Research Exchange: December 2023

Selected Outside Research

The Secular Decline in Private Firm Leverage

This paper examines trends in firm leverage and investment since the Global Financial Crisis in relation to firm characteristics, using firm-level administrative tax data. The analysis finds dramatic reductions in private leverage, accompanied by lower investment, whereas leverage among public firms increased during this period. These patterns are not accounted for by changes in firm characteristics, but the decline in private firm leverage and investment is strongly related to increases in local area bank capital requirements. The findings “suggest that banks’ credit supply plays a prominent role in explaining the leverage pattern of private firms.”

Monetary Tightening, Commercial Real Estate Distress and U.S. Bank Fragility

Commercial real estate loans account for about a quarter of the assets of an average bank and about $2.7 trillion of aggregate bank assets. Using loan-level data, this study analyzes the effects on bank solvency risk of recent declines in CRE property values following higher interest rates and adoption of hybrid working patterns. The analysis suggests that about 14 percent of all CRE loans and 44 percent of office loans are in a “negative equity” position, such that their current property values are less than the outstanding loan balances. Additionally, “around one-third of all CRE loans and the majority of office loans may encounter substantial cash flow problems and refinancing challenges.” The implied rise in credit risk of CRE loans, combined with the decline in banks’ mark-to-market asset values following the monetary tightening of 2022, implies significant risk of bank insolvencies. To assess the risk of solvency bank runs induced by higher rates and credit losses, the study applies a financial stability measure (developed in a prior study) incorporating the impact of credit losses along with the effects of higher interest rates. The results suggest that CRE distress “can induce anywhere from dozens to over 300 mainly smaller regional banks joining the ranks of banks at risk of solvency runs.” Monetary Tightening, Commercial Real Estate Distress, and US Bank Fragility | NBER

The History of Nonbank Subsidiaries of Bank Holding Companies

Using a unique database that tracks the organizational structure of bank holding companies past and present over multiple decades, this blog post looks at how the population of nonbank subsidiaries of bank holding companies has evolved with respect to number, type and location (direct ownership by the holding company versus indirect ownership under a bank subsidiary) since 1990. The analysis shows that nonbank subsidiaries’ share of holding company assets and operating revenue has steadily increased, and that the number of subsidiaries that are investment funds has grown while the number of nonbank lending subsidiaries has declined. The analysis suggests the presence of “important conglomeration synergies to having both banks and NBFIs under the same organizational umbrella,” since consistently about four out of 10 nonbank subsidiaries are under indirect ownership, alongside the six out of 10 that are independent entities within the holding company. The Nonbank Shadow of Banks – Liberty Street Economics (

Failing Banks

Using panel data covering most U.S. commercial banks from 1863 through 2023, this paper studies the history of U.S. bank failures. The analysis demonstrates that failing banks are characterized by rising losses that often are tied to realized credit risk. It further documents that credit losses are typically preceded by rapid lending growth financed by non-core funding. The findings suggest that bank failures are highly predictable, even through heterogeneous environments including periods predating deposit insurance, a central bank, and broader safety net. In addition, the study constructs a new measure of elevated systemic risk, using micro-data on bank-level fundamentals, and shows that it forecasts the major historical waves of banking failures.

Internal and External Capital Markets of Large Banks

Within bank holding companies, commercial bank and dealer divisions have different investment opportunities, and they raise capital externally as well as actively sharing some capital internally. This paper studies the internal and external capital markets of large U.S. bank holding companies by developing and empirically testing a simple model where a bank division raises funding from both internal and external capital markets, subject to frictions. Empirically, marginal returns to dealer investment opportunities are measured using arbitrage spreads. The analysis finds that when spreads widen, the dealer raises additional capital through both internal and external markets. Three times more capital is raised internally than externally, implying that there are larger frictions to external capital, but both sources of additional capital respond slowly to investment opportunities.

What Do Lead Banks Learn from Leveraged Loan Investors?

In leveraged loan deals, lead banks often engage in a bookbuilding process by which they obtain information about investors’ valuation of the loan, prior to setting the final loan terms. This paper examines the content of information extracted through bookbuilding by lead banks in a loan syndicate. The analysis finds that pricing adjustments during bookbuilding are highly informative about investors’ required risk premium, whereby “a one-percentage-point increase in loan spread predicts a 0.8 percentage point higher excess return, a proxy for risk premium, over the first 3 months of secondary market trading.” More importantly, bookbuilding is also informative about borrower quality, as a one-percentage-point increase in loan spread also predicts a 3-percentage-point higher probability of subsequent default, implying that investors have private information about borrower quality that is unknown to the lead bank. What Do Lead Banks Learn from Leveraged Loan Investors? – Federal Reserve Bank of Chicago (

Job Loss, Credit Card Loans and the College Persistence Decision of U.S. Working Students

This study assesses the effect of involuntary job loss on student continuity in college and how continuity may be affected by the availability of credit card loans. Using data from the Current Population Survey (CPS) on a student’s enrollment status and labor market activities over the 16-month CPS survey window, the analysis finds that job loss increases the probability that a working college student leaves college before attaining a degree. However, the analysis also indicates that access to short-term credit through credit card loans buffers this liquidity effect. In particular, “by restricting credit supply to college students, the CARD Act of 2009 has inadvertently inhibited the ability of liquidity-constrained students to remain in college when their earnings unexpectedly fall, resulting in a stronger liquidity effect of job loss on college persistence over the last decade.” Job Loss, Credit Card Loans, and the College-persistence Decision of US Working Students – Federal Reserve Bank of Boston (

Are Rising Rents Raising Consumer Debt and Delinquency?

This study examines the sharp rise in rents since 2020 and how it has affected the financial status of renters versus that of homeowners. The analysis uses anonymized consumer credit record data merged with county measures of rent growth derived from a large national database comprising property management records. The study finds that rents grew by about 30 percent in the median sample county; that credit card balances have grown more sharply for renters in the past two years relative to homeowners; and that the gap between card balances of renters versus owners is wider in counties with relatively high rent growth. In addition, credit card delinquency has also risen in the past two years for renters relative to homeowners, and again the gap is greatest in counties where rents have grown the most. Overall, the findings are “consistent with the notion that rising rents may be contributing to recent increases in consumer debt and delinquency.”

Chart of the Month

Breakdown of Collateral Type Pledged at the Discount Window by Lendable Value

The chart shows the percentage of the lendable value of all collateral pledged by depository institutions that borrowed from the discount window between 2020Q4 and 2021Q3. Each quarter, the Federal Reserve releases data on discount window borrowing from two years prior. Depository institutions maintain pools of collateral at the Federal Reserve Banks to support borrowing if necessary; except in rare circumstances, they do not pledge additional assets at the time of borrowing. The data released by the Fed includes all the collateral pledged by the borrower. Each asset pledged is assigned a fair value against which a haircut is applied to determine lendable value. If a depository institution borrowed more than once during the sample period, only the collateral information from the last borrowing is used. Total collateral pledged by borrowers had lendable value of $917 billion. For more information, see the BPI note “Statistics on Collateral Pledged to the Discount Window” by Laura Suhr Plassman and Felipe Rosa, Nov. 20, 2023.

Featured BPI Research

The New Profit and Loss Attribution Tests: Not Ready for Prime Time

The market risk capital framework in the Basel proposal includes new statistical tests (Profit and Loss Attribution Tests) designed to evaluate the consistency of the profit and loss estimates generated by a bank’s risk management models with those produced by the bank’s trading desk models. If the risk management models are deemed inadequate based on these tests, the bank must cease using them for its market risk capital calculation and instead must use the standardized approach. This note describes important flaws with the proposed PLA tests. One major flaw is that they tend to fail more frequently when a bank improves its market risk management by hedging more effectively, thus penalizing better market risk management. Another flaw is that PLA test failures can be caused by economically small changes in P&L distributions and can occur randomly, implying that banks with the same risks do not necessarily get the same capital treatment. Considering the deficiencies described in this note, these tests should not be used to validate internal bank risk models for capital purposes, but they could be repurposed as additional reporting and diagnostic tools. The New Profit and Loss Attribution Tests: Not Ready for Prime Time – Bank Policy Institute (

The Long-Term Debt Proposal and Bank Profitability

The federal banking agencies have proposed a rule that would mandate U.S. banking organizations with $100 billion or more in total assets that are not GSIBs to issue long-term debt (LTD). The agencies’ notice of proposed rulemaking included a cost analysis, which found that shortfalls between banks’ existing LTD and the proposed required levels of LTD could result in an increase in pre-tax funding costs of $1.5 billion: $400 million for Category II and III banks, and $1.1 billion for Category IV banks. This rise in pre-tax funding costs is expected to cause a permanent decrease in aggregate net interest margins: 2 basis points for Category II-III banks and 5 basis points for Category IV banks. The analysis considers five factors that could significantly increase the estimated impact of the LTD proposal on bank funding costs, including (1) the effects of complying with the requirement at the subsidiary bank level; (2) the necessity of replenishing the liquidity coverage ratio at the holding company level; (3) the possible rise in risk-weighted assets stemming from the Basel proposal which would raise LTD requirements; (4) the need for banks to maintain management buffers; and (5) using individual bond spreads instead of CDS spreads to avoid an underestimation of bank funding costs. The note recommends that the Federal Reserve should tailor the LTD requirements, specifically for Category IV banks, to mitigate the adverse financial impact of the LTD proposal. The Long-Term Debt Proposal and Bank Profitability – Bank Policy Institute (

Our Assessment of the Federal Reserve’s Latest Semiannual Supervision and Regulation Report and Some Recommendations for Future Reports  

This note reviews and critiques the latest semiannual report on supervision and regulation released by the Federal Reserve. Two key takeaways from the latest report are that a larger percentage of large banking organizations receive unsatisfactory ratings compared to community and regional banks, and that lower overall ratings mostly are driven by concerns around governance and controls. However, the report lacks detailed information on the adverse supervisory findings for large financial institutions; providing more detail would improve transparency in supervision, showing whether supervisory activities are appropriately focused on the primary financial risks. A third key takeaway is that contingency funding plans are a supervisory priority. However, the report does not encourage banks to be prepared to use the discount window. The report also indicates that the Federal Reserve has made the supervision of interest rate and liquidity risk management at large banks a higher priority and intensified its monitoring of CBOs and RBOs that seem most vulnerable to funding pressures. Given that the sensitivity of deposit rates to changes in market rates and deposit outflows under stress is still a poorly understood issue, the Federal Reserve should take a cautious approach in addressing these issues, gathering more data and conducting further analysis prior to implementing new supervisory policies. Our Assessment of the Federal Reserve’s Latest Semiannual Supervision and Regulation Report and Some Recommendations for Future Reports – Bank Policy Institute (

Conferences & Symposiums

Measuring Cyber Risk in the Financial Institutions Sector
Massachusetts Institute of Technology and Federal Reserve Bank of Richmond (hybrid)
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An Economy that Works for All: Measurement Matters
Federal Reserve Bank of NY (hybrid)
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Symposium on the Tokenization of Real-World Assets and Liabilities
Office of the Comptroller of the Currency, Washington, D.C.
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8th Annual SIPA/BPI Bank Regulation Conference
Columbia University and Bank Policy Institute
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2024 Research Conference on Bank Regulation: Announcement and Call for Papers
Columbia University and Bank Policy Institute
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3/4/2024 – 3/7/2024
2024 National Interagency Community Reinvestment Conference
Portland, Oregon
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Consumer Research Symposium: Announcement and Call for Papers 
Federal Deposit Insurance Corporation, Arlington, VA
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Financial Stability Implications of Digital Assets Products and Activities: Stablecoins and Tokenization Federal Reserve Banks of Boston and New York (virtual)
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4/18/2024 – 4/19/2024
Inaugural Fintech and Financial Institutions Research Conference
University of Delaware and Federal Reserve Bank of Philadelphia: Announcement and Call for Papers
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Rethinking Optimal Deposit Insurance: Announcement and Call for Papers
Yale University
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5/2/2024 – 5/3/2024
7th Annual CFPB Research Conference: Announcement and Call for Papers
Consumer Financial Protection Bureau, Washington, D.C.
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5/9/2024 – 5/10/2024
Conference on Fixed Income Markets and Inflation: Announcement and Call for Papers
Federal Reserve Bank of San Francisco
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5/12/2024 – 5/14/2024
Boulder Summer Conference on Consumer Financial
Decisionmaking: Announcement and Call for Papers
Leeds School of Business, University of Colorado
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5/15/2024 – 5/16/2024
Mortgage Market Research Conference: Announcement and Call for Papers
Federal Reserve Bank of Philadelphia
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The 17th New York Fed/NYU Stern Conference on Financial Intermediation: Announcement and Call for Papers
New York City
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6/5/2024 – 6/7/2024
OCC Bank Research Symposium on Depositor Behavior, Bank Liquidity, and Run Risk: Announcement and Call for Papers
Office of the Comptroller of the Currency, Washington, D.C.
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OCC Bank Research Symposium on Depositor Behavior, Bank Liquidity, and Run Risk: Announcement and Call for Papers
Office of the Comptroller of the Currency, Washington, D.C.
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6/19/2024 – 6/21/2024
Economics of Financial Technology Conference: Announcement and Call for Papers
University of Edinburgh Business School
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The views expressed do not necessarily reflect those of the Bank Policy Institute’s member banks, and are not intended to be, and should not be construed as, legal advice of any kind.