Selected Outside Research
The Information Content of Stress Test Announcements
The reaction of market participants to stress test announcements is explored in this study. The analysis focuses on stress tests pre-2019, exploiting the fact that until 2019, different types of information were released in two phases (DFAST and CCAR). The analysis finds that for the first phase, which carried no supervisory consequences, when the stress test results indicated a more sizable capital cushion, credit default swap (CDS) spreads declined and stock prices rose systematically. The second phase of the stress tests had supervisory consequences in the form of regulators potentially objecting to the bank’s capital plans and preventing dividends or share buybacks. For this phase, when capital plans were objected to or not approved, stock prices declined, but there is no evidence of a significant response of CDS spreads. In sum, the study demonstrates that “financial markets scrutinize the stress test results to understand whether participating firms can withstand harsh economic conditions.” Read More ⇨
The Macroeconomic Implications of CBDC: A Review of the Literature
This paper examines the effects of the introduction of a CBDC on financial intermediation, financial stability and the implementation and transmission of monetary policy in a developed economy such as the United States, based on a review of the literature. A key takeaway is that a CBDC can potentially reduce financial frictions in deposit markets by boosting financial inclusion and improving the transmission of monetary policy. However, studies find that a CBDC also significantly increases the risk of bank disintermediation and associated contraction in bank credit. A CBDC also poses financial stability risks and raises complications for the implementation of monetary policy. These potential effects of a CBDC depend critically on its design features Read More ⇨
How Do Deposit Rates Respond to Monetary Policy?
This blog post examines the response of deposit rates to changes in the federal funds rate (that is, deposit betas) since the 1990s and the factors that affect this response. The analysis indicates that deposit rates have become less responsive to monetary policy changes, and that this can be explained by the growth in deposits over the post-crisis period relative to alternative investment opportunities for depositors. In other words, “current deposit betas are lower and slower given banks’ significant supply of deposit funding.” Moreover, the analysis projects that going forward, in the wake of the rapid increase in the fed funds rate, the rate gap will be higher than in recent rate cycles, “causing depositors to look elsewhere and deposit rates to rise in response.” Read More ⇨
Debunking the Narratives about Cryptocurrency and Financial Inclusion
Although various narratives have been put forth regarding the role of cryptocurrency in promoting financial inclusion, they may not hold up under closer examination. This research note scrutinizes these narratives and finds “a mismatch between what crypto can actually provide and the needs of the groups it purports to serve.” The note demonstrates that cryptocurrency may exacerbate existing inequalities in the provision of financial services and discusses how policymakers and regulators can protect retail investors and consumers while addressing financial inclusion in ways that do not require crypto. Moreover, the analysis indicates that cryptocurrency “carries a host of risks and drawbacks that undermine its benefits” and finds “parallels between crypto and other predatory products.” Read More ⇨
How Abundant Are Reserves? Evidence from the Wholesale Payment System
Conventional wisdom holds that in the current era of large central bank balance sheets, the reliance of banks on their incoming payments to make outgoing payments would no longer apply because banks hold abundant reserves at their central banks. This study analyzes the coupling of interbank payments in the Fedwire Funds Service (Fedwire) system, shedding light on the role of reserves. The analysis indicates that even in the current era of ample reserves, the volume of payments that a bank makes each minute depends significantly on the volume received over preceding minutes. This high degree of dependence between incoming payments and outgoing payments indicates that banks still economize on intraday liquidity and suggests that “access to central-bank reserve balances is a constraint on funding liquidity.” The findings suggest “a potential for strategic cash hoarding when reserve balances get sufficiently low, as was the case in mid-September 2019 and mid-March 2020.” Read More ⇨
Do Fintech Shadow Banks Compete with Technological Advantages? Evidence from Mortgage Lending
Using data on patent grants and technology-related employment, along with data on mortgage loan pricing and mortgage repayment performance, this study assesses potential technological advantages of fintech firms in mortgage lending relative to similarly sized banks. The analysis indicates that, contrary to common perceptions, fintechs do not possess technological advantages over traditional banks, as demonstrated by significantly more patent output and technology-based talent acquisitions by banks over the past decade. Moreover, while fintechs initially were able to charge a higher rate than traditional banks without incurring higher defaults, this premium declined over time “and recently has completely reversed.” Further analysis suggests that compared to traditional banks, fintech mortgage lenders overall underinvest in technology, and that “providing convenient services alone is not sufficient to sustain premium pricing in the long term.” Read More ⇨
Aligning Incentives: The Effect of Mortgage Servicing Rules on Foreclosure and Delinquency
The U.S. Consumer Financial Protection Bureau implemented regulations in 2014 for mortgage servicers aimed at promoting alternatives to foreclosure for the purpose of mitigating the large societal costs of foreclosures. These rules included a new requirement to delay foreclosure until borrowers were at least 120 days delinquent in most cases, up from typically 90 days. Using two large panels of mortgage performance data, this study estimates the effect of these rules on foreclosure rates and on the ability of borrowers to recover from delinquency. The analysis indicates that the rule reduced the incidence of foreclosure and increased the frequency of recovery. The rule’s foreclosure delay requirement appears to have been a key factor driving the decline in foreclosure rates. Specifically, borrowers who became 90 days delinquent after the rule went into effect were six percentage points less likely to have foreclosure initiated within two months. Larger effects are observed for loans with characteristics that qualify them for more generous loan modification offers. Read More ⇨
Are Banks Really Informed? Evidence from Their Private Information
This study assesses banks’ informational role in credit markets using confidential regulatory data containing banks’ private assessments of expected losses on business loans. The analysis finds that that changes in expected losses predict the borrowing firms’ next quarter stock returns, bond returns and earnings surprises. The predictability is observed only for downward adjustment in expected losses, “consistent with banks monitoring firms’ downside risks.” The analysis further suggests that banks’ information advantage arises from both receiving private information early and processing that information. Overall, the findings are consistent with the view that banks engage in information production and monitoring, even among publicly traded firms. Read More ⇨
Chart of the Month
Featured BPI Research
As U.S. Regulators Implement the 2017 Basel Accord, It’s Time for a Reality-Based Assessment of Current Capital Levels
The U.S. banking agencies recently reaffirmed their commitment to implement the most recent Basel Accord, a sweeping series of changes to bank capital requirements. If implemented without care, and specifically without avoiding duplication of capital charges unique to the existing U.S. regime, those changes could reduce U.S. economic growth, further diminish capital markets liquidity, increase systemic risk and further disincentivize bank lending to small businesses and low- to moderate-income households. While the Basel Accord has many parts requiring calibration, at a macro level the question is whether there is evidence that U.S. banks require additional capital to reduce the danger of insolvency or financial instability. This post reviews the considerable amount of real evidence to reach an answer to the question posed. Read More ⇨
Against What Liquidity Risks Should a Bank Self-Insure?
A key question for bank liquidity regulation is: “Against what liquidity risks should a bank self-insure?” In other words, in what types of situations should a bank have the resources to meet liquidity demands without making use of funding from the central bank? Previous research by Carlson, Duygan, and Nelson (2015) concluded that banks should insure against idiosyncratic risk (risk resulting from troubles at the bank) but should be able to count on the central bank to handle systemic risks (severe market illiquidity or broad runs on commercial banks). This important question is revisited in this note, which reaches a somewhat different conclusion that distinguishes between types of central bank lending rather than between types of situations (although it can accommodate the view of Carlson and colleagues). Specifically, regulatory liquidity assessments of banks such as internal liquidity stress tests (ILSTs) should allow banks to assume that they will use those types of ordinary central bank credit that the central bank wants seen as available and reliable, as long as the bank would still be eligible for the credit in the stress scenario considered. Read More ⇨
Conferences & Symposiums
Events:
12/15/2022 – 12/16/2022
CFPB Research Conference 2022: Announcement and Call for Papers
Consumer Financial Protection Bureau
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2/10/2023
Symposium on Bank Mergers
Office of the Comptroller of the Currency
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3/30/2023 – 3/31/2023
Procyclicality Symposium: Announcement and Call for Papers
Federal Reserve Board
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5/5/2023
The Sixteenth NY Fed / NYU Stern Conference on Financial Intermediation: Announcement and Call for Papers
Federal Reserve Bank of New York
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6/21/2023 – 6/23/2023
Policy Summit 2023: Communities Thriving in a Changing Economy
Federal Reserve Bank of Cleveland
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6/21/2023 – 6/23/2023
Economics of Financial Technology Conference: Announcement and Call for Papers
The University of Edinburgh
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