This paper shows that large U.S. banks have enough high-quality liquid assets to cover wholesale funding runoffs in response to an extreme cyber event. However, the resiliency of large banks to cyber runs is not a guarantee to avoid damage to the real economy as nonbanks may be unwilling to send funds through customary bank payment nodes. To address this issue, the authors propose the creation of a narrow payment-bank utility to process payments between a key set of nonbank financial firms. Moreover, it suggests the inclusion of a cyber-run event in the U.S. stress tests as an additional safeguard.
Read More: https://www.brookings.edu/wp-content/uploads/2019/06/WP51-Duffie-Younger-2.pdf
The Costs and Benefits of Bank Capital – A Review Of The Literature
This paper provides a literature review on the optimal level of bank capital. Based on the result of a recent academic paper, the benefits of additional capital may have been understated because of the stabilizing effects of bank capital on reducing the costs of a financial crisis. The paper states that future studies on the optimal level of capital should incorporate the effect of Basel III reforms such as liquidity regulations, resolution regimes and the countercyclical capital buffer.
Read More: https://www.bis.org/bcbs/publ/wp37.pdf
Understanding Changes in Household Debt by Credit Risk Category: The Role of Credit Score Transitions
The rise in aggregate household debt has accrued to prime borrowers rather than near-prime or subprime over the post-crisis period, which is somewhat surprising since borrowers with lower credit scores tend to be more responsive to increases in the availability of credit. Using credit records from the FRBNY Consumer Credit Panel/Equifax, the authors find that a large share of the increase in household debt in the post-crisis period has been driven by individuals that had near-prime scores earlier in the recovery and subsequently moved to the prime category.
Read More: https://www.federalreserve.gov/econres/notes/feds-notes/the-role-of-credit-score-transitions-20190625.htm
Assessing Contagion Risk in a Financial Network AND How Large Are Default Spillovers in the U.S. Financial System?
This two-part series of posts analyzes financial network contagion from default spillovers that arise from counterparty risk. In part one, the authors use a few simple models to show how the structure of a financial network can amplify losses caused by an initial shock. In part two, the authors apply the proposed framework and find that the losses that can attributed to default spillovers is currently very small. As a result, the financial network is robust to contagion risk arising from counterparty risk.