection agencies and the supply of consumer credit
Supersedes Working Paper 13-38/R. The activities of third-party debt collectors affect millions of borrowers. However, relatively little is known about their impact on consumer credit. To study this issue, I investigate whether state debt collection laws affect the ability of third-party debt collectors to recover delinquent debts and if this, in turn, affects the amount of credit being provided. This paper constructs, from state statutes and session laws, a state-level index of debt collection restrictions and uses changes in this index over time to estimate the impact of debt collection laws on revolving credit. Stricter debt collection regulations appear to reduce the number of third-party debt collectors and to lower recovery rates on delinquent credit card loans. This, in turn, leads to fewer openings of credit cards.
AUTHORS: Fedaseyeu, Viktar
DATE: 2015-06-19

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