Weekly Research Rundown – June 14, 2019

Weekly Research Rundown – June 14, 2019

The Costs And Benefits Of Liquidity Regulations:  Lessons From An Idle Monetary Policy Tool

This paper investigates the effect of liquidity regulations on banks by analyzing the impact of changes in reserve requirements. The authors find that increased reserve requirements cause banks to reduce credit supply and depress bank profitability. They also find that higher reserve requirements prior to the crisis made banks less likely to fail.

Read More: https://www.federalreserve.gov/econres/feds/files/2019041pap.pdf


Unintended Side Effects: Stress Tests, Entrepreneurship, And Innovation

This paper shows that U.S. banks subject to the stress tests strongly cut small business lending and contributed to the anemic recovery of young firms since the crisis.  Specifically, counties in which banks subject to the stress tests have a higher pre-crisis market share see a stronger decline in employment, and patent applications of younger firms as well as weaker labor productivity.  Moreover, the decline is stronger in sectors with a higher share of younger firms using home equity financing.

Read More: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3384006


The Currency Composition Of International Reserves, Demand For International Reserves, And Global Safe Assets

This paper studies the determinants of the international reserves (IR) currency composition before and after the Global Financial Crisis (GFC). The authors find that countries that trade with the US, EU, UK, and Japan hoard more IR in the “big four” currencies (dollar, euro, pound, and yen). Countries hold less of the big four currencies as IR since the GFC, and more since the Federal Reserve began to taper off quantitative easing.

Read More: https://www.nber.org/papers/w25934


The Procyclicality Of Banking: Evidence From The Euro Area

The authors find that loan loss provisions in the euro area are negatively related to GDP growth, when GDP growth declines, loan loss provisions increase and vice versa.  This procyclicality in provisions explains about two-thirds of the variation of bank capital over the business cycle.  The procyclicality of loss provisions in the euro area is about twice as large as in other advanced economies.

Read More: https://www.ecb.europa.eu/pub/pdf/scpwps/ecb.wp2288~e0622ceb43.en.pdf?4086813a1017747f1d0899b68a4f215f


Competition Among High-Frequency Traders, And Market Quality

The paper studies how competition among high-frequency traders (HFTs) affects trading behavior and market liquidity using a unique dataset.  The authors find that when HFTs compete, their speculative trading increases. As a result, market liquidity deteriorates, and short-term volatility rises.