Selected Outside Research
Bank Capital Requirements and Risk-Taking: Evidence from Basel III
This study examines the effects of changes in bank capital requirements—both tightening and loosening—on credit supply and risk-taking behavior, using loan-level data from Spain’s credit register matched with firm and bank balance sheet information. Two regulatory shifts are analyzed: the implementation of Basel III (which tightened capital requirements) and the subsequent introduction of an SME Supporting Factor (which relaxed them for loans to small and medium enterprises). Tighter capital requirements are found to reduce credit supply, but with ex-ante riskier firms experiencing a smaller reduction. In contrast, relaxation of capital requirements increased credit supply, but disproportionately benefitted safer firms. The findings highlight key trade-offs in capital regulation, as such policies not only influence the aggregate volume of lending but also shift its distribution across borrowers with different risk profiles.
Bank Capital Requirements and Risk-Taking: Evidence from Basel III
Bank Lending to Private Credit: Size, Characteristics, and Financial Stability Implications
U.S. banks have rapidly increased their lending to private credit entities—such as Business Development Companies (BDCs) and private debt funds—with committed credit lines growing at nearly 25 percent per year over the past five years, reaching about $95 billion by the end of 2024. Drawing on supervisory Y-14Q data and public BDC disclosures, this article highlights distinct features of these lines, including significantly higher utilization rates (56 percent compared to 19 percent for nonfinancial corporations) and wider interest spreads compared to lending to other nonbank financial institutions. Despite these characteristics, such loans exhibit lower default probabilities and delinquency rates. Stress testing suggests that these exposures pose minimal capital and liquidity risks to banks. The note also describes growing interconnections between banks and private credit vehicles—through origination partnerships, warehouse financing and risk-transfer arrangements. The note points to this interconnectedness, along with the overall growing indebtedness of the NBFI sector, as worthy of monitoring for emerging risks.
Bank Lending to Private Credit: Size, Characteristics, and Financial Stability Implications
Fintech Practices and Banking Regulation
Fintech partnerships with FDIC-insured banks to offer deposit-related products have prompted concerns related to consumer protection, regulatory oversight and financial stability, which have been exacerbated following the failure of the banking-as-a-service company Synapse. This note evaluates whether these fintech-offered products meet the requirements for FDIC insurance coverage under current rules. Based on a sample of 35 fintech firms that provide deposit services through bank partnerships, the analysis finds that these firms’ policies and practices often do not align with FDIC policy guidance, potentially placing insurance eligibility at risk. The paper also examines sweep networks used by some fintech companies to extend deposit coverage beyond the $250,000 limit, highlighting operational challenges, especially with respect to accurate and timely recordkeeping of end-customer information. The paper emphasizes the need for stronger regulatory oversight of these entities.
Fintech Practices and Banking Regulation
Post-Merger Divestitures, Switching Costs, and Market Dynamics
Post-merger branch divestitures are often required to alleviate competitive concerns as a condition for regulatory approval of a bank merger, but their effectiveness as a mitigation tool hinges on how the affected customers of the merging institutions respond to their home branch being sold off or closed. This study examines U.S. bank mergers between 1999 and 2018 to assess how divestitures affect local lending markets—specifically mortgage and small business lending—depending on product-specific switching costs. Results show that divestitures lead to meaningful reductions in merged banks’ combined lending shares, particularly for products with lower switching costs—such as securitized mortgages and small-volume lending to small business. In contrast, effects are muted for retained mortgages and large-volume small business loans. The analysis also indicates that divestitures implemented through branch sales, rather than closures, are more effective in preserving competitive conditions by limiting customer disruption.
Post-Merger Divestitures, Switching Costs, and Market Dynamics
Climate-Aware Credit Risk Capital
This paper proposes a comprehensive framework that incorporates both physical and transition climate risks into credit portfolio loss models alongside macroeconomic risk, based on a multi-factor credit risk modeling approach. The framework introduces joint macroeconomic-climate Monte Carlo simulations to estimate climate-adjusted credit risk metrics—including Expected Loss (EL), Value-at-Risk (VaR) and Economic Capital (EC). The analysis finds that integrating climate factors consistently increases all key portfolio risk measures, with the magnitude of the effects depending on the correlation between macroeconomic conditions and the frequency and severity of climate events across alternative scenarios. Notably, under procyclical scenarios where climate and economic downturns align, VaR and EC rise more sharply, while in countercyclical scenarios, increases are more concentrated in EL.
Climate-Aware Credit Risk Capital
Banking Is Getting Easier, but Is It Riskier?
Digital banking has reshaped many aspects of financial interaction, not only for individual consumers but also at a macro level, such as how interest-rate changes propagate through the financial system. This article summarizes recent research on transformative effects of digital banking. In particular, the discussion highlights the experience of the 2022‑23 rate-hike cycle, when fintech-enabled (online) banks offered higher rate increases and attracted deposits more effectively than traditional banks. This new dynamic brought forth by online banking amplifies monetary-policy transmission while also introducing greater deposit volatility and liquidity-management challenges. Researchers estimate that the heightened interest rate sensitivity of digital banking customers may increase their sensitivity to interest-rate shocks by up to 32 percent. The discussion also considers the implications of digital banking for the cyclicality of credit supply, the viability of bank branches and cost of in-person banking and consumer financial health.
Banking Is Getting Easier, but Is It Riskier?
Could the Growth of Private Credit Pose a Risk to Financial System Stability?
Private credit has grown rapidly over the past decade, approaching the loan volumes in some traditional business credit markets, and with total assets nearing $1 trillion as of 2023. Much of this expansion has been indirectly financed by banks, particularly through revolving credit lines to business development companies (BDCs) and other nonbank lenders. This paper explores the growth of private credit; banks’ role in funding this growth; similarities and differences between private credit and bank-originated loans; and implications of the rise of private credit for financial stability. The analysis highlights that banks’ exposure to private credit is secured and senior in the capital structure of private credit entities, and that these entities maintain substantial liquidity buffers, including undrawn line amounts. While these factors mitigate financial stability concerns, the discussion also points to a potential for underappreciated tail risk via correlated drawdowns under stress conditions.
Could the Growth of Private Credit Pose a Risk to Financial System Stability?
The Next-Generation Monetary and Financial System
This chapter of the BIS annual report asserts that banks and central banks face a pivotal opportunity arising from innovations in digital money and tokenized platforms. It argues that these innovations offer the potential to enhance efficiency while preserving trust—provided they build on the existing two-tier monetary system. The case is presented for a unified ledger that integrates tokenized central bank reserves, commercial bank deposits and government securities within a single settlement platform. This discussion highlights how, on the one hand, such an infrastructure could facilitate synchronous settlement, improve cross-border payments and securities issuance and automate collateral and margining processes. On the other hand, its efficacy depends on preserving three key features of the current system: singleness (all forms of money exchanged at par), elasticity (liquidity available when needed) and integrity (safeguards against misuse and illicit finance). The chapter also argues that stablecoins, despite their innovative elements, do not meet these criteria and are not suited to serve as the foundation for future monetary systems.
The Next-Generation Monetary and Financial System
Borrowers in the Shadows: The Promise and Pitfalls of Alternative Credit Data
Lenders have increasingly turned to alternative credit data to assess borrower risk and expand access to credit for the more than 45 million U.S. adults who lack traditional credit histories. This paper examines the consequences of using such data in subprime auto lending, a market largely dominated by nonbank lenders, finding that the use of alternative credit data in subprime auto lending could potentially exacerbate existing disparities in credit access.
Borrowers in the Shadows: The Promise and Pitfalls of Alternative Credit Data
Chart of the Month
Risk-weighted assets (RWA) adjust exposures for credit risk, whereas total leverage exposure (TLE) counts all on- and off-balance-sheet items at face value for the supplementary leverage ratio. As Federal Reserve Vice Chair for Supervision Michelle Bowman noted in her recent speech, the RWA-to-TLE ratio for the eight U.S. GSIBs has fallen from roughly 48 percent when the supplementary leverage ratio took hold in the mid-2010s to about 40 percent today—a pattern the chart confirms, with the ratio hovering near 48 percent through 2018, spiking above 50 percent during the 2020 SLR relief (when reserves and Treasuries were temporarily excluded from TLE), then plunging to 40 percent. Because reserves and Treasuries carry a zero risk weight but count fully in TLE, and the Fed’s successive rounds of QE have driven the level of reserves to astronomical levels, the leverage ratio has increasingly become the binding capital constraint. A lower RWA/TLE ratio therefore signals that large banks may be constrained from expanding low-risk market-making in U.S. Treasuries, with implications for market liquidity and financial stability.
Featured BPI Research
The Fed vs. the World: Our Central Bank’s Unique Distrust of Private Markets
In contrast to an emergent global consensus among central banks which emphasizes private sector engagement, the Federal Reserve continues to favor direct government involvement over private market mechanisms, primarily through its persistent use of a floor system for setting short-term rates. This note argues for enhanced engagement by the Federal Reserve with private sector interbank markets for carrying out monetary policy. It argues that the Fed’s current approach, where rates are anchored by the Fed’s interest rate on reserve balances (IORB), significantly diminishes interbank lending activity and erodes institutional expertise in liquidity management. It also entails heavy reliance on central bank resources, reflected in reserve balances currently exceeding $3 trillion, which exposes taxpayers to substantial interest rate risk. Accordingly, transitioning away from the floor system and reinvigorating private market participation would enhance the resilience, efficiency and overall health of U.S. money markets.
The Fed vs. the World: Our Central Bank’s Unique Distrust of Private Markets
Stress Test Results 2025: Volatile Outcomes Highlight Need for Reforms
This post examines the 2025 stress test results recently released by the Federal Reserve. These generated a smaller projected capital loss compared to last year, driven by stronger income projections and lower loan losses. The post argues that the Fed’s stress tests continue to produce significant year-over-year volatility across banks, which complicates capital planning and forces institutions to hold excess capital as an uncertainty buffer. The Federal Reserve has recently acknowledged the limitations of its stress testing framework that contribute to this volatility and is working to reduce it through averaging and other steps.
The 2025 DFAST Stress Test Results: Volatile Outcomes Highlight Need for Reforms
