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Working Paper
Unintended Consequences of Regulating Central Clearing
Recent U.S. and European regulations promote centrally clearing derivatives to reduce complexity and systemic risk in the financial system. We argue that more clearing does not guarantee less systemic risk. We identify conditions under which the core clears less intensively than the periphery, which increases systemic risk by substituting multilateral netting for bilateral netting and making contagion less likely to start in the core but more likely to spread from the core. We study confidential derivatives regulatory data and find evidence of such clearing patterns. We further explore the ...
Working Paper
The Founding of the Federal Reserve, the Great Depression and the Evolution of the U.S. Interbank Network
Financial network structure is an important determinant of systemic risk. This paper examines how the U.S. interbank network evolved over a long and important period that included two key events: the founding of the Federal Reserve and the Great Depression. Banks established connections to correspondents that joined the Federal Reserve in cities with Fed offices, initially reducing overall network concentration. The network became even more focused on Fed cities during the Depression, as survival rates were higher for banks with more existing connections to Fed cities, and as survivors ...
Working Paper
Interbank Connections, Contagion and Bank Distress in the Great Depression
Liquidity shocks transmitted through interbank connections contributed to bank distress during the Great Depression. New data on interbank connections reveal that banks were much more likely to close when their correspondents closed. Further, after the Federal Reserve was established, banks? management of cash and capital buffers was less responsive to network risk, suggesting that banks expected the Fed to reduce network risk. Because the Fed?s presence removed the incentives for the most systemically important banks to maintain capital and cash buffers that had protected against liquidity ...