Research Exchange: January 2024

Selected Outside Research

The Informational Centrality of Banks

This paper demonstrates that the equity and debt prices of large nonbank firms contain information about the future state of the banking system, which makes banks “informationally central”. The analysis further shows that the quantity of information revealed in banks’ equity and debt prices and the relative informativeness of equity versus debt vary over time. The analysis suggests that during the 2007-2009 financial crisis, debt prices were about 50 percent more informative than equity prices about the future state of the banking system, “partly due to investors’ fears that banks might not be able to refinance their debt”. The Informational Centrality of Banks | NBER

Bankruptcy Exemption of Repo Markets: Too Much Today for Too Little Tomorrow

Sale-and-repurchase (repo) contracts, by which financial intermediaries engage in short-term borrowing with securities as collateral, include “safe harbor” provisions that exempt creditors from an automatic stay in bankruptcy, enabling a creditor to proceed with liquidation of the collateral if the borrower enters bankruptcy. This paper evaluates the efficiency of this safe harbor structure. The discussion highlights a tradeoff whereby the safe harbor exemption enables financial intermediaries to raise greater liquidity and function with higher leverage during normal times, at “the cost of ex-post inefficiency when there are adverse aggregate shocks to the fundamental quality of collateral underlying the contracts.” The safe harbor exemption prompts creditors to engage in collateral liquidation at “fire-sale prices” in response to such shocks, which in turn can divert funds from real-sector lending and induce higher lending rates and “in the extremis, a credit crunch for the real sector”. In light of this “distributive externality”, the paper concludes that “not granting safe harbors, i.e., requiring an automatic stay on repo contracts in bankruptcy, can be not only ex-post optimal, but also ex-ante optimal, especially for illiquid collateral with high exposure to aggregate risk”. Bankruptcy Exemption of Repo Markets: Too Much Today for Too Little Tomorrow? | NBER

Effects of Bank Capital Requirements on Lending by Banks and Nonbank Financial Institutions

In 2011, the European Banking Authority conducted a “capital exercise,” which reviewed the capital positions of selected banks and subjected them to higher capital requirements. Using German credit registry data, this study examines the consequences of this exercise for lending by the directly affected banks and by other banks and nonbank financial institutions, thus highlighting potential effects of unexpected, material increases in bank capital requirements on lending activity. The results indicate that certain categories of NBFIs, including insurance companies, and factoring companies, as well as banks not subject to the capital exercise, expanded their corporate lending relative to the directly affected banks. The results further indicate that NBFIs expanded their credit activities in riskier and more competitive borrower segments. However, this expansion does not appear to have been financed through increased reliance on bank funding.

Destabilisation of Bank Deposits across Destinations: Assessment and Policy Implications

The vulnerability of depository institutions to rapid and large deposit outflows from banks has attracted increased attention from policymakers and academics following the March 2023 demises of Credit Suisse, SVB and other regional U.S. banks. Additional concerns around the stability of deposit funding are raised by the possible introduction of CBDC and possible inroads by stablecoins. This paper examines these deposit outflow vulnerabilities, with particular attention to where bank deposits can flow to and how the mechanics of deposit flows differ across possible destinations. The paper also reviews the “current and prospective future factors that may contribute to the observed increase of the speed and size of bank runs.” A key takeaway is that policy measures may help counter some of the factors contributing to these vulnerabilities, but that  “others, like the intensified competition between banks will inevitably stay, and bank balance sheet management and liquidity regulation need to accept the new normal” of somewhat less stable deposits. Destabilisation of bank deposits across destinations: assessment and policy implications (

Question Design and the Gender Gap in Financial Literacy

Financial literacy surveys that are based on a standard set of questions covering interest, inflation and investment diversification consistently find that women are less likely than men to answer the questions correctly, what has been termed the financial literacy gender gap. This note explores the extent to which the observed gender gap may reflect women’s greater propensity to respond “don’t know”—a response option typically offered—when answering the standard financial literacy questions. The analysis finds that the gender gap in financial literacy shrinks when the “don’t know” option is removed. Moreover, the analysis suggests that for both men and women, but more so for women, removing the “don’t know” option would increase the share of correct responses “beyond what we predict would occur if people were simply guessing.” The Fed – Question design and the gender gap in financial literacy (

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

This paper studies the effect of job loss on the college-persistence decision of US 18- to 24-year-old working college students and whether access to credit through credit card loans facilitates remaining in school, using the Current Population Survey (CPS) and other data sources. The study finds that job loss had minimal effects on working students’ college enrollment decision from 2000-01 to 2008-09. However, job loss was associated with an 18-percentage-point increase in the college dropout rate in the period spanning the 2009-10 through 2018-19 school years, when college students’ access to credit card loans had dropped dramatically due to restrictions imposed by the CARD Act of 2009. These findings suggest that “the liquidity effect of job loss on college persistence declines with student leverage of credit card loans” and that “credit card loans disproportionately increase student retention rates in post-secondary institutions whose enrollment includes a higher share of lower-income students.”
Job Loss, Credit Card Loans, and the College-persistence Decision of US Working Students – Federal Reserve Bank of Boston (

Buy Now, Pay Later: A Cross-Country Analysis

This articles provides a global overview of Buy Now, Pay Later programs, which allow consumers to divide the payment for a purchase into a few interest-free installments. It first presents an overview of the BNPL business model and how the benefits and costs of a transaction are allocated among the merchant, consumer and platform. In addition, it examines the growth of BNPL internationally, the demographic composition and risk profiles of BNPL consumers across countries. One key takeaway is that merchants pay high fees in exchange for transferring credit risk to the platforms and growing their customer base. Despite the high fees, platforms have faced profitability challenges due to high operating costs and rising credit losses. Another main finding is that BNPL consumers typically have a riskier credit profile than those of traditional consumer credit products, and typically are younger and less educated. The article also documents that BNPL uptake varies across countries and is greater in countries “with a robust e-commerce base, higher inflation and less stringent regulation” and in those “with a higher level of household debt and banking inefficiencies”. Buy now, pay later: a cross-country analysis (

Quantifying Financial Stability Risks for Monetary Policy

This article outlines a novel empirical approach to assessing the costs and benefits of monetary policies, The proposed approach is distinguished by integration of a risk management perspective into monetary policymaking, with explicit accounting for potential financial stability effects, whereby financial stability tradeoffs are introduced into the policy assessment through their direct effects on future inflation and economic activity. The approach is demonstrated with reference to the macroeconomic environment in 2020, when inflationary pressures started intensifying. During this period, the world’s major central banks on the one hand could “rapidly tighten monetary policy at the risk of fueling financial distress after years of ultra-low interest rates and balance sheet expansion, potentially amplifying the intended effects of the policy move on the real economy and inflation.” On the other hand, “they could take a more gradual approach to fighting inflation that would protect the financial system, but risk high inflation becoming entrenched.” Quantifying financial stability risks for monetary policy (

Creditors, Shareholders and Losers In Between: A Failed Regulatory Experiment

In the aftermath of the 2007-08 Global Financial Crisis, regulators of the world’s largest banks encouraged them to hold a new type of convertible bond instrument known as a “CoCo,” short for contingent convertible bond. These are designed to convert from debt into equity in the event that the bank is under financial stress. Many of the largest international banks have issued CoCos worth hundreds of billions of dollars. This paper argues that the “this regulatory experiment has failed” in practice and was conceptually flawed from the start. In particular, from a finance perspective, “providing more equity only stabilizes a wobbling bank in normal times”; once a bank faces a liquidity crisis, the equity infusion is of limited value as it cannot protect the bank against a run on deposits. Moreover, the triggering mechanism of a CoCo can have a “stigma effect” in that it can signal that a bank is near failure, thereby causing a run. The article also suggests reform proposals, consistent with these insights, that might potentially preserve the usefulness of these instruments, including that “the trigger mechanism should be used early, well before a liquidity crisis begins.” Creditors, Shareholders, and Losers In Between: A Failed Regulatory Experiment by Albert H. Choi, Jeffery Y. Zhang :: SSRN

Chart of the Month

Despite ongoing quantitative tightening, reserve balances are rising not falling

Since 2022, the asset side of the Federal Reserve balance sheet has been contracting, in line with the Fed’s quantitative tightening policy. During 2022, this was reflected on the liability side with a decline in reserve balances held at Federal Reserve Banks. However, during 2023, reserve balances have been rising while the volume of overnight reverse repurchase transactions has sharply declined, which reflects declining use of the Fed’s ON RRP facility by money market funds. The reasons for these changes are not known for sure. One possible factor is an increase in direct purchases of newly issued Treasury securities by money market funds, crowding out ON RRP activity. Another possible explanation is that money funds are lengthening the duration of their investments, and therefore reducing investments in overnight maturities now that interest rates are not rising. Lastly, the relative stability of reserve balances could indicate the banking system is already at or near the minimum level needed to satisfy liquidity needs, although the fact that money market rates have not risen relative to the Fed’s policy rates is evidence against this possibility.

Featured BPI Research

Deposit and Interest Rate Risk: Some Simple But Surprising Results

The bank failures in early 2023 demonstrated that banks’ reliance on their deposit franchise as a hedge for the interest rate risk posed by holding longer-term assets can prove ineffective when depositors become sufficiently concerned about the banks’ solvency. Motivated by this experience, this article explores the hedging properties of a deposit franchise. In particular, the analysis highlights that “depending on how deposit rates behave, longer-term assets may not be a good hedge for a deposit franchise even if the depositors do not run, at least from the perspective of insulating the economic value of equity (EVE) of the bank from interest rate shocks.” In addition, the analysis demonstrates that “a hedging strategy designed to minimize exposure of a bank’s net interest margin to interest rate shocks is ill-suited for hedging the bank’s EVE to those same shocks.” Deposit and Interest Rate Risk: Some Simple But Surprising Results – Bank Policy Institute (

Clear Recognition of the Discount Window Would Improve Liquidity Rules

The OCC’s Acting Comptroller Michael Hsu recently gave remarks at Columbia Law School discussing the importance of the Federal Reserve’s discount window in liquidity risk management, particularly in light of the 2023 bank failures of SVB and Signature Bank. Responding to these comments, this article emphasizes the need to explicitly recognize banks’ borrowing capacity at the discount window in liquidity regulations. Such recognition would make liquidity assessments more accurate, provide incentives for banks to be prepared to borrow, and help reduce the stigma associated with using the discount window. Moreover, the article suggests integrating this approach into the U.S. liquidity risk framework, which could facilitate the Federal Reserve’s balance sheet reduction efforts. Lastly, the article also stresses the need for a nuanced understanding of different types of uninsured deposits and their behavior under stress, advocating for input from bankers to inform the design of new short-term liquidity requirements. Clear Recognition of the Discount Window Would Improve Liquidity Rules – Bank Policy Institute (

Stability Pass-Through: Lessons From the Richmond Fed’s LOLR Support During the 1920 – 1921 Recession  

This article examines the Federal Reserve’s role as a lender of last resort during the 1920-1921 recession, drawing parallels to the recent bank failures of 2023. Focusing on the Richmond Fed’s response to the 1920-21 recession, the article highlights how the Fed provided crucial liquidity to member banks, particularly to those affected by the cotton price collapse. This intervention allowed banks to avoid selling assets at depressed prices and indirectly supported non-member banks, thereby stabilizing the entire banking system. By examining deposit and loan trends in Virginia banks, the article underscores the significance of Federal Reserve support in helping banks manage the risk of bank runs in times of distress, thereby facilitating economic recovery. In contrast, because SVB was not prepared to use the discount window to manage its deposit outflows, it was especially vulnerable to the unprecedented levels and speed of deposit outflows that caused its failure. Stability Pass-Through: Lessons From the Richmond Fed’s LOLR Support During the 1920 – 1921 Recession – Bank Policy Institute (

Comment on the New G30 Report 

The Group of Thirty, an organization of past and present leaders of central banks and other financial agencies around the world, released a new report in the beginning of January, which contains recommendations on managing bank failures and contagion, in light of the 2023 banking turmoil involving Silicon Valley Bank and other large institutions. Key recommendations include that all banks should maintain collateral at the discount window and reserve balances equal to uninsured deposits, and that the Fed should improve the efficiency of its collateral management operations. This article reviews the G30 report, highlighting the report’s emphasis on central bank lending in liquidity risk management as a positive development, while criticizing certain other recommendations. In particular, the article takes an unfavorable view of recommendations to curtail regulatory tailoring by bank size and to increase the frequency and intensity of supervisory reviews. The article also highlights misconceptions in the report regarding held-to-maturity securities and the fiscal costs of bank failures. In addition, it emphasizes a need for a fundamental reconsideration of liquidity regulations, in line with Federal Reserve initiatives that emphasize the significance of the discount window in banks’ contingency plans. Comment on the New G30 Report – Bank Policy Institute (

A Better Way to Assess the Economic Impact of the Basel Proposal  

The note critiques the U.S. banking agencies’ assessment of the economic impact of their Basel proposal and recommends ways in which the agencies can more comprehensively evaluate the Basel proposal’s impact on bank lending, trading and other financial intermediation activities. The note demonstrates that the Federal Reserve’s estimate that the average loan would increase by 3 basis points under the Basel proposal is based on an incomplete calculation, which omits a critical $1 trillion increase in risk-weighted assets (RWA) for operational risk related to fee income, known as the op risk services component. It also emphasizes the need for a more detailed, business-line-specific analysis in order to accurately gauge the proposal’s impact, as banks allocate capital at the business-line level. In particular, the note demonstrates that about a third of the omitted, $1 trillion increase in RWA is associated with lending-related business lines. By addressing these concerns, the authors believe a more comprehensive assessment would reveal a greater economic impact than currently estimated, potentially affecting banks’ diversification strategies and consumer costs in financial services. A Better Way to Assess the Economic Impact of the Basel Proposal – Bank Policy Institute (

Are Banks’ Operational Risks Significantly Affected by Climate Change?

This note applies results from a recent Federal Reserve working paper to estimate how much banks’ operational risk losses might be expected to increase under the climate risk stress test. The estimates indicate that the increased operational risk loss under the Fed climate scenario is modest even under very extreme scenarios. Overall, the analysis presented in this note suggests that the effect of climate change on banks’ operational risks is not a potential safety and soundness concern for the banking system, and that although climate change presents new risks for banks to measure and manage, these risks do not necessarily raise systemic risk issues. Are Banks’ Operational Risks Significantly Affected by Climate Change? – 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.