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Discussion Paper
The Economics of Bank Supervision: So Much to Do, So Little Time
Townsend, Robert M.; Lucca, David O.; Eisenbach, Thomas M. (2016-04-12)
While bank regulation and supervision are the two main components of banking policy, the difference between them is often overlooked and the details of supervision can appear shrouded in secrecy. In this post, which is based on a recent staff report, we provide a framework for thinking about supervision and its relation to regulation. We then use data on supervisory efforts of Federal Reserve bank examiners to describe how supervisory efforts vary by bank size and risk, and to measure key trade-offs in allocating resources.
Liberty Street Economics , Paper 20160412

Working Paper
Are Basel's Capital Surcharges for Global Systemically Important Banks Too Small?
von Hafften, Alexander H.; Passmore, Wayne (2017-02-21)
The Basel Committee promulgates bank regulatory standards that many major economies enact to a significant extent. One element of the Basel III capital standards is a system of capital surcharges for global systemically important banks (G-SIBs). If the purpose of the surcharges is to ensure the survival of G-SIBs through serious crises (like the 2007-09 financial crisis) without extraordinary public assistance, our analysis suggests that current surcharges are too low because of three shortcomings: (1) the Basel system underestimates the probability that a G-SIB can fail, (2) the Basel system ...
Finance and Economics Discussion Series , Paper 2017-021

Discussion Paper
The Growing Risk of Spillovers and Spillbacks in the Bank‑NBFI Nexus
Acharya, Viral V.; Cetorelli, Nicola; Tuckman, Bruce (2024-06-20)
Nonbank financial institutions (NBFIs) are growing, but banks support that growth via funding and liquidity insurance. The transformation of activities and risks from banks to a bank-NBFI nexus may have benefits in normal states of the world, as it may result in overall growth in (especially, credit) markets and widen access to a wide range of financial services, but the system may be disproportionately exposed to financial and economic instability when aggregate tail risk materializes. In this post, we consider the systemic implications of the observed build-up of bank-NBFI connections ...
Liberty Street Economics , Paper 20240620

Working Paper
Competition and Bank Fragility
Sengupta, Rajdeep; Marsh, W. Blake (2017-06-01)
Research Working Paper , Paper RWP 17-6

Report
The impact of supervision on bank performance
Hirtle, Beverly; Plosser, Matthew; Kovner, Anna (2016-03-01)
We explore the impact of supervision on the riskiness, profitability, and growth of U.S. banks. Using data on supervisors? time use, we demonstrate that the top-ranked banks by size within a supervisory district receive more attention from supervisors, even after controlling for size, complexity, risk, and other characteristics. Using a matched sample approach, we find that these top-ranked banks that receive more supervisory attention hold less risky loan portfolios and are less volatile and less sensitive to industry downturns, but do not have slower growth or profitability. Our results ...
Staff Reports , Paper 768

Discussion Paper
Bank-Intermediated Arbitrage
Boyarchenko, Nina; Gupta, Pooja; Eisenbach, Thomas M.; Van Tassel, Peter; Shachar, Or (2018-10-18)
Since the 2007-09 financial crisis, the prices of closely related assets have shown persistent deviations—so-called basis spreads. Because such disparities create apparent profit opportunities, the question arises of why they are not arbitraged away. In a recent Staff Report, we argue that post-crisis changes to regulation and market structure have increased the costs to banks of participating in spread-narrowing trades, creating limits to arbitrage. In addition, although one might expect hedge funds to act as arbitrageurs, we find evidence that post-crisis regulation affects not only the ...
Liberty Street Economics , Paper 20181018

Journal Article
The Evolution of US Bank Capital around the Implementation of Basel III
Siedlarek, Jan-Peter (2024-03-26)
Following the Global Financial Crisis of 2007–2008, the capital standards for banks operating in the United States were tightened as US banking regulators implemented the Basel III framework. This Economic Commentary briefly presents the key elements of Basel III relevant to bank capital and analyzes the timing of the evolution of regulatory capital ratios for US bank holding companies during that time. It shows that, on average, banks’ capital ratios increased notably between 2009 and 2012, plateauing before the new rules came into force. While larger and better-capitalized banks ...
Economic Commentary , Volume 2024 , Issue 07 , Pages 5

Report
Resource Allocation in Bank Supervision: Trade-offs and Outcomes
Townsend, Robert M.; Lucca, David O.; Eisenbach, Thomas M. (2016-03-01)
We estimate a structural model of resource allocation on work hours of Federal Reserve bank supervisors to disentangle how supervisory technology, preferences, and resource constraints impact bank outcomes. We find a significant effect of supervision on bank risk and large technological scale economies with respect to bank size. Consistent with macro-prudential objectives, revealed supervisory preferences disproportionately weight larger banks, especially post-2008 when a resource reallocation to larger banks increased risk on average across all banks. Shadow cost estimates show tight ...
Staff Reports , Paper 769

Journal Article
Why Do Supervisors Rate Banking Organizations?
Bergin, James P.; Stiroh, Kevin J. (2021-11-01)
This article addresses a question that at first may appear simple: why do supervisors rate banking organizations? Prudential supervisors have a long-standing practice of confidentially rating the condition of the firms that they supervise. These ratings are used for a variety of purposes and can have important consequences. The authors analyze the history and evolution of this practice and consider how the use of ratings advances the statutory and regulatory goals of supervision of banking organizations. They conclude with a discussion of the implications for the design and implementation of ...
Economic Policy Review , Volume 27 , Issue 3 , Pages 27

Report
Evaluating regulatory reform: banks’ cost of capital and lending
Van Tassel, Peter; Kovner, Anna (2018-06-01)
We examine the eﬀects of regulatory changes on banks’ cost of capital and lending. Since the passage of the Dodd-Frank Act, the value-weighted CAPM cost of capital for banks has averaged 10.5 percent and declined by more than 4 percent on a within-ﬁrm basis relative to ﬁnancial crisis highs. This decrease was much greater for the largest banks subject to new regulation than for other banks and ﬁrms. Over a longer twenty-year horizon, we ﬁnd that changes in the systematic risk of bank equity have real economic consequences: increases in banks’ cost of capital are associated with ...
Staff Reports , Paper 854

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