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Discussion Paper
Selection in Banking
Cetorelli, Nicola; Leonard, Douglas (2019-12-16)
Over the past thirty years, more than 2,900 U.S. banks have transformed from pure depository institutions into conglomerates involved in a broad range of business activities. What type of banks choose to become conglomerate organizations? In this post, we document that, from 1986 to 2018, such institutions had, on average, a higher return on equity in the three years prior to their decision to expand, as well as a lower level of risk overall. However, this superior pre-expansion performance diminishes over time, and all but disappears by the end of the 1990s.
Liberty Street Economics , Paper 20191216

Working Paper
Reconciling Orthodox and Heterodox Views on Money and Banking
Andolfatto, David (2018-10-09)
A wide range of heterodox theories claim that banks are special because they create money in the act of lending. Put another way, banks can create the funding they need ex nihilo, whereas all other agencies must first acquire the funding they need from other parties. Mainstream economic theory largely agrees with this assessment, but questions its theoretical and empirical relevance, preferring to view banks as one of many potentially important actors in the financial market. In this paper, I develop a formal economic model in an attempt to make these ideas precise. The model lends some ...
Working Papers , Paper 2018-27

Working Paper
The Reversal Interest Rate
Brunnermeier, Markus K.; Abadi, Joseph; Koby, Yann (2022-09-01)
The reversal interest rate is the rate at which accommodative monetary policy reverses andbecomes contractionary for lending. We theoretically demonstrate its existence in a macroeconomic model featuring imperfectly competitive banks that face financial frictions. When interest rates are cut too low, further monetary stimulus cuts into banks’ profit margins, depressing their net worth and curtailing their credit supply. Similarly, when interest rates are low for too long, the persistent drag on bank profitability eventually outweighs banks’ initial capital gains, also stifling credit ...
Working Papers , Paper 22-28

COVID-19 Exposes Mortgage Market Vulnerabilities that Led to Volatility, Fed Intervention
Frame, W. Scott; Steiner, Eva; McCartney, Brendan (2021-02-02)
The COVID-19-induced financial market shock in March 2020 significantly disrupted the market for agency mortgage-backed securities.
Dallas Fed Economics

Working Paper
The Information Value of Past Losses in Operational Risk
Curti, Filippo; Migueis, Marco (2023-01-06)
Operational risk is a substantial source of risk for US banks. Improving the performance of operational risk models allows banks’ management to make more informed risk decisions by better matching economic capital and risk appetite, and allows regulators to enhance their understanding of banks’ operational risk. We show that past operational losses are informative of future losses, even after controlling for a wide range of financial characteristics. We propose that the information provided by past losses results from them capturing hard to quantify factors such as the quality of ...
Finance and Economics Discussion Series , Paper 2023-003

Working Paper
Stablecoins: Growth Potential and Impact on Banking
Liao, Gordon Y.; Caramichael, John (2022-01-31)
Stablecoins have experienced tremendous growth in the past year, serving as a possible breakthrough innovation in the future of payments. In this paper, we discuss the current use cases and growth opportunities of stablecoins, and we analyze the potential for stablecoins to broadly impact the banking system. The impact of stablecoin adoption on traditional banking and credit provision can vary depending on the sources of inflow and the composition of stablecoin reserves. Among the various scenarios, a two-tiered banking system can both support stablecoin issuance and maintain traditional ...
International Finance Discussion Papers , Paper 1334

Discussion Paper
China’s Continuing Credit Boom
Dawson, Jeffrey B.; Rosenblum, Aaron; Etra, Alex (2017-02-27)
Debt in China has increased dramatically in recent years, accounting for roughly one-half of all new credit created globally since 2005. The country’s share of total global credit is nearly 25 percent, up from 5 percent ten years ago. By some measures (as documented below), China’s credit boom has reached the point where countries typically encounter financial stress, which could spill over to international markets given the size of the Chinese economy. To better understand the associated risks, it is important to examine the drivers of China’s expansion in credit, the increasing ...
Liberty Street Economics , Paper 20170227

Journal Article
Shadow banking and the crisis of 2007-08
Sanches, Daniel R. (2014-04)
In recent decades, institutions that function much like traditional banks have grown outside regulatory oversight. Yet, as Daniel Sanches explains, these so-called shadow banks are as vulnerable to runs as regular banks. Because banking crises can inflict lasting economic harm, economists are interested in tracing how the panic ensued in the shadow system.
Business Review , Issue Q2 , Pages 7-14

Journal Article
Banking Trends: The Growing Role of CRE Lending
DiSalvo, James; Johnston, Ryan (2016-07)
Commercial real estate has grown dramatically as a share of U.S. economic activity and is banks? largest lending category, particularly for small and midsize banks. It is also the riskiest part of bank portfolios. James DiSalvo and Ryan Johnston provide a primer. First in a series.
Economic Insights , Volume 1 , Issue 3 , Pages 15-21

Working Paper
To sell or to borrow: a theory of bank liquidity management
Kowalik, Michal (2014-12-01)
Research Working Paper , Paper RWP 14-18

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