reference library

The 2008 financial crisis exposed a longstanding problem in financial regulation: traditional regulatory strategies tend to be procyclical. That is, regulatory tools—most notably, bank capital requirements—incentivize excessive credit growth during…
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We propose a contingent clawback bond (COCLA) as an alternative source of contingent convertible capital (CoCo). We develop a utility maximization model in which a bank manager faces the following…
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This report presents the Federal Reserve Board’s current assessment of the resilience of the U.S. financial system. By publishing this report, the Board intends to promote public under- standing and…
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Most economists differ, not on the causes of the Great Recession, but on their relative importance. They concur, though, on the basic problem, namely human, not market failure. This study…
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In any search for policies that slow growth and drive inequality, financial regulation is an obvious place to start. After all, the financial sector was Ground Zero for the worst…
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Yesterday, the Federal Reserve released the results of the 2018 Comprehensive Capital Analysis and Review (CCAR). As described in previous TCH’s posts, the 2018 results were crucially driven by the…
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In this study, we provide a measure of the severity of the 2014-2018 US supervisory stress tests, and examine how that severity measure has evolved. Since the passage of the…
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This study reports estimates of the marginal benefits and costs of increasing the regulatory minimum bank equity-to-asset “leverage ratio” from 4 to 15 percent. Benefits arise from reducing the probability…
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A few academic papers have recently indicated that banks with a greater amount of capital tend to lend more as a result of lower funding costs. This evidence has been…
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This note proposes a recalibration of the global systemically important bank holding company (GSIB) capital surcharge that takes into account the impact of the liquidity coverage ratio (LCR) – one…
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As a consequence of the large-scale asset purchases by the Federal Reserve during its quantitative easing operations that began during the Great Recession in 2008, the Fed’s interest income increased…
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This annual assessment consists of two primary components: The Dodd-Frank Act stress test (DFAST) is a forward-looking quantitative evaluation of bank capital that demonstrates how a hypothetical set of stressful…
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Reliance on macroprudential tools is problematic in several ways. First, in spite of reforms to the regulation of bank capital, high leverage, regulatory complexity, and public-sector guarantees continue to be…
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In addressing the stated topics, the RTF-CCyB work stream aimed at shedding light on some of the relevant mechanisms and likely implications for bank lending and the broader economy. The…
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Since the 2009 Supervisory Capital Assessment Program (SCAP), US regulators have employed a representative bank model as the benchmark of comparison in mandatory stress test exercises. For risk management functions,…
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In 2010, the Basel Committee on Banking Supervision published an assessment of the long-term economic impact (LEI) of stronger capital and liquidity requirements (BCBS (2010)). This paper considers this assessment…
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This paper provides, for the first time, large-scale evidence that liquidity transformation by banks creates fragility, as their uninsured depositors face an incentive to withdraw their money before others (a…
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We provide evidence that credit lines offer liquidity insurance to borrowers. Borrowers are able to extensively use their credit lines in recessions and ahead of credit line cuts. In fact…
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Using a new equity price-based measure of the global financial cycle, this paper evaluates the relative importance of global financial shocks for quarterly equity returns and output growths in a…
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This article assesses the accomplishments, unfinished business, and outstanding issues in the post-crisis approach to prudential regulation. After briefly reviewing how the ongoing integration of capital markets and traditional lending…
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We propose a novel conceptual approach to transparently characterizing credit market outcomes in economies with multi-dimensional borrower heterogeneity. Based on characterizations of securities’ implicit demand for bank equity capital, we…
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The COVID-19 crisis paralyzed huge parts of the planet in weeks. It not only infected the population but injected a gargantuan dose of uncertainty into the system. In that regard,…
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Maintaining sufficient liquidity in the financial system is vital for its stability. However, since returns on liquid assets are typically low, individual financial institutions may seek to hold fewer such…
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The widespread economic damage caused by the ongoing COVID-19 pandemic poses the first major test of the bank regulatory reforms put in place following the global financial crisis. This study…
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Using a sample of 625 microfinance institutions (MFI) across 40 countries from 2010-2015, we empirically examine the effect of buffer capital on the performance of MFIs and how this effect…
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In the past 30 years, defaults on corporate bonds in the US have been substantially above the historical average. Using firm-level data, this column shows that the increase in credit…
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We explore the actions of financially distressed banks in two distinct periods that include financial crises (1985-1994, 2005-2014) and differ in bank regulations, especially concerning capital requirements and enforcement. In…
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We study the impact of higher capital requirements on banks’ decisions to grant collateralized rather than uncollateralized loans. We exploit the 2011 EBA capital exercise, a quasi-natural experiment that required…
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The Basel I Accord introduced a discontinuity in required capital for undrawn credit commitments. While banks had to set aside capital when they extended commitments with maturities in excess of…
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We are living through a period of major political and economic uncertainty. While Brexit and new global forces reshape our economy, the rise of digital technologies could set our financial…
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Stress tests applied to individual institutions are an important tool for evaluating financial resilience. However, financial systems are typically complex, heterogeneous and rapidly changing, raising questions about the adequacy of…
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The macroprudential elements of the stress tests arise from: the scenario design, which is set to vary over time with the economic and financial cycles; the requirement to hold portfolios…
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We provide evidence that a weak banking sector contributed to low productivity following the European debt crisis. An unexpected increase in capital requirements provides a natural experiment to study the…
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The post-Global Financial Crisis period shows a surge in corporate leverage in emerging markets and a number of countries with deteriorated corporate financial fragility indicators (Altman’s Z-score). Firm size plays…
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We find that (1) an intensification of competition increases the efficiency and fragility of banks; (2) economies can avoid the fragility costs of competition by enhancing bank governance and tightening…
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This paper studies the effects of prudential regulation, financial development, and financial openness on economic growth. Using both existing models and a new OLG framework with banking and prudential regulation…
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Using data on publicly traded banks in 61 countries, we examine how the institutional environment affects the relationship between bank capital and system-wide fragility. Consistent with prior studies, we find…
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We analyze how bank profitability impacts financial stability from both theoretical and empirical perspectives. We first develop a theoretical model of the relationship between bank profitability and financial stability by…
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In December 2013, the primary United States financial regulatory agencies jointly adopted final rules to implement Section 619 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, which is…
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We analyze a sample of large international banks in major advanced economies and examine the impact that bank-specific factors have on an institution’s solvency risk and its contribution to systemic…
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In the supervisory post-stress capital assessment, the Federal Reserve estimates that the aggregate common equity tier 1 ratio for the firms participating in CCAR 2018 would decline in the severely…
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We take issue with claims that the funding mix of banks, which makes them fragile and crisis-prone, is efficient because it reflects special liquidity benefits of bank debt. Even aside…
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Following the 2008-9 financial crisis, large banks increasingly issued contingent convertible bonds (CoCo bonds) to increase their capital buffers – a policy supported by national bank regulators. This paper examines…
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Systemic risk arises when shocks lead to states where a disruption in financial intermediation adversely affects the economy and feeds back into further disrupting financial intermediation. We present a macroeconomic…
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We provide evidence that a weak banking sector has contributed to low productivity growth following the European sovereign debt crisis. An unexpected increase in capital requirements for a subset of…
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In the European Banking Authority’s EU-wide stress tests, banks project capital ratios under a hypothetical adverse scenario employing their own models, which are constrained by a common methodology set by…
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This research aims to investigate whether the stress-testing exercises affect credit supply, banks’ profitability and risk-taking behaviour. The granular confidential supervisory data of Euro Area banks allows for a quasi-natural…
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One aim of post-crisis monetary policy has been to ease credit conditions for borrowers by unlocking bank lending. We find that bank equity is an important determinant of both the…
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A newly emerged consensus holds that policy makers should use macroprudential regulation to prevent financial crises or soften their impact on the real economy. Despite their widespread use, little is…
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The studies I have reviewed suggest that for every 1 percent increase in capital minimums, lending rates will rise by 5 to 15 basis points and economic output will fall…
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What are the quantitative effects of countercyclical capital buffers (CCyB)? I study this question in the context of a nonlinear DSGE model with a financial sector that is subject to…
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We estimate the effect of changes in microprudential regulatory capital requirements on bank capital ratios and bank lending. We do so by running panel regressions using a rich new data…
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While excessive bank debt can impose overwhelming costs on the broader economy, some contend that there may be some benefits from debt for a firm’s corporate governance. In particular, some…
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Anat Admati argues that the banking system is too fragile and inefficient, and that reform efforts have been flawed. The fragility of the system causes booms and busts, and busts…
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Both investors and borrowers are concerned about liquidity. Investors desire liquidity because they are uncertain about when they will want to eliminate their holding of a financial asset. Borrowers are…
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This paper presents a model of competition in the banking industry based upon the interplay of two factors: the level of capitalization of banks and their ability to monitor different…
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The on-going reform of the Basel Accord relies on three “pillars”: capital adequacy requirements, centralized supervision and market discipline. This article develops a simple continuous-time model of commercial banks’ behavior…
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We document the build-up of regulatory and market equity capital in large U.S. bank holding companies between 1986 and 2000. During this time, large banking firms raised their capital ratios…
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In 1988 the Basel Committee on Banking Supervision completed the Basel Capital Accord, which set risk-weighted minimum capital standards for internationally active banks. The accord, which has been adopted by…
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We assess the influence of competition and capital regulation on the stability of the banking system. We particularly ask two questions: i) how does capital regulation affect (endogenous) entry; and…
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This paper develops a banking-sector framework with heterogeneous loan monitoring costs. Banks are exposed to the moral hazard behavior of borrowers and endogenously choose whether to monitor their loans to…
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There is a strong consensus that reform of the financial regulatory system must include significant increases in the capital requirements for banks. All else equal, this should make the banks…
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There is a strong consensus among policymakers that there need to be higher minimum capital requirements for banks in order to foster a more stable financial system and to help…
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While it is recognized that the high degree of leverage used by financial institutions creates systemic risks and other negative externalities, many argue that equity financing is “expensive,” and that…
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Several possible explanations have been suggested for this untoward state of affairs–the lack of servicer capacity to execute modifications, purported financial incentives for servicers to foreclose rather than modify, what…
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We examine the pervasive view that “equity is expensive,” which leads to claims that high capital requirements are costly and would affect credit markets adversely. We find that arguments made…
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This paper analyzes the effect of the business cycle on the regulatory capital buffers of German local banks in the period 1993–2004. The capital buffers are found to fluctuate countercyclically…
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The Basel regime is an international system of capital adequacy regulation designed to strengthen banks’ financial health and the safety and soundness of the financial system as a whole. It…
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While the current capital adequacy framework, Basel II, aims to make banks’ capital requirements more sensitive to the underlying risk of the assets, it may also introduce an additional source…
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Building an unbalanced panel of United States (US) bank holding company (BHC) and commercial bank balance-sheet data from 1986 to 2008, we examine the relationship between short-term capital buffer and…
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During the financial crisis that started in 2007, the U.S. government has used a variety of tools to try to rehabilitate the U.S. banking industry. Many of those strategies were…
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This paper analyzes the cyclical effects of bank capital requirements in a simple model with credit market imperfections. Lending rates are set as a premium over the cost of borrowing…
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The regulation of bank capital as a means of smoothing the credit cycle is a central element of forthcoming macro-prudential regimes internationally. For such regulation to be effective in controlling…
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Much attention has been paid to the large decreases in value of non-agency residential mortgage-backed securities (RMBS) during the financial crisis. Many observers have argued that the fall in prices…
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This study assesses the overall impact on credit of the financial regulatory reforms in Europe, Japan, and the United States. Long-term cost estimates are provided for Basel III capital and…
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This paper develops a framework for analyzing socially and privately optimal bank loan-monitoring decisions, with and without capital regulation. In contrast to the monitoring decision of a social planner who…
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Supplementing the discussion in our book The Bankers’ New Clothes: What’s Wrong with Banking and What to Do about It, this paper examines the plausibility and relevance of claims in…
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A dangerous misconception appears to be taking root in the public debate about bank safety. A belief is growing that banks could be made much safer, at essentially no economic…
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This paper analyzes how different types of bank funding affect the extent to which banks ration credit to borrowers, and the impact that capital requirements have on that rationing. Using…
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Minimum capital requirements are a central tool of banking regulation. Setting them balances a number of factors, including any effects on the cost of capital and in turn the rates…
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Liquidity production is a central role of banks. We show that, under idealized conditions, high leverage is optimal for banks when there is a market premium for (socially valuable) liquid…
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This paper examines the impact of imposing capital requirements on systemic risk. We use a static model on financial institutions’ risk-taking behavior to quantify the systemic risk in the cross-sectional…
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This paper analyzes the incentive effects of special bank resolution schemes which were introduced during the recent financial crisis. These schemes allow regulators to take control over a systemically important…
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Our results indicate that financial liberalization increases bank risk-taking in both developed and developing countries but through different channels. Financial liberalization promotes stronger bank competition that increases risk-taking incentives in…
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The financial crisis was a systemic run. Hence, the central regulatory response should be to eliminate run-prone securities from the financial system. By contrast, current regulation guarantees run-prone bank liabilities…
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We present a theory of risk capital and of how tax and other costs of risk capital should be allocated in a financial firm. Risk capital is equity investment that…
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This paper contributes to the empirical literature on risk shifting. It proposes a method to find out whether risk shifting is present in the banking industry and, if so, what…
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In this paper, we investigate how the introduction of complex, model-based capital regulation affected credit risk of financial institutions. Model-based regulation was meant to enhance the stability of the financial…
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Minimum capital regulations play a central role in banking regulation. Regulators require banks to maintain capital above a certain level in order to correct incentives to make excessively risky loans…
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The principal purpose of these models is to determine banks’ regulatory capital requirements—the capital “buffers” to be set aside so banks can withstand adverse events and remain solvent.Risk models are…
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Excessive leverage (indebtedness) in banking endangers the public and distorts the economy. Yet current and proposed regulations only tweak previous regulations that failed to provide financial stability. This paper discusses…
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Do banks matter for growth and how? This paper examines the effects of national banks in the United States from 1870–1900. I use the discontinuity in entry caused by a…
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The excessive increase of leverage, i.e. the abuse of debt financing, is considered one of the primary factors in the default of financial institutions since it amplifies potential investment losses….
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During the financial crisis, life insurers sold long-term policies at deep discounts relative to actuarial value. The average markup was as low as –19 percent for annuities and –57 percent…
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We examine banks’ loan losses in Europe in 1982–2012 using a nonlinear three-factor model that takes into account output growth, real interest rate, and the ratio of private credit to…
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What should be our destination? We want a regulatory system that credibly requires banks to risk their stockholders’ investments, not taxpayers’ wealth. And we want to avoid permitting losses to…
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To study the impact of macroprudential policy on credit supply cycles and real effects, we analyze dynamic provisioning. Introduced in Spain in 2000, revised four times, and tested in its…
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This study examines Japanese banks’ behavior of adjusting denominators of capital ratios upon the introduction of Basel II regulations. The first analysis investigates the adjustments to the size and composition…
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Unregulated U.S. corporations dramatically increased their debt usage over the past century. Aggregate leverage – low and stable before 1945 – more than tripled between 1945 and 1970 from 11%…
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Flawed claims are still made in the policy debate, particularly in the context of proposals that banks be funded with more equity and less debt than current or new regulations…
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