Search Results
Report
The fragility of short-term secured funding markets
This paper develops a model of financial institutions that borrow short term and invest in long-term assets that can be traded in frictionless markets. Because these financial intermediaries perform maturity transformation, they are subject to potential runs. We derive distinct liquidity, collateral, and asset liquidation constraints, which determine whether a run can occur as a result of changing market expectations. We show that the extent to which borrowers can ward off an individual run depends on whether it has sufficient liquidity, collateral, and asset liquidation capacity. These ...
Report
How do stock repurchases affect bank holding company performance?
Using data from bank holding company regulatory reports, we examine the relationship between stock repurchases and financial performance for a large sample of bank holding companies over the years 1987 to 1998. The primary result is that higher levels of repurchases in one year are associated with higher profitability and a lower share of problem loans in the subsequent year. This finding is robust to several different ways of measuring share repurchase activity. Our results appear to be driven primarily by bank holding companies with publicly traded stock, especially those companies whose ...
Report
Responses to the financial crisis, treasury debt, and the impact on short-term money markets
Several programs have been introduced by U.S. fiscal and monetary authorities in response to the financial crisis. We examine the responses involving Treasury debt?the Term Securities Lending Facility (TSLF), the Supplemental Financing Program, increases in Treasury issuance, and open market operations?and their impacts on the overnight Treasury general collateral repo rate, a key money market rate. Our contribution is to consider each policy in light of the others, both to help guide policy responses to future crises and to emphasize policy interactions. Only the TSLF was designed to ...
Speech
Fixing wholesale funding to build a more stable financial system
Remarks at the New York Bankers Association's 2013 Annual Meeting & Economic Forum, The Waldorf Astoria, New York City.
Briefing
Bank Resolution and the Fed’s New Standing Repo Facility
In July 2021, the Fed put a new lending program in place: the Standing Repo Facility. The program will likely impact the financial system in multiple ways. One specific area of influence is the process of resolution planning at large banking corporations. How the facility interacts with those plans will depend in part on guidance provided by regulators as resolution planning continues evolving.
Report
Trading risk and volatility in interest rate swap spreads
This paper examines how risk in trading activity can affect the volatility of asset prices. We look for this relationship in the behavior of interest rate swap spreads and in the volume and interest rates of repurchase contracts. Specifically, we focus on convergence trading, in which speculators take positions on a bet that asset prices will converge to normal levels. We investigate how the risks in convergence trading can affect price volatility in a form of positive feedback that can amplify shocks in asset prices. In our analysis, we see empirical evidence of both stabilizing and ...
Report
Liquidity and leverage
In a financial system in which balance sheets are continuously marked to market, asset price changes appear immediately as changes in net worth, prompting financial intermediaries to adjust the size of their balance sheets. We present evidence that marked-to-market leverage is strongly procyclical and argue that such behavior has aggregate consequences. Changes in dealer repurchase agreements (repos) -the primary margin of adjustment for the aggregate balance sheets of intermediaries - forecast changes in financial market risk as measured by the innovations in the Chicago Board Options ...
Report
Expected repo specialness costs and the Treasury auction cycle
Repo rates for the most recently issued or "on-the-run" securities often diverge from general repo rates. The purpose of this study is to convey that relatively sizable divergences in repo rates for on-the-run issues are normal repeating events for the Treasury market, rather than evidence of abnormal circumstances. The costs associated with these repo market premia are small for short holding periods and are sometimes offset by gains from declining cash market premia for longer holding periods. Moreover, repo specialness costs seem small when considered against the alternative of not ...
Discussion Paper
The Odd Behavior of Repo Haircuts during the Financial Crisis
Since the financial crisis began, there’s been substantial debate on the role of haircuts in U.S. repo markets. (The haircut is the value of the collateral in excess of the value of the cash exchanged in the repo; see our blog post for more on repo markets.) In an influential paper, Gorton and Metrick show that haircuts increased rapidly during the crisis, a phenomenon they characterize as a general “run on repo.” Consequently, some policymakers and academics have considered whether regulating haircuts might help stabilize the repo markets, for example, by setting a minimum level so ...
Speech
Introductory remarks at Workshop on \"Fire Sales\" as a Driver of Systemic Risk in Tri-Party Repo and Other Secured Funding Markets
Remarks at Workshop on "Fire Sales" as a Driver of Systemic Risk in Tri-Party Repo and Other Secured Funding Markets, Federal Reserve Bank of New York, New York City.