Do Distressed Banks Really Gamble for Resurrection?
It is believed by some financial economists that banks refrain from deleveraging in times of distress and instead “gamble for resurrection, “counting on taxpayers to cover any losses. This paper compares bank behavior in two distinct crisis periods in U.S. banking, the pre-Basel Accord late 1980s and the post-Basel late 2000s. The authors find that, despite a significant tightening of regulations between the first and second period, banks acted to reduce their asset risk and leverage during both crises.
Second Chance: Life without Student Debt
National Collegiate, the largest owner of private student loan debt, has been unable to prove chain of title for thousands of loans across the United States. This paper exploits the plausibly random debt discharge that occurred as a result to study the effect of student debt relief on credit and labor market outcomes. The authors find that borrowers who experienced debt relief reduced their indebtedness and likelihood of credit default while increasing their geographic mobility, probability of changing jobs, and income.
Understanding Bank and Nonbank Credit Cycles: A Structural Exploration
Since the 1990s, nonbank financial intermediaries have extended a significant proportion of total credit to the nonfinancial business sectors. This paper uses an estimated model to investigate the drivers of bank and nonbank credit cycles, as well as the relationship of these cycles to the macroeconomy. The authors find that the dominant drivers of bank lending growth are shocks to the net worth of those who borrow from nonbanks and vice versa. These shocks account for roughly half of declines in lending growth during both the early 1990s and the Great Recession.
Selected Deposits and the OBFR
The Federal Reserve Bank of New York recently added overnight, interest bearing demand deposits booked at bank offices in the U.S. (“selected deposits”) to the Overnight Bank Funding Rate (OBFR). The OBFR is a reference rate that measures the cost faced by banks for borrowing overnight in U.S. dollar money markets. Previously, the OBFR only included federal funds and Eurodollar transactions, but several regulatory changes led to a significant amount of Eurodollar borrowing moving onshore. Selected deposits are defined as those in amounts of $1 million or more, maturity of 6 days or less, and not payable on demand. Selected deposits are economically similar to federal funds and Eurodollar transactions, so the change should produce a more robust measure of bank borrowing costs without changing the reported rate.