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Working Paper
Margin requirements, volatility, and market integrity: what have we learned since the crash?
This study assesses the state of the policy debate that surrounds the federal regulation of margin requirements. A relatively comprehensive review of the literature finds no undisputed evidence that supports the hypothesis that margin requirements can be used to control stock return volatility and correspondingly little evidence that suggests that margin-related leverage is an important underlying source of "excess" volatility. The evidence does not support the hypothesis that there is a stable inverse relationship between the level of Regulation T margin requirements and stock returns ...
Working Paper
Regulatory competition and the efficiency of alternative derivative product margining systems
Although margin requirements would arise naturally in the context of unregulated trading of clearinghouse-guaranteed derivative contracts, the margin requirements on U.S. exchange-traded derivative products are subject to government regulatory oversight. At present, two alternative methodologies are used for margining exchange-traded derivative contracts. Customer positions in securities and securities options are margined using a strategy-based approach. Futures, futures-options, and securities-option clearinghouse margins are set using a portfolio margining system. This study evaluates the ...
Journal Article
Should the US Issue a Central Bank Digital Currency?
If the web 3.0 requires a public ledger–based payments platform, central bank digital currency (CBDC) is unlikely to provide the digital currency needed to fuel the smart contracts of tomorrow. This payments dilemma can be solved by a hybrid digital currency that includes a new type of bank deposit as well as regulated private stablecoins, both of which clear and settle on a next-generation public ledger created and managed as a joint venture between banks and private stablecoin issuers. With this payments platform under Federal Reserve oversight, there would be no need for the Federal ...
Working Paper
Microeconomic sources of beta risk instability
Working Paper
Deposit insurance, bank incentives, and the design of regulatory policy
This study analyzes alternative bank regulatory polices within a theoretical framework that can encompass many policy design issues. Consequences of generalizing banks' investment and financing opportunities for results in the existing literature are examined. Under costless equity issuance, a narrow banking requirement costlessly resolves moral hazard and insurance pricing problems addressed in the literature. With costly equity, minimum capital requirements can be effective but optimal policy design is complicated by its dependence on equity issuance costs, heterogeneous bank investment ...
Working Paper
The pre-commitment approach: using incentives to set market risk capital requirements
This paper develops a model of bank behavior that focuses on the interaction between the incentives created by fixed-rate deposit insurance and a bank's choice of its loan portfolio and its market-traded financial instruments. The model is used to analyze the consequences of the Federal Reserve Board's proposed pre-commitment approach (PCA) for setting market risk capital requirements for bank trading portfolios. Under the PCA, a bank determines its own market risk capital requirement and is subject to a known regulatory penalty should its trading activities generate subsequent losses that ...