Capital, Contagion, and Financial Crises: What Stops a Run from Spreading?
Since the 2008 crisis, regulators have focused their attention on tightening capital and liquidity regulations. This paper uses data on share prices and credit default swaps to investigate the relationship between banks’ balance-sheet liquidity and regulatory capital and the effect of the Lehman Brothers failure on those banks. While the authors do not challenge the well-established findings that increased capital and liquidity may prevent or improve the recovery from a crisis, they find that in some markets banks with greater capital and liquidity were more exposed to the Lehman Brothers failure rather than less.
Bank Intermediation Activity in a Low Interest Rate Environment
Central banks have kept interest rates low since the financial crisis, eroding banks’ profit margins. This paper studies how reduced profitability in the low interest rate environment has affected bank intermediation activity. The authors find that low interest rates drive banks to shift from interest-generating lending to fee-generating activities and this shift is more pronounced in banks that are less well-capitalized.
Read More: https://www.bis.org/publ/work807.htm
A Quantitative Analysis of Countercyclical Capital Buffers
The counter-cyclical capital buffer (CCyB), which allows central banks to increase banks’ required risk-based capital during credit expansions or periods of financial system vulnerability in order to prevent financial crises, has never been raised above zero in the U.S. This paper shows that in computer simulations of a stylized economy, the CCyB could reduce the frequency and severity of such crises.
How Do Foreclosures Exacerbate Housing Downturns?
Foreclosures were a key feature of the recent housing downturn, with roughly eight percent of the owner-occupied housing stock experiencing a foreclosure. This paper uses a structural model to analyze the effect of foreclosures on the downturn and the policies designed to mitigate foreclosures. The authors find that foreclosures amplify the initial shock to the housing market and that, regarding policy, principal reduction is less cost effective than lender equity injections.
Read More: https://www.nber.org/papers/w26216