Search Results
Speech
Monetary, fiscal, and financial stability policy tools: are we equipped for the next recession?: remarks at the 2018 Economics Department Grossman Lecture, Colby College, Waterville, Maine, April 18, 2018
The focus of the talk was on tools that are available to policymakers once a significant adverse financial shock occurs.
Working Paper
The Failure of supervisory stress testing: Fannie Mae, Freddie Mac, and OFHEO
In the aftermath of the global financial crisis, policymakers in the United States and elsewhere have adopted stress testing as a central tool for supervising large, complex, financial institutions and promoting financial stability. Although supervisory stress testing may confer substantial benefits, such tests are vulnerable to model risk. This paper studies the risk-based capital stress test conducted by the Office of Federal Housing Enterprise Oversight (OFHEO) for Fannie Mae and Freddie Mac, the two government-sponsored enterprises (GSEs) that are central to the U.S. housing finance ...
Working Paper
Stressed Banks? Evidence from the Largest-Ever Supervisory Review
We study short-term and medium-term changes in bank risk-taking as a result of supervision, and the associated real effects. For identification, we exploit the European Central Bank's asset-quality review (AQR) in conjunction with security and credit registers. After the AQR announcement, reviewed banks reduce riskier securities and credit supply, with the greatest effect on riskiest securities. We find negative spillovers on asset prices and firm-level credit availability. Moreover, non-banks with higher exposure to reviewed banks acquire the shed risk. After the AQR compliance, reviewed ...
Speech
Testimony on improving financial institution supervision: examining and addressing regulatory capture
Testimony before the Senate Committee on Banking, Housing, and Urban Affairs Financial Institutions and Consumer Protection Subcommittee.
Discussion Paper
Are BHCs Mimicking the Fed's Stress Test Results?
In March, the Federal Reserve and thirty-one large bank holding companies (BHCs) disclosed their annual Dodd-Frank Act stress test (DFAST) results. This is the third year in which both the BHCs and the Fed have published their projections. In a previous post, we looked at whether the Fed’s and the BHCs’ stress test results are converging in the aggregate and found mixed results. In this post, we look at stress test projections made by individual BHCs. If the Fed’s projections are very different from a BHC’s in one year, do the BHC projections change in the following year to close this ...
Report
Stress testing effects on portfolio similarities among large US Banks
We use an expansive regulatory loan-level dataset to analyze how the portfolios of the largest US banks have evolved since 2011. In particular, we analyze how the commercial and industrial and commercial real estate loan portfolios have changed in response to stress-testing requirements stipulated in the 2010 Dodd-Frank Act. We find that the largest US banks, which are subject to stress testing, have become more similar since the current form of the stress testing was implemented in 2011. We also find that banks with poor stress test results tend to adjust their portfolios in a way that makes ...
Working Paper
Stress tests and information disclosure
Supersedes Working Paper 13-26 . We study an optimal disclosure policy of a regulator that has information about banks? ability to overcome future liquidity shocks. We focus on the following tradeoff: Disclosing some information may be necessary to prevent a market breakdown, but disclosing too much information destroys risk-sharing opportunities (the Hirshleifer effect). We find that during normal times, no disclosure is optimal, but during bad times, partial disclosure is optimal. We characterize the optimal form of this partial disclosure. We relate our results to the Bayesian persuasion ...
Journal Article
Resilience of Community Banks in the Time of COVID-19
Stress tests in December 2020 showed that the largest U.S. banks had strong capital levels and could continue to lend to households and businesses under hypothetical severe recessions. Assessing thousands of small community banks against similar criteria suggests that, while about one-fifth could fall below adequate capitalization, only a handful of those risk becoming insolvent. Overall, this is a reassuring view for small banks and their communities, suggesting that the risk of widespread bank failures leading to financial instability appears to be small.
Working Paper
Can We Take the “Stress” Out of Stress Testing? Applications of Generalized Structural Equation Modeling to Consumer Finance
Financial firms, and banks in particular, rely heavily on complex suites of interrelated statistical models in their risk management and business reporting infrastructures. Statistical model infrastructures are often developed using a piecemeal approach to model building, in which different components are developed and validated separately. This type of modeling framework has significant limitations at each stage of the model management life cycle, from development and documentation to validation, production, and redevelopment. We propose an empirical framework, spurred by recent developments ...