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New York Fed
The Federal Reserve Bank of New York was incorporated in May 1914 and opened for business in November later that year. To commemorate the New York Fed’s centennial, take a look at the people and events that helped shape our history.

New York Fed

Bank-Intermediated Arbitrage

Nina Boyarchenko, Thomas M. Eisenbach, Pooja Gupta, Or Shachar, and Peter Van Tassel Since the 2007-09 financial crisis, the prices of closely related assets have shown persistent deviations—so-called basis spreads. Because such disparities create apparent profit opportunities, the question arises of why they are not arbitraged away. In a recent Staff Report, we argue that post-crisis changes to regulation and market structure have increased the costs to banks of participating in...

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Credit Market Choice

Nina Boyarchenko, Anna M. Costello, and Or Shachar Credit default swaps (CDS) are frequently credited with being the cause of AIG’s collapse during the financial crisis. A Reuters article from September 2008, for example, notes “[w]hen you hear that the collapse of AIG […] might lead to a systemic collapse of the global financial system, the feared culprit is, largely, that once-obscure […] instrument known as a credit default swap.” Yet, despite the prominent role that CDS played...

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Liquidity Effects of Post-Crisis Regulatory Reform

Nina Boyarchenko and Or Shachar The post-crisis regulatory reform efforts to improve capital and liquidity positions of regulated institutions provide incentives for banks to change not only the structure of their own balance sheets but also how they interact with their customers and other market participants more generally. A 2015 PwC study on global financial market liquidity, for example, noted that “[a]s banks respond to the new regulatory environment, they have sought to make more...

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Did Banks Subject to LCR Reduce Liquidity Creation?

Daniel Roberts, Asani Sarkar, and Or Shachar Banks traditionally provide loans that are funded mostly by deposits and thereby create liquidity, which benefits the economy. However, since the loans are typically long-term and illiquid, whereas the deposits are short-term and liquid, this creation of liquidity entails risk for the bank because of the possibility that depositors may “run” (that is, withdraw their deposits on short notice). To mitigate this risk, regulators...

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Leverage Rule Arbitrage

Dong Beom Choi, Michael Holcomb, and Donald P. Morgan Classic arbitrage involves the same asset selling at different prices; the leverage rule arbitrage we study here involves assets of different risk levels requiring the same amount of capital. The supplementary leverage ratio (SLR) rule, finalized by U.S. regulators in September 2014, requires a minimum ratio of capital to assets at the largest U.S. banks. The floor is higher for more systemically important banks, but not for banks...

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What Happens When Regulatory Capital Is Marked to Market?

Andreas Fuster and James Vickery Minimum equity capital requirements are a key part of bank regulation. But there is little agreement about the right way to measure regulatory capital. One of the key debates is the extent to which capital ratios should be based on current market values rather than historical “accrual” values of assets and liabilities. In a new research paper, we investigate the effects of a recent regulatory change that ties regulatory capital directly to the market...

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Why Do Banks Target ROE?

George Pennacchi and João A.C. Santos Nonfinancial corporations focus on the growth in earnings per share (EPS) to benchmark their performance. Banks used to follow a similar practice, but starting in the late 1970s they began to emphasize return on equity (ROE) instead. In this blog post, we outline findings from our recent staff report, which argues that banks had an incentive to make this change when their charter values eroded owing to increased competition, and the...

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Analyzing the Effects of CFPB Oversight

Andreas Fuster, Matthew Plosser, and James Vickery The Consumer Financial Protection Bureau (CFPB), created in 2011, is a key element of post-crisis U.S. financial regulation, as well as the subject of intense debate. While some have praised the agency, citing the benefits of consumer financial protection, others argue that its activities involve high compliance costs, increase uncertainty and legal risk, and ultimately reduce the availability of financial services for consumers....

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Changing Risk-Return Profiles

Richard Crump, Domenico Giannone, and Sean Hundtofte Are stock returns predictable? This question is a perennially popular subject of debate. In this post, we highlight some results from our recent working paper, where we investigate the matter. Rather than focusing on a single object like the forecasted mean or median, we look at the entire distribution of stock returns and find that the realized volatility of stock returns, especially financial sector stock returns, has strong...

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The Cost of Regulatory Capital

Matthew Plosser and João A.C. Santos Banks contend that equity capital is expensive and that an increase in capital requirements will adversely impact bank services, including the volume and cost of mortgages and corporate loans. For example, JPMorgan CEO Jamie Dimon said in 2017 that “It is clear that the banks have too much capital…and more of that capital can be safely used to finance the economy.” In a recent staff report, we compare the different treatments of short-term credit...

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