Selected Outside Research
Buy Now Pay Later…On Your Credit Card
“Buy now, pay later” is a credit product, typically associated with unregulated FinTech companies, that enables consumers to defer payments interest-free into a small number of installments. This study offers empirical analysis of this growing credit market segment using a new, unique dataset from the U.K. The analysis demonstrates that in 2021, almost 20 percent of transactions by BNPL firms ultimately were transferred to active credit cards with a typical interest rate of 20 percent. Moreover, this transition to credit card balances is found to be “most prevalent among younger consumers and in the most deprived geographies.” Thus, the analysis “raises doubts on consumers’ ability to pay for BNPL.” Read More ⇨
How Interconnected Are Cryptocurrencies and What Does This Mean for Risk Measurement?
To the extent that the cryptocurrency markets are interconnected, the risk of a single currency depends not only on its own idiosyncratic characteristics but also on the volatility of other currencies and on the degree of spillover, with spillover defined as propagation of variations in the price or volatility of a digital currency to other cryptocurrencies in the market. This article examines how individual cryptocurrencies are interconnected via prices and volatility spillovers, using a large set of digital currency prices and volatilities. The analysis finds that the cryptocurrency market is “extremely interconnected,” implying that “most of the variations in the prices in the cryptocurrency market are the results of the market’s spillovers and only a small fraction can be ascribed to the idiosyncratic characteristics of individual digital currencies.” In other words, “most of the market volatility is the result of the linkages that amplify and reverberate any price movements in the market.” Read More ⇨
Bank Access to Federal Reserve Accounts and Payment Systems
This article examines the Federal Reserve’s decision process for granting access to its accounts and payment services. It documents the Federal Reserve’s longtime practice of limiting access for riskier banks and the lack of consistency across Reserve Banks regarding risk tolerances. The article also analyzes recent, novel account applications and highlights the confusion surrounding them. It attributes this confusion to a lack of clarity in statutes, regulations, and Federal Reserve policies about how banks should apply for an account, what information they should provide, and who decides which banks are legally eligible. Key takeaways are that “the Federal Reserve needs a transparent framework for evaluating access requests” but that “the Federal Reserve’s recently proposed guidelines, which consist primarily of a risk identification framework, do not go far enough.” Read More ⇨
The Bright Side of Transparency: Evidence from Supervisory Capital Requirements
A change in disclosure policy allowed bank-level data on Pillar 2 capital requirements to be published for the first time in January 2020 for all banks under direct supervision of the ECB. This study exploits this unique experiment to show how bond prices and cross-border holdings of debt securities are sensitive to disclosure of regulatory data, and how “rating gaps” exist between the ECB and private rating agencies. The authors conclude that “overall, supervisors have specific, distinctive, and valuable knowledge of the banks they supervise,” and that increased transparency around Pillar 2 requirements will have a positive long-term effect and allow for more efficient capital allocation. Read More ⇨
Banking Services: Regulators Have Taken Actions to Increase Access, but Measurement of Actions’ Effectiveness Could Be Improved
This report from the U.S. GAO examines factors examines factors associated with households’ use of basic banking services; statutory and regulatory factors affecting service availability and cost; households’ use of prepaid cards and trends in the prepaid card market; and the efforts of selected federal financial regulators to address availability and cost of basic banking services to households. The report is based on analysis of relevant data, review of academic and other studies on laws and regulatory factors; examination of agency documentation; and interviews with market participants, agency officials, and other observers. One finding is that regulatory uncertainty tied to changing rules and guidance around small-dollar loans have discouraged banks from offering such loans. The report recommends that the “FDIC, NCUA, and OCC establish outcome-based performance measures reflecting the full scope of their efforts to achieve strategic objectives related to access to banking services.” Read More ⇨
The Global Dash for Cash: Why Sovereign Bond Market Functioning Varied across Jurisdictions in March 2020
The investor reaction to the uncertainty surrounding the COVID-19 pandemic led to a global flight to safety and greater demand of high-quality assets. Importantly, the decline in the U.S. Treasury market relative to other sovereign markets was driven by more pronounced selling pressure. The authors argue that high debt issuance leading up to the pandemic, along with heavier leverage, were the main factors behind this disruption. The paper concludes by discussing recent and potential Treasury market reforms that would help absorb such surges in selling pressure. Read More ⇨
Testing Bank Resiliency Through Time
This note describes an alternative stress-testing model for bank resiliency called the Forward-Looking Analysis of Risk Events (FLARE). Using this top-down model, the authors simulate three types of severe shocks to the banking industry, focused on different potential vulnerabilities: asset prices, loan losses, economic activity. The results demonstrate that the banking system’s resiliency to severe shocks as measured by post-stress CET1 capital is at its highest since 2014, due to a combination of increased earnings, higher capital ratios, and stabilized credit quality. The note also highlights how the next financial crisis will differ from previous ones and how such top-down approaches as exemplified by the FLARE model can help assess developing risks to financial stability. Read More ⇨
Money Market Fund Vulnerabilities: A Global Perspective
Money market funds have reached over $9 trillion in global assets under management. MMFs offer private, money-like assets resembling bank deposits. Because they provide liquidity transformation, they are vulnerable to runs resulting from sudden changes in investor perception. This paper offers a cross-country analysis of the MMF runs that have occurred historically in many countries and under many regulatory regimes. The analysis finds that vulnerabilities are not uniquely associated with a particular type of governing arrangement, and that maintaining stability will require fundamental reforms that address more clearly the nature of MMFs. That is, “mitigating these vulnerabilities requires fundamental reforms that either place MMFs more clearly within the investment‐fund sector or establish protections for MMFs similar to those for deposits.” The authors point out that stablecoins face a similar set of issues and could potentially pose a financial stability concern. Read More ⇨
Countercyclical Capital Buffers and Credit Supply: Evidence from the COVID-19 Crisis
The countercyclical capital buffer is a capital requirement for banks aimed at building-up capital in good times and using it in times of stress. European banks were subject to the CCyB at the onset of the pandemic and benefited from the release of this buffer from the second quarter of 2020 onwards. This study examines the effect of the CCyB on lending by European banks during this period. The study finds that being subject to the CCyB ahead of the crisis led to an ex-ante slowdown in bank lending; release of the buffer led to an increase in the average bank’s lending by about 5.6 percentage points of their total assets; and this increase happened mainly in retail mortgage loans and was independent of banks’ capital ratios. Read More ⇨
Small Firm Financing Frictions: How Salient Are They and What Are Their Real Effects? Review and Perspectives for New Research
A literature review and analysis on small businesses’ access to credit, including an examination of sources of and obstacles to credit, is presented in this paper. Using data from the Survey of Business Owners, the analysis demonstrates that about half of small firms do not use external finance, and among those that do, bank- and credit card-based borrowing account for the overwhelming share of external finance. The discussion highlights evidence that, while many firms do not seek external finance because they do not wish to grow; on the other hand, “relaxing constraints has large, measured effects on investment and employment for certain sub-populations of small firms.” The paper identifies important issues for further research, including on “the degree to which the rise of financial technology can overcome traditional financing frictions” and on “the effectiveness of different types of government interventions on small business financing and growth.” Read More ⇨
Euro Area Banks’ Sensitivity to Changes in Carbon Price
An important question for financial stability as it relates to climate risks is the extent to which the sudden implementation of climate change mitigation policies would impact the financial system. This paper addresses one important aspect of this question: the effects of changes in carbon price on the European banking system. Using a banking sector contagion model where firms are negatively impacted by an increase in carbon prices and a unique granular dataset to calibrate the model, the consequences of alternative carbon price and firm emission reduction strategies are assessed. The analysis suggests that early policy action, implying more gradual changes in carbon prices, would not adversely affect the banking system, particularly if firms reduce their emissions efficiently. Read More ⇨
The Case for and Against CBDC – Five Years Later
The pros and cons of central bank digital currency have been amply debated in recent years. This note aims to provide a systematic summary of the arguments on each side. The note argues that certain risks associated with CBDC can be mitigated with adequate design. The author concludes that despite the complexities of the new, digital payments ecosystem, central banks should eventually enter this space through CBDC issuance, and that “they should not give up the important role they had for so long in retail payments.” Read More ⇨
Chart of the Month
Featured BPI Research
Should the High Resiliency of Large Banks Be Used as the Basis for Prohibiting Bank Mergers?
A prominent research paper by two Federal Reserve Board staff economists observes that big bank failures tend to happen during severe recessions, but small bank failures can occur even in modest economic downturns. The authors view this finding as evidence that big-bank failures exacerbate economic downturns more than those of small banks. Others cite it as evidence that mergers creating banks over a certain size should be banned. A new research note from BPI chief economist Bill Nelson provides another take: although the basic observation in the paper rings true, another explanation makes more sense — large banks are more resilient than small banks, so it takes a bigger downturn to cause them to fail. The BPI note breaks down how the results in the research paper could be entirely explained by large banks’ higher resilience. The note cautions against misinterpreting the data to justify preventing mergers for the very banks that are most resilient to economic crisis. Read More ⇨
