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Working Paper
Fed-Driven Systemic Tail Risk: High-Frequency Measurement, Evidence and Implications
Yang, Xiye; Neely, Christopher J.; Erdemlioglu, Deniz (2025-05-27)
We develop a framework to measure market-wide (systemic) tail risk in the cross-section of asset returns. Using high-frequency data on individual U.S. stocks and sector-specific ETF portfolios, we estimate time-varying jump intensities and multi-asset tail risk around Fed policy announcements. While most FOMC announcements generate systemic left-tail risk, there is no evidence that macro announcements have a similar effect. The magnitude of the tail risk induced by Fed policy announcements varies over the business cycle, peaks during the global financial crisis and remains high during phases ...
Working Papers , Paper 2023-016

Report
The fragility of short-term secured funding markets
von Thadden, Ernst-Ludwig; Skeie, David R.; Martin, Antoine (2013)
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 ...
Staff Reports , Paper 630

Working Paper
The Financial Stability Implications of Digital Assets
Scotti, Chiara; Carapella, Francesca; Rappoport, David E.; Baughman, Garth; Swem, Nathan; Vardoulakis, Alexandros (2022-08)
The value of assets in the digital ecosystem has grown rapidly, amid periods of high volatility. Does the digital financial system create new potential challenges to financial stability? This paper explores this question using the Federal Reserve’s framework for analyzing vulnerabilities in the traditional financial system. The digital asset ecosystem has recently proven itself highly fragile. However adverse digital asset markets shocks have had limited spillovers to the traditional financial system. Currently, the digital asset ecosystem does not provide significant financial services ...
Finance and Economics Discussion Series , Paper 2022-058

Report
The Financial Stability Implications of Digital Assets
Azar, Pablo; Baughman, Garth; Carapella, Francesca; Gerszten, Jacob; Lubis, Arazi; Perez-Sangimino, JP; Rappoport, David E.; Scotti, Chiara; Swem, Nathan; Vardoulakis, Alexandros; Werman, Aurite (2022-09-01)
The value of assets in the digital ecosystem has grown rapidly amid periods of high volatility. Does the digital financial system create new potential challenges to financial stability? This paper explores this question using the Federal Reserve’s framework for analyzing vulnerabilities in the traditional financial system. The digital asset ecosystem has recently proven itself to be highly fragile. However, adverse digital asset market shocks have had limited spillovers to the traditional financial system. Currently, the digital asset ecosystem does not provide significant financial ...
Staff Reports , Paper 1034

Report
Discussion of “Systemic Risk and the Solvency-Liquidity Nexus of Banks”
Adrian, Tobias (2015-04-01)
Pierret (2015) presents empirical analysis of the solvency-liquidity nexus for the banking system, documenting that a shock to the level of banks? solvency risk is followed by lower short-term debt. Conversely, higher short-term debt Granger-causes higher solvency risk. These results point toward a tight interaction between solvency and liquidity risk over time. My comments are threefold. First, I suggest improving the identification of shocks in Pierret?s vector autoregressive setup. Second, I caution against using the quantitative results as the basis for setting policy. Third, I recommend ...
Staff Reports , Paper 722

Discussion Paper
Intermediary Leverage Cycles and Financial Stability
Adrian, Tobias; Boyarchenko, Nina (2013-11-20)
The financial crisis of 2007-09 highlighted the central role that financial intermediaries play in the propagation and amplification of shocks. Intermediaries increase leverage during the boom, which then makes them more vulnerable to adverse economic developments. In this post, we review evidence on the balance-sheet behavior of financial intermediaries and describe a channel that allows intermediaries to increase leverage during booms when asset market volatility tends to be low, which in turn forces them to dramatically reduce leverage once volatility increases. As shown during the ...
Liberty Street Economics , Paper 20131120

Working Paper
Systemic Tail Risk: High-Frequency Measurement, Evidence and Implications
Yang, Xiye; Neely, Christopher J.; Erdemlioglu, Deniz (2023-07-20)
We develop a new framework to measure market-wide (systemic) tail risk in the cross-section of high-frequency stock returns. We estimate the time-varying jump intensities of asset prices and introduce a testing approach that identifies multi-asset tail risk based on the release times of scheduled news announcements. Using high-frequency data on individual U.S. stocks and sector-specific ETF portfolios, we find that most of the FOMC announcements create systemic left tail risk, but there is no evidence that macro announcements do so. The magnitude of the tail risk induced by Fed news varies ...
Working Papers , Paper 2023-016

Discussion Paper
Financial Vulnerability and Macroeconomic Fragility
Nourbash, Ethan; Akinci, Ozge; Benigno, Gianluca; Del Negro, Marco; Queraltó, Albert (2023-05-22)
What is the effect of a hike in interest rates on the economy? Building on recent research, we argue in this post that the answer to this question very much depends on how vulnerable the financial system is. We measure financial vulnerability using a novel concept—the financial stability interest rate r** (or “r-double-star”)—and show that, empirically, the economy is more sensitive to shocks when the gap between r** and current real rates is small or negative.
Liberty Street Economics , Paper 20230522

Discussion Paper
Did Too-Big-To-Fail Reforms Work Globally?
Sarkar, Asani (2020-09-30)
Once a bank grows beyond a certain size or becomes too complex and interconnected, investors often perceive that it is “too big to fail” (TBTF), meaning that if the bank were to fail, the government would likely bail it out. Following the global financial crisis (GFC) of 2008, the G20 countries agreed on a set of reforms to eliminate the perception of TBTF, as part of a broader package to enhance financial stability. In June 2020, the Financial Stability Board (FSB), a sixty-eight-member international advisory body set up in 2009, published the results of a year-long evaluation of the ...
Liberty Street Economics , Paper 20200930

Report
Transformed Intermediation: Credit Risk to NBFIs, Liquidity Risk to Banks
Acharya, Viral V.; Cetorelli, Nicola; Tuckman, Bruce (2026-01-01)
We argue that the rapid asset growth of nonbank financial intermediaries (NBFIs) relative to banks is the outcome of transformations of risks between banks and NBFIs that increase the interconnectedness of the two sectors. These transformations are consistent with avoiding tighter, post-GFC bank regulation while harnessing the funding and liquidity advantages of bank deposit franchises and access to safety nets. Specifically, we show that banks fund NBFIs through senior loans and credit lines, which NBFIs use for acquiring junior credit claims, warehouse financing, and liquidity management. ...
Staff Reports , Paper 1176

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