Selected Outside Research
When Forecasts Meet Reality: Assessing Climate Damage Functions
This paper develops and applies a novel method to evaluate climate damage functions—models that estimate the economic costs of climate change. The approach treats IMF World Economic Outlook forecasts, which incorporate economic fundamentals but not weather shocks, as a baseline and attributes part of the gap between those forecasts and actual GDP growth to climate effects. The paper then assesses how well various damage functions explain real-world outcomes by evaluating how consistently they explain this gap. The analysis finds that the best performing functions explain a modest share—up to about 6 percent—of the difference. So-called “bottom-up” models—those that estimate aggregate economic damage by building up from specific, measurable effects across individual sectors—and those that use smoothed climate data, tend to be the best performers. The most extreme damage functions predict economic contractions inconsistent with observed growth, suggesting that moderate, historically consistent damage functions are more reliable for near- to medium-term policy analysis.
When Forecasts Meet Reality: Assessing Climate Damage Functions
Understanding the Banking Sector Capital Framework in the European Union
This paper examines how the EU has implemented the Basel international bank capital standards along several key dimensions. First, it describes the adaptations and accommodations in place to enable compliance by banks of different sizes with varying business models. Second, using granular supervisory data, it analyzes the effect of EU-specific choices or calibrations (as distinguished from core Basel requirements) on minimum required capital for the set of “significant institutions” (those subject to direct ECB supervision under the Single Supervisory Mechanism). Third, it examines the dynamics of capital ratios since the EU’s 2013 adoption of the SSM, documenting the marked increase in CET1 and Tier 1 over this period. Finally, it compares the EU and U.S. implementations of international standards by conducting a model-based counterfactual exercise which assesses how minimum requirements of significant institutions would change if those banks were hypothetically subject to the key features of the current U.S. prudential framework. Two key takeaways are that EU requirements do not substantially deviate from the core Basel requirements (EU-specific additions and relaxations have relatively limited impact), and that the U.S. framework, if applied to large EU banks, would result in higher capital requirements on average.
Understanding the Banking Sector Capital Framework in the European Union
Disciplining Digital Risk: Evidence from Cyber Stress Tests
Cybersecurity has a “public good” aspect—a bank’s security investment benefits the whole financial system. In theory, this feature may lead banks to underinvest, since they don’t fully capture the systemic benefits of their own resilience efforts. This paper examines whether supervisory scrutiny alone—without capital penalties or public disclosure—can push banks to invest more in cybersecurity, based on analysis of results from the ECB’s 2024 Cyber Resilience Stress Test. Introduction of this stress test—a non-public, qualitative exercise assessing how well banks could respond to a sophisticated cyberattack, with no direct capital consequences—triggered a roughly 45 percent increase in cybersecurity investment across the sector as a whole. Moreover, the response was heavily concentrated among “laggard” banks—those investing less than their risk profiles warranted—which increased spending by about 80 percent relative to peers. The increased investment was driven by supervisory engagement intensity, not by actual cyber incidents or losses—banks subject to more rigorous oversight changed behavior most, while those receiving light-touch attention showed no significant change.
Disciplining Digital Risk: Evidence from Cyber Stress Tests
Pretend or Amend? On Evergreening in CRE
CRE markets have been under stress in recent years, and banks have responded by more frequently offering lenient loan extensions to troubled borrowers. This paper investigates whether in doing so banks were engaging in “extend-and-pretend” behavior—extending loan maturities simply to delay recognizing losses on their books. The paper first constructs a model demonstrating that a bank’s motivation can be inferred from the terms offered: extensions offered merely to delay loss recognition would feature more lenient terms for the weakest borrowers (since banks need to incentivize those borrowers not to default). By contrast, extensions driven by legitimate economic factors would feature stricter terms for weaker borrowers, since banks would demand credit enhancements to offset higher risk. The paper then analyzes supervisory data on bank CRE loan holdings to assess these competing motivations and finds that the data does not support an extend-and pretend explanation. As borrower conditions deteriorated after 2022, extension terms became stricter—riskier borrowers were increasingly required to pay down principal, provide additional guarantees or accept higher interest rates.
Pretend or Amend: On Evergreening in CRE
Regulatory Arbitrage within the Firm
This paper studies the differential response of bank holding companies across their bank and nonbank subsidiaries to changes in Basel III capital requirements that were phased in after 2015 for bank subsidiaries. The analysis demonstrates that BHCs with more complex organizational structures (more nonbank subsidiaries) built significantly more bank capital post-2015, but entirely through internal equity transfers and not new external capital. Nonbank subsidiaries paid higher dividends upstream to fund this, while banks retained earnings to accumulate buffers. The analysis also demonstrates that while bank subsidiaries became safer and more profitable, their nonbank affiliates shifted toward less collateralized lending (particularly consumer lending), experienced worse credit quality and became more vulnerable to shocks.
Regulatory Arbitrage within the Firm
Price-Segmented Beliefs and the U.S. Housing Boom
House price expectations and credit conditions are generally viewed as mutually reinforcing factors behind the U.S. housing boom of the 2000s, but because data on beliefs are lacking, disentangling these two factors is challenging. This paper provides evidence on how they mutually reinforced each other, based on estimating a statistical model of housing price changes using Zillow transaction data on repeat sales of the same properties, from which expected capital gains are backed out as a measure of buyer beliefs. The analysis covers three metro areas with meaningfully different housing market characteristics: San Diego, featuring constrained supply, low geographic elasticity; Phoenix, having high supply elasticity and rapid 2000s growth; and Cleveland, having high supply elasticity but experiencing depopulation. The key takeaway is that expected capital gains were higher for lower-priced homes than higher-priced ones across all locations studied. Since buyers of lower-priced homes are more sensitive to credit conditions, this pattern suggests the two drivers reinforced each other—loose credit amplified optimism precisely where it would have the most impact.
Price-Segmented Beliefs in the U.S. Housing Boom
External Finance Premium: Market Finance versus Bank Finance
This paper presents a comparative analysis of how firms’ financing costs vary across states within the U.S. and across euro area countries. Using daily bond-level data from 2006-2023, the paper shows that monetary policy surprises transmit homogeneously to corporate bond spreads regardless of whether the issuer is Italian or German, Californian or New Yorker. Geographic fragmentation does not appear in bond markets—the euro area corporate bond market turns out to be just as geographically integrated as that of the U.S., contrary to conventional wisdom. In contrast, the study finds that euro area bank loan spreads are strongly determined by the borrower’s country—the same firms pay country-determined spreads when they borrow from banks—so the integration is a property of the bond market itself, not the firms participating in it.
External Finance Premium: Market Finance versus Bank Finance
Dissecting Depositor Flight: An Analysis of the Spring 2023 Bank Failures
The bank runs that brought down Silicon Valley Bank, Signature Bank and First Republic Bank in the spring of 2023 were historically unprecedented in speed and scale. This paper provides a detailed analysis of these deposit runs using granular operational data collected by the FDIC from the three banks. One key takeaway is that “deposit insurance is stabilizing,” as demonstrated by the facts that insurance coverage was the single strongest predictor of whether a depositor stayed or fled. A second important finding is that even after regulators invoked the systemic risk exception—extending full deposit insurance to all deposits at SVB and SBNY—significant outflows continued, possibly reflecting depositor uncertainty. Other key findings are that the largest depositors were most likely to run, and that business depositors that ran mostly withdrew completely, leaving little or nothing behind in their operating accounts.
Dissecting Depositor Flight: An Analysis of the Spring 2023 Bank Failures
Featured BPI Research
Yield-Bearing Stablecoins Can Destroy Deposits
This note pushes back against the claim that yield-bearing stablecoins backed by Treasury bills will leave aggregate bank deposits unchanged. The claim is based on the reasoning that deposits simply move between banks when stablecoins are purchased, leaving the total unchanged. The author rejects this as incomplete analysis—tracing a single chain of transactions proves nothing; the right approach is to ask how the entire system re-equilibrates once everyone has adjusted their portfolios. Instead, the author turns to a model by economist Lin William Cong, in which yield-bearing stablecoins and deposits are perfect substitutes, meaning stablecoin growth reduces deposits dollar for dollar. In turn, projecting $4 trillion in stablecoins by 2030 (an outcome Cong cites) implies a net $3.7 trillion destruction of deposits and a 19 percent decline in lending—roughly $2.7 trillion. The note also points to a separate, Federal Reserve study, which estimated a more modest but still significant range of $65 billion to $1.26 trillion in destroyed deposits and reduced lending.
Yield-Bearing Stablecoins Can Destroy Deposits
BPI, European University Institute Conference Explores the Evolving Landscape of Bank Supervision and Regulation
The European University Institute, in collaboration with the Bank Policy Institute, held a research conference on May 18 that brought together academics, policymakers and market participants to examine the evolving landscape of bank supervision and regulation. This note summarizes the content of this conference. The conference program featured six research papers, each discussed by both an academic researcher and market participant, as well as a panel discussion about the opportunities and challenges associated with advancing a European Savings and Investment Union. Patrick Montagner, a member of the European Central Bank’s Supervisory Board, delivered the keynote address.
The Bank of England’s Updated Assessment of Optimal Bank Capital
The optimal amount of bank capital balances the tradeoffs between reducing the likelihood of bank failures and raising the cost of loans and other credit. At the end of 2025, the Bank of England updated its assessment of the optimal level of tier 1 capital in the banking system, lowering it from about 14 percent of risk-weighted assets to about 13 percent. Such an estimate has important implications for borrowing costs and economic growth. This revision represents a rare example of a major regulator re-examining an earlier estimate of optimal capital by applying the same broad framework to updated data and improved risk measurement, informed by years of post-crisis experience.
This note describes the Bank’s analytical framework for assessing optimal capital, how its original 2015 estimate was formed and what changed in the 2025 update and why. As the U.S. and European Union revisit their own capital frameworks, the Bank of England’s analysis provides a reference point.
The Bank of England’s Updated Assessment of Optimal Bank Capital
Outside Blog Posts and Research Notes of Interest
Monitoring High Credit Growth: The Link Between Local Deposits and CRE Lending
Stress and Strain from NBFIs to Banks
Foreign Currency Funding Risk and Global Financial Stability
Covered Savings Associations: A New Type of Depository Institution
Conferences & Symposiums
6/18/2026 – 6/19/2026
Fifth Conference on the International Roles of the U.S. Dollar: Announcement and Call for Papers
Federal Reserve Board, Washington, D.C.
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6/22/2026 – 6/23/2026
Fifth Conference on the International Roles of the U.S. Dollar: Announcement and Call for Papers
Federal Reserve Board, Washington, D.C.
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6/25/2026 – 6/26/2026
Eighth Annual Workshop on Financial Institutions Research: Announcement and Call for Papers
Federal Reserve Bank of St. Louis
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9/2/2026 – 9/3/2026
Edinburgh Financial Technology Conference: Announcement and Call for Papers
University of Edinburgh Business School, Edinburgh, Scotland
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9/10/2026 – 9/11/2026
Higher Education Finance Research Conference: Announcement and Call for Papers
Federal Reserve Bank of Philadelphia
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9/13/2026
Workshop on Innovations in Credit Scoring
Federal Reserve Bank of Philadelphia (Virtual)
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9/18/2026 – 9/19/2026
2026 Wharton-Chicago-Harvard Insolvency and Restructuring Conference: Announcement and Call for Papers
University of Pennsylvania, Philadelphia, PA
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9/24/2026 – 9/25/2026
Inflation Drivers and Dynamics Conference 2026: Announcement and Call for Papers
Federal Reserve Bank of Cleveland
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9/24/2026 – 9/25/2026
25th Annual Bank Research Conference: Announcement and Call for Papers
FDIC Center for Financial Research, Arlington, VA
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10/6/2026 – 10/7/2026
2026 Annual Community Banking Research Conference
Federal Reserve Bank of St. Louis
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10/9/2026 – 10/10/2026
2026 Wharton Conference on Liquidity and Financial Fragility
University of Pennsylvania, Philadelphia, PA
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10/29/2026 – 10/30/2026
Sixth Biennial Conference on Auto Lending: Announcement and Call for Papers
Federal Reserve Bank of Philadelphia
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11/5/2026 – 11/6/2026
2026 Federal Reserve Stress Testing Research Conference
Federal Reserve Bank of Boston
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11/13/2026
NY Fed-ECB Conference on Nonbank Financial Institutions: Announcement and Call for Papers
Federal Reserve Bank of New York
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11/19/2026 – 11/20/2026
International Conference on Payments and Securities Settlement: Announcement and Call for Papers
Deutsche Bundesbank (Conference Center in Eltville, Germany)
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11/19/2026 – 11/20/2026
2026 Financial Stability Conference
Federal Reserve Bank of Cleveland
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11/20/2026
Pacific Basin Research Conference: Announcement and Call for Papers
Federal Reserve Bank of San Francisco
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11/24/2026 – 11/25/2026
25th Annual Bank Research Conference: Announcement and Call for Papers
FDIC’s Center for Financial Research, Arlington, VA
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