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Jel Classification:G20 

Working Paper
Strategic Liquidity Mismatch and Financial Sector Stability

This paper examines whether banks strategically incorporate their competitors? liquidity mismatch policies when determining their own and how these collective decisions impact financial sector stability. Using a novel identification strategy exploiting the presence of partially overlapping peer groups, I show that banks? liquidity transformation activity is driven by that of their peers. These correlated decisions are concentrated on the asset side of riskier banks and are asymmetric, with mimicking occurring only when competitors are taking more risk. Accordingly, this strategic behavior ...
Finance and Economics Discussion Series , Paper 2019-082

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 ...
Working Papers , Paper 16-5

Report
The payment system benefits of high reserve balances

The policy measures taken since the financial crisis have greatly expanded the size of the Federal Reserve?s balance sheet and have thus raised the level of aggregate bank reserves as well. Over the same period there has been a significant shift in the timing of payments made over the Federal Reserve?s Fedwire Funds Service toward earlier settlement. This paper documents this timing change and presents regression results suggesting that the increase in overall reserve balances explains the vast majority of this development. The paper also discusses the benefits of high aggregate reserve ...
Staff Reports , Paper 779

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
Financial Stability Considerations for Monetary Policy: Empirical Evidence and Challenges

This paper reviews literature on the empirical relationship between vulnerabilities in the financial system and the macroeconomy, and how monetary policy affects that connection. Financial vulnerabilities build up over time, with both risk appetite and risk taking rising during economic expansions. To some extent, financial crises are predictable and have severe real economic consequences when they occur. Empirically it is difficult to link monetary policy to financial vulnerabilities, in part because financial cycles have long durations, making it difficult to separate effects of changes in ...
Finance and Economics Discussion Series , Paper 2022-006

Working Paper
Important Factors Determining Fintech Loan Default: Evidence from the LendingClub Consumer Platform

This study examines key default determinants of fintech loans, using loan-level data from the LendingClub consumer platform during 2007–2018. We identify a robust set of contractual loan characteristics, borrower characteristics, and macroeconomic variables that are important in determining default. We find an important role of alternative data in determining loan default, even after controlling for the obvious risk characteristics and the local economic factors. The results are robust to different empirical approaches. We also find that homeownership and occupation are important factors in ...
Working Papers , Paper 20-15

Working Paper
Relative Liquidity and Future Volatility

The main contribution of this paper is to identify the strong predictive power of the relative concentration of depth provision, rather than volume of orders, over volatility. To this end, we propose a new measure, relative liquidity (RLIQ), which extracts information from a limit order book distribution and captures the level of consensus on a security's trading price. Higher liquidity provision farther away from the best quotes, relative to the rest of the book, is associated with a disagreement on the current price and followed by high volatility. The relationship is robust to the ...
Finance and Economics Discussion Series , Paper 2014-45

Working Paper
Un-Networking: The Evolution of Networks in the Federal Funds Market

Using a network approach to characterize the evolution of the federal funds market during the Great Recession and financial crisis of 2007-2008, we document that many small federal funds lenders began reducing their lending to larger institutions in the core of the network starting in mid-2007. But an abrupt change occurred in the fall of 2008, when small lenders left the federal funds market en masse and those that remained lent smaller amounts, less frequently. We then test whether changes in lending patterns within key components of the network were associated with increases in ...
Finance and Economics Discussion Series , Paper 2015-55

Working Paper
Arbitrage Capital of Global Banks

We show that the role of unsecured, short-term wholesale funding for global banks has changed significantly in the post-financial-crisis regulatory environment. Global banks mainly use such funding to finance liquid, near risk-free arbitrage positions---in particular, the interest on excess reserves arbitrage and the covered interest rate parity arbitrage. In this environment, we examine the response of global banks to a large negative wholesale funding shock as a result of the U.S. money market mutual fund reform implemented in 2016. In contrast to past episodes of wholesale funding dry-ups, ...
Finance and Economics Discussion Series , Paper 2021-032

Report
The minimum balance at risk: a proposal to mitigate the systemic risks posed by money market funds

This paper introduces a proposal for money market fund (MMF) reform that could mitigate systemic risks arising from these funds by protecting shareholders, such as retail investors, who do not redeem quickly from distressed funds. Our proposal would require that a small fraction of each MMF investor's recent balances, called the "minimum balance at risk" (MBR), be demarcated to absorb losses if the fund is liquidated. Most regular transactions in the fund would be unaffected, but redemptions of the MBR would be delayed for thirty days. A key feature of the proposal is that large redemptions ...
Staff Reports , Paper 564

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