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Working Paper
The Collateral Premium and Levered Safe-Asset Production
Ross, Chase P. (2022-07-12)
Banks are vital suppliers of money-like safe assets, which they produce by issuing short-term liabilities and pledging collateral. But their ability to create safe assets varies over time as leverage constraints fluctuate. I present a model to describe private safe-asset production when intermediaries face leverage constraints. I measure bank leverage constraints using bank-intermediated basis trades. The collateral premium â€” a strategy long Treasuries used more often as repo collateral and short Treasuries used less often â€” has a positive expected return of 22 basis points per ...
Finance and Economics Discussion Series , Paper 2022-046

Working Paper
Collateralized Debt Networks with Lender Default
Chang, Jin-Wook (2019-11-26)
The Lehman Brothers' 2008 bankruptcy spread losses to its counterparties even when Lehman was a lender of cash, because collateral for that lending was tied up in the bankruptcy process. I study the implications of such lender default using a general equilibrium network model featuring endogenous leverage, endogenous asset prices, and endogenous network formation. The multiplex graph model has two channels of contagion: a counterparty channel of contagion and a price channel of contagion through endogenous collateral price. Borrowers diversify their lenders because of the counterparty risk, ...
Finance and Economics Discussion Series , Paper 2019-083

Working Paper
Collateral Runs
Vardoulakis, Alexandros; Infante, Sebastian (2018-04-04)
This paper models an unexplored source of liquidity risk faced by large broker-dealers: collateral runs. By setting different contracting terms on repurchase agreements with cash borrowers and lenders, dealers can source funds for their own activities. Cash borrowers internalize the risk of losing their collateral in case their dealer defaults, prompting them to withdraw it. This incentive creates strategic complementarities for counterparties to withdraw their collateral, reducing a dealer's liquidity position and compromising her solvency. Collateral runs are markedly different than ...
Finance and Economics Discussion Series , Paper 2018-022

Speech
Evolving consumer behavior: remarks at the National Retail Federation Annual Convention, Jacob K. Javits Convention Center, New York City
Dudley, William (2017-01-19)
Remarks at the National Retail Federation Annual Convention, Jacob K. Javits Convention Center, New York City.
Speech , Paper 232

Working Paper
Special Repo Rates and the Cross-Section of Bond Prices: the Role of the Special Collateral Risk Premium
D'Amico, Stefania; Pancost, N. Aaron (2018-12-03)
We estimate the joint term-structure of U.S. Treasury cash and repo rates using daily prices of all outstanding Treasury securities and corresponding special collateral (SC) repo rates. This allows us to derive a risk premium associated to the SC value of Treasuries and quantitatively link this premium to various price anomalies, such as the on-the-run premium. We show that a time-varying SC risk premium can explain between 74%?90% of the on-the-run premium, and is highly correlated with a number of other Treasury market anomalies. This suggests a commonality across these price anomalies, ...
Working Paper Series , Paper WP-2018-21

Working Paper
Emergency Collateral Upgrades
Macchiavelli, Marco; Carlson, Mark A. (2018-11-15)
During the 2008-09 financial crisis, the Federal Reserve established two emergency facilities for broker-dealers. One provided collateralized loans. The other lent securities against a pledge of other securities, effectively providing collateral upgrades, an operation similar to activities traditionally undertaken by broker-dealers. We find that these facilities alleviated dealers' funding pressures when access to repos backed by illiquid collateral deteriorated. We also find that dealers used the facilities, especially the ability to upgrade collateral, to continue funding their own illiquid ...
Finance and Economics Discussion Series , Paper 2018-078

Working Paper
Transparency and Collateral : Central versus Bilateral Clearing
Carli, Francesco; Carapella, Francesca; Antinolfi, Gaetano (2018-03-08)
Bilateral financial contracts typically require an assessment of counterparty risk. Central clearing of these financial contracts allows market participants to mutualize their counterparty risk, but this insurance may weaken incentives to acquire and to reveal information about such risk. When considering this trade-off, participants would choose central clearing if information acquisition is incentive compatible. If it is not, they may prefer bilateral clearing, when this choice prevents strategic default while economizing on costly collateral. In either case, participants independently ...
Finance and Economics Discussion Series , Paper 2018-017

Working Paper
Transparency and Collateral: The Design of CCPs' Loss Allocation Rules
Carli, Francesco; Carapella, Francesca; Antinolfi, Gaetano (2019-08)
This paper adopts a mechanism design approach to study optimal clearing arrangements for bilateral financial contracts in which an assessment of counterparty risk is crucial for efficiency. The economy is populated by two types of agents: a borrower and lender. The borrower is subject to limited commitment and holds private information about the severity of such lack of commitment. The lender can acquire information at a cost about the commitment of the borrower, which affects the assessment of counterparty risk. When truthful revelation by the borrower is not incentive compatible, the ...
Finance and Economics Discussion Series , Paper 2019-058

Working Paper
Debt Deflation Effects of Monetary Policy
Vardoulakis, Alexandros; Tsomocos, Dimitrios P.; Lin, Li (2014-05-07)
This paper assesses the role that monetary policy plays in the decision to default using a General Equilibrium model with collateralized loans, trade in fiat money and production. Long-term nominal loans are backed by collateral, the value of which depends on monetary policy. The decision to default is endogenous and depends on the relative value of the collateral to face value of the loan. Default results in foreclosure, higher borrowing costs, inefficient investment and a decrease in total output. We show that pre-crisis contractionary monetary policy interacts with Fisherian debt-deflation ...
Finance and Economics Discussion Series , Paper 2014-37

Working Paper
What Drives U.S. Treasury Re-use?
Infante, Sebastian; Saravay, Zack (2021-08-24)
We study what drives the re-use of U.S. Treasury securities in the financial system. Using confidential supervisory data, we estimate the degree of collateral re-use at the dealer level through their collateral multiplier : the ratio between a dealer's total secured funding and their outright holdings financed through secured funding. We find that Treasury re-use increases as the supply of available securities decreases, especially when supply declines due to Federal Reserve asset purchases. We also find that non-U.S. dealers' re-use increases when profits from intermediating cash are high, ...
Finance and Economics Discussion Series , Paper 2020-103r1

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