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Working Paper
The Community Reinvestment Act and the Profitability of Mortgage-Oriented Banks
The Community Reinvestment Act (CRA) requires lenders ``to help meet the credit needs of the local communities in which they are chartered, consistent with the safe and sound operation of such institutions.'' For proponents of efficient markets, the CRA is a threat to lender profitability. For others, the CRA has the potential to increase profitability. We examine the relative profitability of commercial banks that specialize in mortgage lending in lower-income neighborhoods or to lower-income borrowers using three different techniques, and find that lenders active in lower-income ...
Report
Uncovering covered interest parity: the role of bank regulation and monetary policy
We analyze the factors underlying the recent deviations from covered interest parity. We show that these deviations can be explained by tighter post-crisis bank capital regulations that made the provision of foreign exchange swaps more costly. Moreover, the recent monetary policy and related interest rate divergence between the United States and other major foreign countries has led to a surge in demand for swapping low interest rate currencies into the U.S. dollar. Given the higher bank balance sheet costs resulting from these regulatory changes, the increased demand for U.S. dollars in the ...
Working Paper
Choosing Stress Scenarios for Systemic Risk Through Dimension Reduction
Regulatory stress-testing is an important tool for ensuring banking system health in many countries around the world. Current methodologies ensure banks are well capitalized against the scenarios in the test, but it is unclear how resilient banks will be to other plausible scenarios. This paper proposes a new methodology for choosing scenarios that uses a measure of systemic risk with Correlation Pursuit variable selection, and Sliced Inverse Regression factor analysis, to select variables and create factors based on their ability to explain variation in the systemic risk measure. The main ...
Speech
Welcoming Remarks, Bank Structure Conference
Remarks by Michael H. Moskow President and Chief Executive Officer Federal Reserve Bank of Chicago. The Westin Hotel - 909 North Michigan Avenue, Chicago, Illinois 60611 - May 17, 2007.
Journal Article
Using Economic Experiments to Improve Contingent Convertible Capital Bonds
This Commentary describes experiments conducted to study alternative designs for a new type of financial security, CoCo bonds, that is being used in some European countries to manage the risk of financial crises. CoCo bonds are bank-issued debt that converts to equity when a trigger is breached. The conversion into equity serves to recapitalize a bank during financial distress, precisely when it is hardest to raise capital. The types of trigger used for all CoCos issued thus far are defined in terms of book capital. The experiments we conducted explore the effects of using triggers that are ...
Working Paper
Technological Change and Financial Innovation in Banking: Some Implications for Fintech
Financial intermediation has changed dramatically over the past 30 years, due in large part to technological change. The paper first describes the role of the financial system in a modern economy and how technological change and financial innovation can affect social welfare. We then survey the empirical literatures relating to several specific financial innovations, broadly categorized as new production processes, new products or services, or new organizational forms. In each case, we also include examples of significant fintech innovations that are transforming various aspects of banking. ...
Journal Article
The rising gap between primary and secondary mortgage rates
While mortgage rates reached historic lows during 2012, the spread between primary and secondary rates rose to very high levels. This trend reflected a number of factors that potentially affected mortgage originator costs and profits and restrained the pass-through from lower secondary rates to borrowers? funding costs. This article describes the mortgage origination and securitization process and the way in which originator profits are determined. The authors calculate a series of originator profits and unmeasured costs (OPUCs) for the period 1994 to 2012, and show that these OPUCs increased ...
Journal Article
Do big banks have lower operating costs?
This study examines the relationship between bank holding company (BHC) size and components of noninterest expense (NIE) in order to shed light on the sources of scale economies in banking. Drawing on detailed expense information provided by U.S. banking firms in the memoranda of their regulatory filings, the authors find a robust negative relationship between size and normalized measures of NIE. The relationship is strongest for employee compensation expenses and components of ?other? noninterest expense such as information technology and corporate overhead expenses. In addition, the authors ...
Journal Article
Public disclosure and risk-adjusted performance at bank holding companies
This article examines the relationship between the amount of information disclosed by bank holding companies (BHCs) and the BHCs? subsequent risk-adjusted performance. Using data from the annual reports of BHCs with large trading operations, the author constructs an index that quantifies the BHCs? public disclosure of forward-looking estimates of market risk exposure in their trading and market-making activities. She then examines the relationship between this index and subsequent risk-adjusted returns in the BHCs? trading activities and for the firm overall. The key finding is that more ...
Discussion Paper
Income Evolution at BHCs: How Big BHCs Differ
As noted in the introduction to this series, over the past two decades financial intermediation has evolved from a traditional, bank-centered system to one where nonbanks play an increasing role. For my contribution to the series, I document how the sources of bank holding companies? (BHC) income have evolved. I find that the largest BHCs have changed the most; they?ve shifted their mix of income toward providing new financial services and are earning an increasing share of income outside of their commercial bank subsidiaries. In this post, I summarize my study?s key findings.