Liquidity and Lending
FRBNY Staff Report: The Mortgage Rate Conundrum
(Justiniano, Primiceri & Tambalotti)
This report analyzes the evolution of a gap between mortgage and Treasury interest rates in the summer of 2003 at the end of the Federal Reserve’s expansionary cycle. Controlling for loan, borrower, and geographic characteristics, the authors documented this divergence of mortgage rates from its historical relationship with Treasury yields and the increase in delinquencies that followed as the shift in the supply of mortgage credit ultimately resulted in the originations of mortgages with lower interest rates and worse quality overall.
NBER Working Paper: Mortgage Design in an Equilibrium Model of the Housing Market
(Guren, Krishnamurthy & McQuade)
The paper finds that mortgage designs that reduce payments in recessions and increase payments in booms improve welfare relative to fixed-rate mortgages. In particular, adjustable-rate mortgages improve welfare relative to fixed-rate mortgages in an economy where the central bank eases monetary policy in recessions. Moreover, mortgage regimes that front-load payment reductions to alleviate household liquidity constraints during recessions reduce default and stimulate housing demand.
Bank of England Working Paper: The Impact of the Bank of England’s Corporate Bond Purchase Scheme on Yield Spreads
(Boneva, de Roure & Morley)
This paper explores the announcement effect of the Bank of England’s plan to purchase corporate bonds on yield spreads. After the announcement, the spreads of eligible sterling investment-grade bonds of U.K. firms were reduced by 13–14 basis points relative to foreign bonds of the same firms, and between 2–5 basis points compared to ineligible sterling corporate bonds. The comparison between the two groups of sterling-denominated bonds is likely to underestimate the impact of the Bank of England scheme due to portfolio rebalancing.
Macroprudential Policy
BIS Working Paper: Financial Spillovers, Spillbacks, and the Scope for International Macroprudential Policy Coordination
(Agénor & da Silva)
This paper finds that international coordination of macroprudential policies may be essential for macroprudential instruments to be effective at the national level. The authors note that divergence in national interests can make international coordination unfeasible. Nevertheless, Basel III’s principle of jurisdictional reciprocity for countercyclical capital buffers needs to be extended to a larger array of macroprudential instruments, they conclude.
IMF Working Paper: Understanding the Macro-Financial Effects of Household Debt: A Global Perspective
(Alter, Feng & Valckx)
The paper confirms the negative relationship between household debt growth and future GDP growth, documented in earlier studies. The authors find that a one standard deviation increase in the household debt ratio is, on average, associated with 1.2 percentage points lower output growth over the following three years.
BIS Working Paper: Credit Supply and Productivity Growth
(Manaresi & Pierri)
This paper examines changes in the supply of credit faced by Italian corporations from 1997 to 2013, including the credit contraction between 2007 and 2009. The authors find that credit supply boosts corporations’ productivity, and that volatility of the banking sector’s credit supply is detrimental to firm productivity. The authors conclude that negative shocks have larger effects than positive ones, and credit supply is particularly important during a financial crisis.
Monetary Policy and Bank Profitability in a Low Interest Rate Environment
(Altavilla, Boucinha & Peydró)
Focusing on the euro area, the authors study the side effects for the banking system of a low-interest-rate environment, when protracted for an extended period of time. The study results suggest that keeping interest rates low for long might have negative consequences for bank profitability. However, accommodative monetary conditions support real economic activity, which, in turn, has a positive impact on bank profitability, thereby offsetting the adverse impact. “Moreover, policy easing tends to be more beneficial in relative terms for more efficient banks and for banks with lower asset quality. At the same time, banks engaging more extensively in maturity transformation activities tend to have a more positive reaction to a steepening of the yield curve,” they write.
Bank Structure and Systemic Risk
Richmond Fed Economic Brief: Preventing Bank Runs
(Haltom & Sultanum)
This brief highlights theories behind bank runs, the most widely accepted solutions, and new research suggesting that removing the incentive to run may prevent runs. Using the example of two account options, where one account exceeds the return on the other if depositors do not withdraw early and no run occurs, the authors demonstrate that a low-cost deposit contract that rewards depositors for indirectly revealing when an early withdrawal is made in response to their beliefs about the likelihood of a run could reveal the type of information that depository institutions need to prevent runs.
IMF Working Paper: Leverage – A Broader View
(Singh & Alam)
The authors make the case for developing a broader measure of leverage to gain a better understanding of global systemic risk. They point out that non-bank funding, an increasingly more important source of bank credit since the Lehman crisis, should be included. In addition, accounting for off–balance-sheet transactions and shadow banking as well would enhance information about both national and cross-border leverage.
Bank Regulation, Innovation & Other
NBER Working Paper: What is the impact of successful cyberattacks on target firms?
(Kamiya et al.)
The authors examine patterns arising from successful cyberattacks on large firms. They find that more visible, highly valued firms with less risk management oversight are more likely targets. Firms that have consumer financial information stolen tended to experience adverse reactions from the stock market, a downgrade in their credit rating, more cash flow volatility, and an increase in leverage. Despite these negative effects, these firms also tend to respond to attacks by strengthening risk management, reducing the risk-taking incentives of management and reducing executive compensation.
NBER Working Paper: Bank Examiners’ Information & Expertise & Their Role in Monitoring & Disciplining Banks before & During the Panic of 1893
(Calomiris & Carlson)
This working paper investigates whether bank examiners were informed and contributed to the health of the banking sector. They assess the types of information made available to examiners and how they were used to judge the quality of bank assets and management. They then go on to explore how these judgments affected bank behavior and reactions from market participants.
Compliance Costs, Economies of Scale and Compliance Performance: Evidence from a Survey of Community Banks
(Dahl et al.)
This brief compares compliance costs across a sample of banks using data from annual surveys. The paper finds the ratio of compliance costs to total non-interest expense decreasing in bank size. In addition, the persistence of the pattern (an increase in the burden of compliance costs with a decrease in size) regardless of regulatory performance ratings indicates that large banks are not sacrificing their performance ratings to cut their compliance costs.
