Selected Outside Research
The Rise in Deposit Flightiness and Its Implications for Financial Stability
Using bank and account‑level data from 1,500 institutions, this note shows that the risk of rapid deposit outflows, or “deposit flightiness,” has varied substantially over time. Flow sensitivity rose after the Global Financial Crisis, eased mid‑2010s, then soared to record highs between 2020 and 2022. The expansion of reserves during quantitative easing (QE) helps to explain the pattern: QE‑era inflows disproportionately attracted more rate‑sensitive deposits which later exited faster as policy rates climbed. A key takeaway is that central bank policies may influence the composition of banks’ deposits – when tightening follows periods of elevated reserves, outflows can be sharper – with effects mediated by banks’ asset choices and liquidity risk management.
The Rise in Deposit Flightiness and Its Implications for Financial Stability
When Margins Call: Liquidity Preparedness of Non-Bank Financial Institutions
This study develops a set of indicators and analytical tools to assess the liquidity preparedness of non-bank financial institutions (NBFIs) to margin calls from counterparties and associated network effects driving systemic risk. This framework is then applied to euro-area NBFIs during the March 2020 market turmoil and the 2022–23 monetary tightening. The analysis finds an increase in liquidity‑distressed entities during these episodes, which exhibited a comparatively high frequency and severity of distressed asset sales. What gets sold varies episodically – equities dominated in 2020; government bonds more often appeared among top sales during the monetary tightening – signaling context‑dependent pressures and behaviors. The study emphasizes the toolkit as complementary to system‑wide stress tests, whereby preparedness for margin‑driven liquidity needs can mitigate the risk of procyclical fire sales and systemic spillover effects.
When Margins Call: Liquidity Preparedness of Non-bank Financial Institutions
Fed Repo Operations and Dealer Intermediation
Using dealer‑level, daily supervisory data from September 2019–May 2020, this study examines the relationship between Federal Reserve repo operations and dealers’ borrowing and lending. The study finds that, in normal conditions, each $1 of Fed repo operations raised dealers’ total repo borrowing by $0.76 (with the remainder substituting for private borrowing) and raised lending by $0.53. During the March 2020 stress, a larger share of Fed repo substituted for private funding and on‑lending tilted toward affiliates. Regulatory constraints mattered: dealers with more headroom under the supplementary leverage ratio requirement had larger increases in borrowing and lending per Fed‑repo dollar. Overall, the Fed’s repo operations eased funding stress and sustained intermediation, with transmission shaped by balance‑sheet constraints and internal capital markets.
Fed Repo Operations and Dealer Intermediation
PIK Now and Pay Later – How Deferred Interest Reshapes Private Credit
This study documents and analyzes the inclusion of deferred interest (so-called “Payment-in-Kind” or PIK) provisions in loans offered by private credit lenders, whereby borrowers can roll interest payments into the outstanding loan principal. Drawing on quarterly loan‑level data from business development companies, the paper shows that PIK usage is associated with riskier loans and junior debt tranches and reliably signals subsequent deterioration: non‑accrual and bankruptcy risks rise if a borrower exercises PIK options. In addition, greater PIK usage is associated with slower asset and dividend growth – about 0.09 and 0.06 percentage points lower, respectively, for each 1 percent increase in PIK share – as well as tighter covenants on bank loans. Overall, the study frames PIK provisions as useful for borrowers facing temporary liquidity issues but cautions that sustained reliance on them may impair performance.
PIK Now and Pay Later – How Deferred Interest Reshapes Private Credit
Quantifying the Savings from the GSEs’ Home Retention Programs
This paper examines the cost effectiveness of the loss mitigation programs of the Government Sponsored Enterprises (GSEs), Fannie Mae and Freddie Mac, aimed at home retention for delinquent mortgage borrowers. The analysis demonstrates that loan modifications with reduced monthly payments (“Flex Mod”) and those with deferral of missed payments yield sizable cost savings relative to other either a property disposition or a traditional market‑rate modification (which rolls the existing loan balance plus missed payments into a new, market-rate loan). At the loan level, a completed home retention action cuts expected GSE costs by roughly $19,000 versus disposition, and by roughly $11,000 versus a traditional modification, once self‑cures and redefaults are counted. The paper also highlights procedural tweaks that could further improve cost-effectiveness.
Quantifying the Savings from the GSEs’ Home Retention Programs
Debt and Assets
Traditionally, corporate debt is viewed as either secured by specified assets; that is, “asset-based”, or “cash‑flow‑based”; that is, unsecured. This study rethinks that distinction, arguing that much unsecured debt is implicitly backed by assets, to an extent that varies with the firm’s financial condition and the macroeconomic environment. The study therefore recommends viewing corporate debt along a continuum of cash‑flow and asset backing, with the relative mix shifting over the cycle, and emphasizes the scope for future research, such as around the circumstances under which asset dependence dominates.
Does Mortgage Rate Lock-in Dampen Commercial Real Estate Busts?
It has been widely observed that the sharp rise in interest rates in 2022 led to a lock-in effect on residential housing markets, reducing housing turnover and property sales and increasing prices due to existing homeowners being unwilling to give up their low-interest rate mortgages. This paper investigates whether a commercial mortgage lock-in effect similarly may have prevented commercial real estate values from falling as much as they otherwise would have. Using securitized loan data, the paper finds that when market rates increase to 1 percentage point above a property’s contract rate, the 10‑year sale probability falls by nearly 20 percent on average and transaction prices for locked‑in properties rise by about 4 percent. Given the average rate advantages observed in late 2023 to late 2024 on existing loans, the estimates imply that lock‑in limited recent CRE price declines by around 8 percent on average.
Does Mortgage Rate Lock-in Dampen Commercial Real Estate Busts?
Technology Providers and Financial Stability: Overview of Risks and Regulatory Frameworks
Banks and financial markets operationally depend on technology‑focused third‑party service providers (TPSPs), ranging from core processors and payment platforms to cloud and critical data services. This paper examines the regulatory frameworks in place to address the operational and systemic risks that these dependencies entail. The discussion emphasizes that U.S. oversight is not adequately comprehensive: supervisors lean on bank‑led risk management and limited authority under the Bank Service Company Act, leaving gaps in visibility and response. Moreover, no dedicated macroprudential framework covers TPSP risks domestically, while international initiatives are in early implementation. In addition, the paper highlights a case study demonstrating potential systemic risks arising from a cyber or operational risk event at a TPSP and concludes that further research is needed to understand these vulnerabilities and how to identify and mitigate them.
Technology Providers and Financial Stability: Overview of Risks and Regulatory Frameworks
Fintech Innovations in Banking: Fintech Partnership and Default Rate on Bank Loans
This paper explores the potential for banks to improve their credit risk management, particularly regarding mortgage and credit card lending decisions, via expanded use of innovative fintech tools. This is accomplished by analyzing the effects of entry into fintech partnerships on bank lending outcomes using loan-level data collected from multiple proprietary and regulatory databases. The analysis finds that partnering banks increase credit‑card lines to consumers with low or missing scores, while repayment performance improves. In mortgages, partnering banks do not extend larger loans to nonprime borrowers, but default rates fall – consistent with improved screening. Pricing evidence also points to benefits of adopting fintech tools: post-adoption, banks offer relatively lower rates to creditworthy nonprime borrowers while maintaining higher premia for riskier ones.
Fintech Innovations in Banking: Fintech Partnership and Default Rate on Bank Loans
Stablecoin Growth – Policy Challenges and Approaches
This report presents an overview of the stablecoin market and describes key policy challenges posed by the growing presence of stablecoins in public blockchains and their expanding linkages to the traditional financial system. As with other crypto assets, stablecoins raise concerns around use for illicit activities and enforcement of anti-money laundering regulations. The continued growth of stablecoins and their major holdings of Treasury bills may have important implications for monetary policy and market volatility. The report also highlights significant financial stability concerns around stablecoins, including that despite their intended purpose of providing a stable value, they have exhibited frequent inability to trade exactly at par. Additionally, cross‑border use is climbing, raising concerns around the effectiveness of capital controls and foreign exchange regulations. The report concludes that the various policy concerns raised by stablecoins will require a coordinated response across jurisdictions, while maintaining technological neutrality in regulation to preserve a level playing field for market participants.
Stablecoin Growth – Policy Challenges and Approaches
Pay-by-Bank and the Merchant Payments Use Case: Benefits, Risks and Potential impacts on Consumer Payment Behaviors in the U.S.
This report examines “Pay-by-Bank,” an expanding alternative payment mechanism that involves the direct transfer of funds from a customer’s bank account into a merchant’s account over ACH or instant payment rails, facilitated by third-party service providers using open banking infrastructure. Pay-by-Bank uptake remains low but is rising: according to a recent study cited in this report, about 11 percent of U.S. adults made at least one open‑banking payment in the prior year, with usage notably higher among Gen Z (72 percent), millennials (66 percent) and higher income earners. While merchant economics can be compelling, fee structures and integration expenses vary so that merchant cost savings are context dependent. Consumer value will continue to compete with card rewards and credit, with liability allocation and fraud/dispute handling (especially on instant rails) a key consideration, whereby the trajectory of Pay-by-Bank will hinge on clear consumer‑protection and liability regimes.
Chart of the Month
The chart plots Bloomberg’s Mid-G spreads for two dollar-denominated, top-grade European Sovereign, Supranational, and Agency (SSA) benchmarks – European Investment Bank (EIB) 4.375% 10/10/2031, and KfW Bankengruppe (KfW) 1.75% 9/14/2029 – against matched-maturity U.S. Treasuries. Positive in early 2025, both series tightened through the spring and briefly turned negative in July. The move may reflect concerns over U.S. rising public debt, which have tempered the longstanding safe-haven appeal of Treasuries. At the same time, EIB and KfW have retained AAA ratings from major agencies – a distinction the U.S. lost in May – drawing the most risk-averse buyers to these issuers.
Featured BPI Research
Post-Crisis Regulatory Reforms and the Decline of Securitization
Securitization has not regained its pre‑2008 prominence; on an inflation-adjusted basis, asset-backed securitization has remained relatively flat over the past decade. The proportion of major consumer loan segments financed through securitization has been declining: credit‑card receivables, for example, have fallen from roughly one‑third of balances before the financial crisis to about 5 percent today, with similar declines for auto and student loans. The note primarily attributes this persistent malaise to post‑crisis regulations that raise the cost of securitization: Basel III’s “p‑factor” securitization surcharge, changes in accounting treatment, exclusion of senior securitization tranches from high‑quality liquid asset treatment under the liquidity coverage ratio and Dodd‑Frank’s uniform 5 percent risk‑retention requirement. The Treasury Department’s 2017 capital markets report urged targeted recalibration to these regulations – notably, lighter capital and liquidity haircuts for high‑quality asset pools as well as broader exemptions for well‑underwritten assets. Reviving securitization’s role in channeling credit hinges on policymakers adopting those still‑relevant recommendations.
Post-Crisis Regulatory Reforms and the Decline of Securitization
The Problems with “Capital Neutral”
“Capital neutral” has become popular regulatory shorthand, but this note argues it is conceptually vague and in practice largely unworkable. Rather than starting with a risk‑based assessment and letting optimal capital emerge from the analysis, a capital‑neutral exercise pre‑sets the total capital result and calibrates individual levels to hit that target. This inevitably “picks winners and losers”: for one bank’s requirement to fall, another’s must rise, inviting political trade‑offs instead of coherent calibration. This approach also serves to lock in existing distortions – such as duplicative coverage of market and operational risk across Basel III and the stress capital buffer – unless compensating increases are imposed elsewhere. The note also argues that predetermining an outcome and adjusting inputs to fit it would likely fail U.S. administrative‑law standards requiring evidence‑based rulemaking.
