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Keywords:procyclicality OR Procyclicality 

Working Paper
Central Clearing and Systemic Liquidity Risk

By stepping between bilateral counterparties, a central counterparty (CCP) transforms credit exposure. CCPs generally improve financial stability. Nevertheless, large CCPs are by nature concentrated and interconnected with major global banks. Moreover, although they mitigate credit risk, CCPs create liquidity risks, because they rely on participants to provide cash. Such requirements increase with both market volatility and default; consequently, CCP liquidity needs are inherently procyclical. This procyclicality makes it more challenging to assess CCP resilience in the rare event that one or ...
Working Paper Series , Paper WP 2019-12

Working Paper
Central Clearing and Systemic Liquidity Risk

By stepping between bilateral counterparties, a central counterparty (CCP) transforms credit exposure. CCPs generally improve financial stability. Nevertheless, large CCPs are by nature concentrated and interconnected with major global banks. Moreover, although they mitigate credit risk, CCPs create liquidity risks, because they rely on participants to provide cash. Such requirements increase with both market volatility and default; consequently, CCP liquidity needs are inherently procyclical. This procyclicality makes it more challenging to assess CCP resilience in the rare event that one or ...
Finance and Economics Discussion Series , Paper 2020-009

Report
Benefits and Challenges of the “CECL” Approach

This note provides an overview of the Current Expected Credit Loss ("CECL") accounting approach for credit losses. It also discusses the potential benefits and challenges of the CECL approach to financial institutions and users of their financial statements.
Supervisory Research and Analysis Notes , Issue 01 , Pages 12

Working Paper
An Empirical Analysis of Futures Margin Changes: Determinants and Policy Implications

Margin regulation raises two policy concerns. First, an alignment of margins to volatility can amplify procyclicality, leading to a build-up of excess leverage in good times and a forced deleverage in bad times. Second, competition among central counterparties (CCPs) can result in lower margin levels in order to attract more trading volume, which is referred to as a "race to the bottom." Motivated by these issues, we empirically analyze the determinants of margin changes by using a data set of various futures margins from Chicago Mercantile Exchange (CME) Group. We first find that CME Group ...
Finance and Economics Discussion Series , Paper 2014-86

Working Paper
Fiscal Stimulus under Sovereign Risk

The excess procyclicality of fiscal policy is commonly viewed as a central malaise in emerging economies. We document that procyclicality is more pervasive in countries with higher sovereign risk and provide a model of optimal fiscal policy with nominal rigidities and endogenous sovereign default that can account for this empirical pattern. Financing a fiscal stimulus is costly for risky countries and can render countercyclical policies undesirable, even in the presence of large Keynesian stabilization gains. We also show that imposing austerity can backfire by exacerbating the exposure to ...
Working Papers , Paper 762

Working Paper
Fiscal Stimulus Under Sovereign Risk

The excess procyclicality of fiscal policy is commonly viewed as a central malaise in emerging economies. We document that procyclicality is more pervasive in countries with higher sovereign risk and provide a model of optimal fiscal policy with nominal rigidities and endogenous sovereign default that can account for this empirical pattern. Financing a fiscal stimulus is costly for risky countries and can render countercyclical policies undesirable, even in the presence of large Keynesian stabilization gains. We also show that imposing austerity can backfire by exacerbating the exposure to ...
International Finance Discussion Papers , Paper 1257

Working Paper
Central Clearing and Systemic Liquidity Risk

By stepping between bilateral counterparties, central counterparties (CCPs) transform credit exposure, thereby improving financial stability. But, large CCPs are concentrated and interconnected with major global banks. Moreover, although they mitigate credit risk, CCPs create liquidity risks, because they require participants to provide cash. Such requirements increase with market volatility; consequently, CCP liquidity needs are inherently procyclical. This procyclicality makes it more challenging to assess CCPs’ resilience in the rare event that one or more large financial institutions ...
Finance and Economics Discussion Series , Paper 2020-009r1

Report
Discussion of “An Integrated Framework for Multiple Financial Regulations”

A 2012 paper by Goodhart, Kashyap, Tsomocos, and Vardoulakis (GKTV) proposes a dynamic general equilibrium framework that provides a conceptual?and to some extent quantitative?framework for the analysis of macroprudential policies. The distinguishing feature of GKTV?s paper relative to any other on macroprudential policy is its study of a setting with multiple financial frictions that permits the analysis of multiple macroprudential policy tools at the same time. The modeling approach includes various market failures such as incomplete markets with heterogeneous agents, fire-sale ...
Staff Reports , Paper 583

Working Paper
Un-used Bank Capital Buffers and Credit Supply Shocks at SMEs during the Pandemic

Did banks curb lending to creditworthy small and mid-sized enterprises (SME) during the COVID-19 pandemic? Sitting on top of minimum capital requirements, regulatory capital buffers introduced after the 2008 global financial crisis (GFC) are costly regions of "rainy day" equity capital designed to absorb losses and provide lending capacity in a downturn. Using a novel set of confidential loan level data that includes private SME firms, we show that "buffer-constrained" banks (those entering the pandemic with capital ratios close to this regulatory buffer region) reduced loan commitments to ...
Finance and Economics Discussion Series , Paper 2021-043

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