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Discussion Paper
Why Do Banks Target ROE?
Santos, Joao A. C.; Pennacchi, George (2018-10-10)
Nonfinancial corporations focus on the growth in earnings per share (EPS) to benchmark their performance. Banks used to follow a similar practice, but starting in the late 1970s they began to emphasize return on equity (ROE) instead. In this blog post, we outline findings from our recent staff report, which argues that banks had an incentive to make this change when their charter values eroded owing to increased competition, and the incentive to change was magnified by risk-insensitive deposit insurance.
Liberty Street Economics , Paper 20181010

Discussion Paper
What Happens When Regulatory Capital Is Marked to Market?
Vickery, James; Fuster, Andreas (2018-10-11)
Minimum equity capital requirements are a key part of bank regulation. But there is little agreement about the right way to measure regulatory capital. One of the key debates is the extent to which capital ratios should be based on current market values rather than historical ?accrual? values of assets and liabilities. In a new research paper, we investigate the effects of a recent regulatory change that ties regulatory capital directly to the market value of the securities portfolio for some banks.
Liberty Street Economics , Paper 20181011

Discussion Paper
Liquidity Effects of Post-Crisis Regulatory Reform
Shachar, Or; Boyarchenko, Nina (2018-10-16)
The post-crisis regulatory reform efforts to improve capital and liquidity positions of regulated institutions provide incentives for banks to change not only the structure of their own balance sheets but also how they interact with their customers and other market participants more generally. A 2015 PwC study on global financial market liquidity, for example, noted that ?[a]s banks respond to the new regulatory environment, they have sought to make more efficient use of capital and liquidity resources, by reducing the markets they serve and streamlining their operations.? In this blog post, ...
Liberty Street Economics , Paper 20181016

Discussion Paper
Stressed Outflows and the Supply of Central Bank Reserves
Bush, Ryan; Martin, Antoine; Zobel, Patricia; Weed, Phillip; Kirk, Adam (2019-02-20)
Since the financial crisis, banking regulators around the world have been intensely aware of liquidity risk and, in part as a response, have introduced the Basel III liquidity regulation. Today, the world's largest banks hold substantial liquidity buffers comprising both securities and central bank reserves, to satisfy internal liquidity stress tests and minimum quantitative regulatory requirements. The appropriate level of liquidity buffers depends on the likely outflows in a market stress situation. In this post, we use public data to provide a rough estimate of stressed outflows that the ...
Liberty Street Economics , Paper 20190220

Discussion Paper
Selected Deposits and the OBFR
Sherman, Scott; Wessel, Timothy; Cipriani, Marco; Mookerjee, Romen; Cambron, Alyssa; Jones, Joshua; Solimine, Brett (2019-05-06)
The Federal Reserve Bank of New York recently decided to revise the composition of the Overnight Bank Funding Rate (OBFR), a reference rate measuring the cost banks face to borrow overnight in unsecured U.S. dollar-denominated money markets. Specifically, in addition to the federal funds and Eurodollar transactions currently comprising the OBFR, the OBFR now also includes overnight, interest-bearing demand deposits (at rates negotiated between the counterparties and excluding deposits payable on demand) booked within banks? U.S. offices, known as ?selected deposits.? In this post, we discuss ...
Liberty Street Economics , Paper 20190506

Discussion Paper
Did Subprime Borrowers Drive the Housing Boom?
Gerardi, Kristopher S.; Conklin, James; Frame, W. Scott; Liu, Haoyang (2020-02-26)
The role of subprime mortgage lending in the U.S. housing boom of the 2000s is hotly debated in academic literature. One prevailing narrative ascribes the unprecedented home price growth during the mid-2000s to an expansion in mortgage lending to subprime borrowers. This post, based on our recent working paper, “Villains or Scapegoats? The Role of Subprime Borrowers in Driving the U.S. Housing Boom,” presents evidence that is inconsistent with conventional wisdom. In particular, we show that the housing boom and the subprime boom occurred in different places.
Liberty Street Economics , Paper 20200226

Discussion Paper
How Does Supervision Affect Bank Performance during Downturns?
Kovner, Anna; Plosser, Matthew; Byambaa, Uyanga; Hirtle, Beverly (2020-04-08)
Supervision and regulation are critical tools for the promotion of stability and soundness in the financial sector. In a prior post, we discussed findings from our recent research paper which examines the impact of supervision on bank performance (see earlier post How Does Supervision Affect Banks?). As described in that post, we exploit new supervisory data and develop a novel strategy to estimate the impact of supervision on bank risk taking, earnings, and growth. We find that bank holding companies (BHCs or “banks”) that receive more supervisory attention have less risky loan ...
Liberty Street Economics , Paper 20200408

Discussion Paper
Bitcoin Is Not a New Type of Money
Martin, Antoine; Lee, Michael Junho (2020-06-18)
Bitcoin, and more generally, cryptocurrencies, are often described as a new type of money. In this post, we argue that this is a misconception. Bitcoin may be money, but it is not a new type of money. To see what is truly new about Bitcoin, it is useful to make a distinction between “money,” the asset that is being exchanged, and the “exchange mechanism,” that is, the method or process through which the asset is transferred. Doing so reveals that monies with properties similar to Bitcoin have existed for centuries. However, the ability to make electronic exchanges without a trusted ...
Liberty Street Economics , Paper 20200618

Speech
Operating global, acting local
Dahlgren, Sarah J. (2014-10-07)
Remarks at Institute of International Bankers Seminar on Risk Management and Regulatory/Examinations Compliance Issues, New York City.
Speech , Paper 146

Speech
Testimony on improving financial institution supervision: examining and addressing regulatory capture
Dudley, William (2014-11-25)
Testimony before the Senate Committee on Banking, Housing, and Urban Affairs Financial Institutions and Consumer Protection Subcommittee.
Speech , Paper 152

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