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Discussion Paper
Did Subsidies to Too-Big-To-Fail Banks Increase during the COVID-19 Pandemic?
Sarkar, Asani (2021-02-11)
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 become distressed, the government would likely bail it out. In a recent post, I showed that the implicit funding subsidies to systemically important banks (SIBs) declined, on average, after a set of reforms for eliminating TBTF perceptions was implemented. In this post, I discuss whether these subsidies increased again during the COVID-19 pandemic and, if so, whether the increase accrued to large firms in all ...
Liberty Street Economics , Paper 20210211

Journal Article
The Financial Stability Implications of Digital Assets
Azar, Pablo D.; Baughman, Garth; Carapella, Francesca; Gerszten, Jacob; Lubis, Arazi; Perez-Sangimino, JP; Rappoport, David E.; Scotti, Chiara; Swem, Nathan; Vardoulakis, Alexandros; Werman, Aurite (2024-11-01)
Financial activity associated with digital assets has grown rapidly, raising concerns about financial stability risks. This article presents an overview of these risks, adapting the Federal Reserve’s framework for monitoring financial stability in the traditional financial system. The overview reveals that the observed fragility of digital assets is associated with several financial vulnerabilities: valuation pressures of crypto assets, funding risk in most crypto sectors, the widespread use of leverage, and a highly interconnected crypto ecosystem. However, to date, these vulnerabilities ...
Economic Policy Review , Volume 30 , Issue 2 , Pages 1-48

Report
Liquidity policies and systemic risk
Adrian, Tobias; Boyarchenko, Nina (2014-12-01)
The growth of wholesale-funded credit intermediation has motivated liquidity regulations. We analyze a dynamic stochastic general equilibrium model in which liquidity and capital regulations interact with the supply of risk-free assets. In the model, the endogenously time-varying tightness of liquidity and capital constraints generates intermediaries? leverage cycle, influencing the pricing of risk and the level of risk in the economy. Our analysis focuses on liquidity policies? implications for household welfare. Within the context of our model, liquidity requirements are preferable to ...
Staff Reports , Paper 661

Working Paper
The 2012 Eurozone Crisis and the ECB’s OMT Program: A Debt-Overhang Banking and Sovereign Crisis Interpretation
Occhino, Filippo (2015-06-02)
This paper develops a model to interpret the 2012 eurozone crisis and the ECB?s policy response. In the model, bank lending is distorted by debt overhang, banks hold sovereign bonds, and the government guarantees the bailout of bank creditors. A self-fulfilling pessimistic view of the economy can trigger a banking and sovereign crisis: with pessimistic economic expectations, the value of sovereign bonds declines, the bank risk of default rises, and the debt overhang distortion worsens; this leads to a contraction in bank lending and to a decline in economic activity, which confi rms the ...
Working Papers (Old Series) , Paper 1509

Working Paper
Model Risk of Risk Models
Valenzuela, Marcela; Danielsson, Jon; James, Kevin; Zer, Ilknur (2014-04-16)
This paper evaluates the model risk of models used for forecasting systemic and market risk. Model risk, which is the potential for different models to provide inconsistent outcomes, is shown to be increasing with and caused by market uncertainty. During calm periods, the underlying risk forecast models produce similar risk readings, hence, model risk is typically negligible. However, the disagreement between the various candidate models increases significantly during market distress, with a no obvious way to identify which method is the best. Finally, we discuss the main problems in risk ...
Finance and Economics Discussion Series , Paper 2014-34

Report
CRISK: Measuring the Climate Risk Exposure of the Financial System
Jung, Hyeyoon; Berner, Richard; Engle, Robert (2021-09-01)
We develop a market-based methodology to assess banks’ resilience to climate-related risks and study the climate-related risk exposure of large global banks. We introduce a new measure, CRISK, which is the expected capital shortfall of a bank in a climate stress scenario. To estimate CRISK, we construct climate risk factors and dynamically measure banks’ stock return sensitivity (that is, climate beta) to the climate risk factor. We validate the climate risk factor empirically and the climate beta estimates by using granular data on large U.S. banks’ loan portfolios. The measure is ...
Staff Reports , Paper 977

Discussion Paper
Liquidity Policies and Systemic Risk
Adrian, Tobias; Boyarchenko, Nina (2014-04-17)
One of the most innovative and potentially far-reaching consequences of regulatory reform since the financial crisis has been the development of liquidity regulations for the banking system. While bank regulation traditionally focuses on requiring a minimum amount of capital, liquidity requirements impose a minimum amount of liquid assets. In this post, we provide a conceptual framework that allows us to evaluate the impact of liquidity requirements on economic growth, the creation of systemic risk, and household welfare. Importantly, the framework addresses both liquidity requirements and ...
Liberty Street Economics , Paper 20140417

Report
CoVaR
Brunnermeier, Markus K.; Adrian, Tobias (2008)
We propose a measure for systemic risk, ?CoVaR, defined as the difference between the conditional value at risk (CoVaR) of the financial system conditional on an institution being in distress and the CoVaR conditional on the median state of the institution. Our ?CoVaR estimates show that characteristics such as leverage, size, maturity mismatch, and asset price booms significantly predict systemic risk contribution. We provide out-of-sample forecasts of a countercyclical, forward-looking measure of systemic risk and show that the 2006:Q4 value of this measure would have predicted more than ...
Staff Reports , Paper 348

Report
Is size everything?
Sarkar, Asani; Antill, Samuel (2018-08-01)
We examine sources of systemic risk (threshold size, complexity, and interconnectedness) with factors constructed from equity returns of large financial firms, after accounting for standard risk factors. From the factor loadings and factor returns, we estimate the implicit government subsidy for each systemic risk measure, and find that, from 1963 to 2006, only our big-versus-huge threshold size factor, TSIZE, implies a positive implicit subsidy on average. Further, pre-2007 TSIZE-implied subsidies predict the Federal Reserve?s liquidity facility loans and the Treasury?s TARP loans during the ...
Staff Reports , Paper 864

Working Paper
The Shift from Active to Passive Investing: Potential Risks to Financial Stability?
Anadu, Kenechukwu E.; Kruttli, Mathias S.; McCabe, Patrick E.; Osambela, Emilio; Shin, Chaehee (2018-08-27)
The past couple of decades have seen a significant shift in assets from active to passive investment strategies. We examine the potential effects of this shift on financial stability through four different channels: (1) effects on investment funds? liquidity transformation and redemption risks; (2) passive strategies that amplify market volatility; (3) increases in asset-management industry concentration; and (4) the effects on valuations, volatility, and comovement of assets that are included in indexes. Overall, the shift from active to passive investment strategies appears to be increasing ...
Supervisory Research and Analysis Working Papers , Paper RPA 18-4

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