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 ...
Crisis Chronicles: Defensive Suspension and the Panic of 1857
Sometimes the world loses its bearings and the best alternative is a timeout. Such was the case during the Panic of 1857, which started when a prestigious bank in New York City collapsed, making all banks suddenly suspect. Banks, fearing a run on their gold reserves, started calling in loans from commercial firms and brokers, leading to asset sales at fire-sale prices and bankruptcies. By mid-October, banks in Philadelphia and New York suspended convertibility, meaning they would not allow gold to be withdrawn from their vaults even while all other banking services continued. Suspension then ...
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 ...
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 ...
Public disclosure and risk-adjusted performance at bank holding companies
This paper examines the relationship between the amount of information disclosed by bank holding companies (BHCs) and their subsequent risk-adjusted performance. Using data from the annual reports of BHCs with large trading operations, we construct an index of publicly disclosed information about the BHCs? forward-looking estimates of market risk exposure in their trading and market-making activities. The paper 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 disclosure ...
Design of contingent capital with a stock price trigger for mandatory conversion
Contingent capital (CC), a regulatory debt that must convert into common equity when a bank?s equity value falls below a specified threshold (a trigger), does not in general lead to a unique equilibrium in the prices of the bank?s equity and CC. Multiplicity or absence of equilibrium arises because economic agents are not allowed to choose a conversion policy in their best interests. The lack of unique equilibrium introduces the potential for price manipulation, market uncertainty, inefficient capital allocation, and unreliability of conversion. Because CC may not convert to equity in a ...
Once Upon a Time in the Banking Sector: Historical Insights into Banking Competition
How does competition among banks affect credit growth and real economic growth? In addition, how does it affect financial stability? In this blog post, we derive insights into this important set of questions from novel data on the U.S. banking system during the nineteenth century.
LIBOR: origins, economics, crisis, scandal, and reform
The London Interbank Offered Rate (LIBOR) is a widely used indicator of funding conditions in the interbank market. As of 2013, LIBOR underpins more than $300 trillion of financial contracts, including swaps and futures, in addition to trillions more in variable-rate mortgage and student loans. LIBOR's volatile behavior during the financial crisis provoked questions surrounding its credibility. Ongoing regulatory investigations have uncovered misconduct by a number of financial institutions. Policymakers across the globe now face the task of reforming LIBOR in the aftermath of the scandal and ...
The impact of network size on bank branch performance
Despite recent innovations that might have reduced banks' reliance on brick-and-mortar branches for distributing retail financial services, the number of U.S. bank branches has continued to increase steadily over time. Further, an increasing percentage of these branches are held by banks with large branch networks. This paper assesses the implications of these developments by examining a series of simple branch performance measures and asking how these measures vary, on average, across institutions with different branch network sizes. The key findings are that banks with 100 to 500 branches ...
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.