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Discussion Paper
Options of Last Resort
During the global financial crisis of 2007-08, collateral markets became illiquid, making it difficult for dealers to obtain short-term funding to finance their positions. As lender of last resort, the Federal Reserve responded with various programs to promote liquidity in these markets, including the Primary Dealer Credit Facility and the Term Securities Lending Facility (TSLF). In this post, we describe an additional and rarely discussed liquidity facility introduced by the Fed during the crisis: the TSLF Options Program (TOP). The TOP was unique among crisis-period liquidity facilities in ...
Discussion Paper
Banking Deserts, Branch Closings, and Soft Information
U.S. banks have shuttered nearly 5,000 branches since the financial crisis, raising concerns that more low-income and minority neighborhoods may be devolving into ?banking deserts? with inadequate, or no, mainstream financial services. We investigate this issue and also ask whether such neighborhoods are particularly exposed to branch closings?a development that, according to recent research, could reduce credit access, even with other branches present, by destroying ?soft? information about borrowers that influences lenders? credit decisions. Our findings are mixed, suggesting that further ...
Journal Article
Central Bank Lending in a Liquidity Crisis
Solvent banks may appear insolvent in the midst of a liquidity crisis, due to the plunge of their assets? value below their normal value. The responsibility of the central bank is to provide liquidity to the banks that would be solvent under normal economic conditions, at lending terms consistent with normal market conditions.
Discussion Paper
Crisis Chronicles: The Long Depression and the Panic of 1873
It always seemed to come down to railroads in the 1800s. Railroads fueled much of the economic growth in the United States at that time, but they required that a great deal of upfront capital be devoted to risky projects. The panics of 1837 and 1857 can both be pinned on railroad investments that went awry, creating enough doubt about the banking system to cause pervasive bank runs. The fatal spark for the Panic of 1873 was also tied to railroad investments—a major bank financing a railroad venture announced that it would suspend withdrawals. As other banks started failing, consumers and ...
Working Paper
Crises in the Housing Market: Causes, Consequences, and Policy Lessons
The global financial crisis of the past decade has shaken the research and policy worlds out of their belief that housing markets are mostly benign and immaterial for understanding economic cycles. Instead, a growing consensus recognizes the central role that housing plays in shaping economic activity, particularly during large boom and bust episodes. This article discusses the latest research regarding the causes, consequences, and policy implications of housing crises with a broad focus that includes empirical and structural analysis, insights from the 2000's experience in the United ...
Discussion Paper
Market Liquidity after the Financial Crisis
The possible adverse effects of regulation on market liquidity in the post-crisis period continue to garner significant attention. In a recent paper, we update and unify much of our earlier work on the subject, following up on three series of earlier Liberty Street Economics posts in August 2015, October 2015, and February 2016. We find that dealer balance sheets have continued to stagnate and that various measures point to less abundant funding liquidity. Nonetheless, we do not find clear evidence of a widespread deterioration in market liquidity.
Working Paper
A Price-Differentiation Model of the Interbank Market and Its Application to a Financial Crisis
Rate curves for overnight loans between bank pairs, as functions of loan values, can be used to infer valuation of reserves by banks. The inferred valuation can be used to interpret shifts in rate curves between bank pairs, for example, in response to a financial crisis. This paper proposes a model of lending by a small bank to a large monopolistic bank to generate a tractable rate curve. An explicit calibration procedure for model parameters is developed and applied to a dataset from Mexico around the 2008 financial crisis. During the crisis, relatively small banks were lending to large ...
Discussion Paper
Turnover in Fedwire Funds Has Dropped Considerably since the Crisis, but It's Okay
The Fedwire Funds Service is a large-value payment system, operated by the Federal Reserve Bank of New York, that facilitates more than $3 trillion a day in payments. Turnover in Fedwire Funds, the value of payments made for every dollar of liquidity provided, has dropped nearly 75 percent since the crisis. Should we be concerned? In this post, we explain why turnover has dropped so much and argue that it is, in fact, a good thing.
Discussion Paper
Dealer Participation in the TSLF Options Program
Our previous post described the workings of the Term Securities Lending Facility Options Program (TOP), which offered dealers options for obtaining short-term loans over month- and quarter-end dates during the global financial crisis of 2007-08. In this follow-up post, we examine dealer participation in the TOP, including the extent to which dealers bid for options, at what fees, and whether they exercised their options. We also provide evidence on how uncertainty in dealers’ funding positions was related to the demand for the liquidity options.
Speech
Shelter from the Storm: Psychological Safety and Workplace Culture during the Coronavirus Pandemic
Keynote Address for the 6th Annual Culture and Conduct Forum for the Financial Services Industry – 'Culture, Conduct and COVID-19'.