Research Exchange: October 2023

Selected Outside Research

The European Significant Risk Transfer Securitization Market

The significant risk transfer (SRT) securitization framework provides a means of transferring the risk of a tranche of a loan portfolio to an investor and thereby obtaining regulatory capital relief. SRT was introduced into the EU regulatory framework in 2006 following the Basel II agreement and is increasingly being used by major EU banks to manage risk and capital, with oversight by banking supervisors who assess the degree of risk transfer for determining whether to grant capital relief. This paper seeks to shed light on the main conceptual features of SRT securitizations in relation to non-SRT securitization structures and the regulatory processes behind capital relief. The first part of the paper describes the main features of typical SRT transactions used by European banks and examines the regulatory framework. The second part uses a unique and comprehensive database that contains information on all SRT transactions originated by supervised banks between 2018 and 2022, to provide an analysis of the EU SRT market. This analysis highlights overall trends in terms of volume, type of securitization, capital benefit, asset classes and geography. In the final section, the authors assess the key market and regulatory features currently shaping the market and discuss likely future developments. The European significant risk transfer securitisation market (

Did Banks Become Unhedged After the Financial Crisis? Variable Deposit Betas and Hedging

Typically, banks engage in maturity transformation, such that the average duration of a bank’s assets exceeds that of its liabilities, and this duration mismatch is reflected in an inverse relationship between changes in market interest rates and banks’ stock returns. This paper shows, however, that during periods when the level of interest rates is relatively low, this rate sensitivity of stock returns weakens. The paper shows that the latter phenomenon results from deposits being less rate-sensitive in low interest rate environments, and that the increased duration of deposits in such environments may not be stable in the event of a relatively large rise in rates. In particular, the study finds that the lengthened duration of deposits during the low interest rates post crisis proved to be unstable when rates increased sharply proved during 2022, and most substantially so for banks that had increased their reliance on uninsured deposits. 

Contagion Effects of the Silicon Valley Bank Run

In this paper, the authors examine contagion effects associated with the failure of SVB by analyzing spillover effects on banks’ cumulative stock returns relative to the S&P 500 between February 2022 and February 2023. The authors find that uninsured deposits, unrealized losses in held-to-maturity securities, bank size and cash holdings were statistically significant factors determining the extent of spillover effects. Additionally, banks whose stocks experienced more negative returns following the SVB failure had already underperformed over the previous year. Further analysis suggests that investors had anticipated the risks associated with uninsured deposits during the interest rate hikes but did not foresee the risks associated with unrealized securities losses until the SVB run occurred , even though this data was available. The study finds that the most immediate negative spillover effects occurred at mid-sized banks, but eventually spread to all but the largest banks.

How (In)effective was Bank Supervision During the 2022 Monetary Tightening?

The circumstances that led to the failure of Silicon Valley Bank and other high-profile bank failures in the first half of 2023 raised questions about the ability of bank supervisors to detect basic bank risks such as interest rate risk arising from maturity mismatch between a bank’s assets and liabilities. This paper analyzes the CAMELS ratings assigned to commercial banks in the United States to investigate how effectively supervisors assessed interest rate and liquidity risks before, during and after the monetary tightening of 2022. The findings indicate that bank supervisors were aware of the interest rate risks that were emerging in the banking system, evidenced by increasing frequency of risk rating downgrades of banks with significant exposures to interest rate risks as early as 2Q2022. The analysis further indicates that these rating downgrades were associated with subsequent declines in exposures to interest rate risks and with increases in bank liquidity, and thus had a risk-mitigating effect. Turning to whether bank supervisors acted on liquidity risks posed by banks that heavily relied on uninsured deposits, the authors find that supervisors were not statistically more likely to downgrade the liquidity and sensitivity ratings of banks that relied more heavily on these less stable funding sources. Thus, the analysis suggests that the supervisory models do not sufficiently differentiate the liquidity risk of a bank’s uninsured deposits. Overall, the authors conclude that supervisory downgrades had the desired effects of limiting some but not all interest rate and liquidity risks.

How Has Treasury Market Liquidity Evolved in 2023?

This post examines how market liquidity conditions have evolved over the past year, updating a previous analysis published by the New York Fed in 2022 which had found that liquidity conditions in the U.S. Treasury securities market had worsened due to an increased uncertainty about the expected path of interest rates. This updated post details that liquidity worsened abruptly after the failures of SVB and Signature, but rapidly rebounded to 2022 levels. In 2023, liquidity continues to track the levels that are expected given the elevated interest rate volatility. The author cautions that although Treasury market volatility has not been unusually poor when considering interest rate volatility, policymakers and market participants should still be cautioned as constraints on intermediation capacity can exacerbate illiquidity. How Has Treasury Market Liquidity Evolved in 2023? (Federal Reserve of New York)

Bank Aggregator Exit, Nonbank Entry and Credit Supply in the Mortgage Industry

Firms that purchase residential mortgages from local originators and then pool and securitize them, known as aggregators, play a key role in the mortgage market by providing liquidity. This study examines how the abrupt pullback of bank aggregators from the market for loans guaranteed by the Federal Housing Administration after 2010, in response to regulatory changes and reputational concerns, affected the roles of the remaining banks and nonbanks as lenders and aggregators. The analysis finds that the departure of banks from the market led to market share gains for nonbank and remaining bank aggregators, and in some originators scaling up and directly securitizing their loans (disintermediation). Although disintermediation expanded credit to borrowers with lower credit quality (lower credit scores), the exit of bank aggregators was not associated with increased delinquencies at the county level. This suggests that as local originators scaled up, they made use of specialized information effectively. The analysis also demonstrates that exiting banks retained a role in the market by providing short-term funding to nonbank loan originators and aggregators. Bank Aggregator Exit, Nonbank Entry, and Credit Supply in the Mortgage Industry (

Housing Speculation, GSEs and Credit Market Spillovers

In 2021, the Treasury Department imposed caps on purchases of comparatively risky mortgages, including loans to high-risk borrowers and loans financing the purchase of second homes and investment properties. This study examines the effects of this rule change on credit supply. The analysis finds that GSE purchases of such loans fell by about 20 percentage points, but that the effect on credit supply was mitigated by entry of corporate investors and by banks choosing to hold more of these loans. The study also finds spillover effects on other categories of bank lending. In particular, banks reduced their supply of jumbo mortgages and small business loans in markets where they stepped in to replace the lost GSE share. The findings are consistent with the notion that banks manage their credit exposure not only at the aggregate level but also at the local market level.

Chart of the Month

Capital Adequacy of New Standardized Approach for Operational Risk

The chart plots the distribution of operational risk losses for each U.S. bank in relation to the capital charge associated with the recently proposed standardized approach for operational risk. It shows that during the global financial crisis, average operational risk losses were always less than 30 percent of the capital required under the new standardized approach for operational risk. Moreover, the loss data are reported at the event level, which means that losses spanning multiple years are consolidated into a single year. Consequently, the operational risk losses shown in the chart during the global financial crisis are considerably higher than what banks actually experienced in those years.

Featured BPI Research

How the Basel Proposal Overcharges U.S. Credit Card Consumers

The Basel capital proposal is set to impose excessive capital requirements on consumer loans, which would make credit more expensive and especially more challenging for the most vulnerable American customers to build or rebuild credit or cover emergency expenses.

  • How? The proposal would impose unduly high capital charges for credit cards, accounting for both the risk of default (credit risk), and operational risk, which is a universal charge that applies to all banking products and services. The risk weights for credit cards in the U.S. Basel proposal are excessively high when compared to historical losses, especially when combined with the buffer for net stress losses from the Fed’s stress tests and operational risk charges. Combined, the capital requirements for operational and credit risk of consumer cards can range between about 200 percent and 250 percent.
  • Credit invisibles: The higher costs would hit “credit invisibles” – people with limited or no credit history – particularly hard. These customers could include young people starting to build credit, lower-income households or recent immigrants. It could become more challenging for such customers and those with impaired credit histories to access affordable cards. Credit cards are a key building block for consumers’ credit profiles. The proposal’s charge for unused portions of lines of credit could lead to banks reducing credit limits or canceling infrequently used lines. This could harm customers’ credit scores and their access to a backup source of financing for emergency expenses.
  • Small-dollar loans: The proposal could also harm another safe source of emergency financing for low-income households: banks’ small-dollar loan programs. These loans serve as a safer alternative to predatory payday lending to meet urgent cash shortfalls. The capital proposal could curtail progress banks have made in recent years in expanding their offerings of small-dollar loans.  How the Basel Proposal Overcharges U.S. Credit Card Consumers (

About Excessive Calibration of Capital Requirements for Operational Risk

Based on the analysis released by the banking agencies, the new operational risk charge in their Basel proposal accounts for nearly 90 percent of the increase in banks’ capital requirements under the proposal. This significant increase in capital requirements for operational risk implies that banks are currently undercapitalized in terms of operational risk capital, yet the agencies have not offered evidence to suggest that is the case. In this post, the author demonstrates that the capital charge under the proposed new approach is excessive compared to actual operational risk losses. Specifically, by using a comprehensive dataset on operational risk losses that dates back to the early 2000s, the analysis shows that annual operational risk losses of U.S. banks rarely exceed 30 percent of the capital required under the proposed approach for operational risk. About Excessive Calibration of Capital Requirements for Operational Risk – Bank Policy Institute (

The Long-Term Debt Shortfall and the Liquidity Coverage Ratio

The federal bank regulatory agencies have proposed a rule requiring issuance of long-term debt by U.S. banking organizations with assets greater than $100 billion that are not considered GSIBs. The proposed rule applies to both depository institutions and their bank holding companies, where parent companies must downstream the proceeds of externally raised debt to their subsidiary banks, which then issue internal long-term debt back to their parent entities. The authors argue that the total shortfall of existing long-term debt versus required debt as projected by the banking agencies is significantly underestimated. The reasons for the understated shortfall are twofold. First, the proposed rule does not allow for a realistic scenario where the holding company meets the debt requirement but does not have liquid assets to downstream to its subsidiary bank. Second, the proposed rule does not consider the potential effects of downstreaming debt from the parent to its subsidiary banks on the bank holding company’s liquidity coverage ratio. The Long-Term Debt Shortfall and the Liquidity Coverage Ratio – Bank Policy Institute (

Rationalizing the Global Market Shock

In this note, the author focuses on how the Global Market Shock (GMS) component of the annual bank stress tests can be rationalized using an empirically driven and objective methodology based on widely used econometric tools and demonstrates that the GMS captures the same risk as the FRTB. The GMS, which was formalized with the initiation of the Comprehensive Capital Analysis and Review (CCAR) in late 2010, was important and necessary to ensure that banks were adequately capitalized for market risk. However, the new FRTB, which is part of the Basel finalization process, also assesses market risk under extreme market stress conditions. The author proposes an approach to rationalizing the GMS shocks, by limiting them in a way that minimizes the overlap with the FRTB and is also consistent with the CCAR macroeconomic assumptions. Rationalizing the Global Market Shock – Bank Policy Institute (    

Summary Of the BPI Webinar on the Outlook for the Fed’s Balance Sheet, Money Market Conditions, Banking Conditions and Bank Regulations

The Bank Policy Institute hosted a live webinar discussing the outlook for the Fed’s balance sheet, money market and banking conditions, and banking regulations featuring two panels consisting of banking professionals and researchers. Themes discussed by the first panel included why banks’ future demand for reserve balances could be higher than anticipated, signs of reserve balance scarcity, and the substitutability between ON RRP and reserve balances. Panelists agreed that QT will likely end earlier than expected reflecting higher than expected demand by banks for reserve balances. The second panel began by discussing key trends that bank investors are focusing on, which suggest challenges ahead involving deposit flows and funding pressures. The panelists weighed in on lessons for bank regulation in light of the turmoil in the spring of 2023 and provided a critical look on the increase in capital requirements as proposed by the Basel Endgame proposal. Summary Of the BPI Webinar on the Outlook for the Fed’s Balance Sheet, Money Market Conditions, Banking Conditions and Bank Regulations – Bank Policy Institute (   

The Trillion Dollar Omission in Vice Chair Barr’s Cost Analysis

In a speech on Oct. 9, the Fed’s Vice Chair of Supervision Michael Barr stated that the potential effects of the proposed capital increases on lending activities would be just 3 basis points on average, accounting for both credit risk and operational risk charges directly related to interest income. However, this estimate disregards the additional $1 trillion in risk-weighted assets that the proposal introduces for the “services component” of operational risk, which relates to fee income and is often closely associated with either lending or trading activities. Therefore, the estimates presented in the speech concerning the economic impact of the proposal are greatly understated. Correcting for this omission could nearly quadruple the effect of the proposal on bank funding costs for lending activities. An additional criticism of the impact analysis presented in the speech is that it focused on average funding costs, failing to recognize that how costs get allocated across individual business units can have important implications, since banks frequently make business decisions based on the profitability of individual business units. The Trillion Dollar Omission in Vice Chair Barr’s Cost Analysis – Bank Policy Institute (

The Federal Reserve Should Revise the U.S. GSIB Surcharge Methodology to Reflect Real Risks and Support the Economy

In this note, the authors explain how the U.S. methodology for assessing a capital surcharge on global systemically important banks (GSIBs) differs from international norms, overstating the risk presented by U.S, GSIBs and placing them at a competitive disadvantage. It also provides recommendations for appropriately calculating the surcharge, and thereby enhancing the lending capacity of these banks and enhancing liquidity in U.S. capital markets. The analysis suggests that implementing these adjustments would reduce GSIB surcharges by roughly 1 percentage point, which would expand lending and market-making capacity by over $1 trillion and boost economic growth by roughly $25 billion per year without harming bank safety and soundness. The Federal Reserve Should Revise the U.S. GSIB Surcharge Methodology to Reflect Real Risks and Support the Economy – Bank Policy Institute (

What to Do About Uninsured Deposits?

The disorderly failures of SVB and Signature Bank were caused largely by very rapid runoffs of uninsured deposits. Those banks were unusually dependent on such deposits, and their deposits also seem to have been unusually concentrated by size and industry. This note uses call report data to examine the extent to which other U.S. banks were funded by uninsured deposits and the extent to which other banks suffered runoffs of uninsured deposits in the first quarter of 2023. It finds that while many other U.S. banks, especially other large regional banks but also significant numbers of smaller banks, relied heavily on uninsured deposits, very few had shares anywhere near as large as those two failed banks. Furthermore, while some other U.S. banks, small and large, experienced significant runoffs of uninsured deposits in the first quarter, runoff rates varied widely and very seldom were more rapid than the runoff rates assumed in the liquidity coverage ratio (LCR) that is applicable to the very largest U.S. banks. Thus, broad application of new policies may not be needed to address risks to bank safety and soundness from uninsured deposits. Furthermore, given that uninsured deposits total about $7 trillion (about 45 percent of all domestic deposits), broad application of such measures could require banks to make major balance sheet adjustments that almost surely would reduce credit availability to U.S. businesses and households. What to do About Uninsured Deposits? – Bank Policy Institute (

Conferences & Symposiums

Challenges and Policy Responses to the Affordable Single-Family Housing Supply Problem 
The Urban Institute, Washington, D.C.
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The 2023 U.S. Treasury Markets Conference
Federal Reserve Bank of New York
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11/16/2023 – 11/17/2023
2023 Financial Stability Conference
Federal Reserve Bank of Cleveland and Office of Financial Research
Cleveland, OH and Virtual
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11/16/2023 – 11/17/2023
2023 Asia Economic Policy Conference
Federal Reserve Bank of San Francisco
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11/30/2023 – 12/1/2023
2nd CEMLA/Dallas Fed Financial Stability Workshop
Federal Reserve Bank of Dallas
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Economic Outlook Symposium
Federal Reserve Bank of Chicago
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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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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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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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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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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.