Speech At the Council on Foreign Relations, New York, New York
Speech At the 2019 Interagency Minority Depository Institution and CDFI Bank Conference, Arlington, Virginia
Speech At Policy Summit 2019: Connecting People and Places to Opportunity, Federal Reserve Bank of Cleveland, Cincinnati, Ohio
Speech At the "Conference on Monetary Policy Strategy, Tools, and Communications Practices" sponsored by the Federal Reserve, Federal Reserve Bank of Chicago, Chicago, Illinois
Speech At the Alternative Reference Rates Committee Roundtable, cohosted by the Alternative Reference Rates Committee and the New York University Stern School of Business and Its Salomon Center for the Study of Financial Institutions, New York, New York
Speech At "Developments in Empirical Macroeconomics," a research conference sponsored by the Federal Reserve Board and the Federal Reserve Bank of New York, Washington, D.C.
Speech At the Economic Club of New York, New York, New York
Speech At "Mapping the Financial Frontier: What Does the Next Decade Hold?” 24th Annual Financial Markets Conference, sponsored by the Federal Reserve Bank of Atlanta, Amelia Island, Florida
Speech At "Fed Listens: A Capstone Roundtable" hosted by the Federal Reserve Bank of New York, New York, New York
Speech At "Certain Uncertainty: Tax Policy in Unsettled Times" National Tax Association 49th Annual Spring Symposium, Washington, D.C.
WASHINGTON – The FINRA Investor Education Foundation (FINRA Foundation) today announced the recipients of its higher-education awards created to recognize outstanding analyses by researchers-in-training who seek to advance understanding of consumer well-being and the complex relationships among financial literacy, financial capability and financial well-being.
Washington D.C., May 23, 2019 – In recognition of the one-year anniversary of the passage of The Senior Safe Act, the North American Securities Administrators Association (NASAA), the U.S. Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA) have issued a fact sheet to help raise awareness among broker-dealers, investment advisers, and transfer agents of the Act and how the Act’s immunity provisions work.
WASHINGTON – FINRA’s Board of Governors met on May 6 and 7 in New York City. During the meeting, the Board received updates on FINRA’s regulatory operations, including a status report on FINRA’s 529 plan self-reporting initiative and draft guidance around when Enforcement would grant firms credit for extraordinary cooperation during the enforcement process. That guidance will be published in a future Regulatory Notice.
WASHINGTON – FINRA today announced the formation of an Office of Financial Innovation that will serve as a central point of coordination for issues related to significant financial innovations by FINRA member firms, particularly new uses of financial technology (fintech). The move will further enhance FINRA’s ability to identify, understand and foster financial innovation in the markets in a manner that strengthens investor protection and market integrity.
WASHINGTON — The Securities and Exchange Commission (SEC) and FINRA announced today the opening of registration for their 2019 National Compliance Outreach Program for Broker-Dealers, which will be held June 27, in Chicago, IL.
The program is designed to provide an open forum for regulators and industry professionals including compliance, audit and other senior personnel of broker-dealer firms and branch offices to discuss current compliance practices and promote an effective compliance structure for the protection of investors.
WASHINGTON, D.C. – To kickoff April as Financial Literacy Month, the FINRA Investor Education Foundation (FINRA Foundation) and the American Library Association (ALA) today announced the selection of 50 U.S. public libraries to be part of a national tour of the traveling exhibition, Thinking Money for Kids.
The Securities and Exchange Commission today announced that Vanessa Countryman has been appointed as the agency’s Secretary. The Secretary is responsible for overseeing the administrative aspects of Commission meetings, rulemakings, and procedures. Ms. Countryman has served as Acting Secretary since March 2019.
Within the SEC, the Office of the Secretary plays a central role in ensuring the effective processing of Commission business. Office staff, among other things, review all documents submitted to the Commission, track documents submitted to the Commission, schedule Commission meetings in accordance with the Government in the Sunshine Act, maintain records of official Commission actions, and provide public notice of those actions on the SEC.gov website and in the Federal Register.
“Since she stepped into the role of Acting Secretary earlier this year, Vanessa has led the office with the utmost professionalism and integrity,” said SEC Chairman Jay Clayton. “I am pleased that the office and the agency as a whole will continue to benefit from her expertise and institutional knowledge.”
Ms. Countryman added, "I am honored and excited for the opportunity to serve in this role. It is a privilege to continue to be part of the Office of the Secretary's exceptional team and support the Commission's mission on behalf of investors and markets."
Ms. Countryman joined the SEC in July 2010 as a Counsel to Commissioner Kathleen Casey and subsequently to Commissioner Daniel Gallagher. Since 2013, Ms. Countryman served as Chief Counsel in the Division of Economic and Risk Analysis, where she actively participated in numerous significant rulemakings. Prior to joining the SEC, Ms. Countryman clerked for Judge Emilio Garza on the Fifth Circuit Court of Appeals and then practiced law at Gibson, Dunn & Crutcher LLP, representing clients in appellate and regulatory matters. Ms. Countryman earned her J.D. from the University of Chicago. She received an M.Phil. from Oxford University and a B.A. from Columbia University.
U.S. Securities and Exchange Commission (SEC) Chairman Jay Clayton, U.S. Commodity Futures Trading Commission (CFTC) Chairman J. Christopher Giancarlo, and U.K. Financial Conduct Authority (FCA) Chief Executive Andrew Bailey issued the following joint statement regarding the credit derivatives markets:
“The continued pursuit of various opportunistic strategies in the credit derivatives markets, including but not limited to those that have been referred to as ‘manufactured credit events,’ may adversely affect the integrity, confidence and reputation of the credit derivatives markets, as well as markets more generally. These opportunistic strategies raise various issues under securities, derivatives, conduct and antifraud laws, as well as public policy concerns.”
As a result, today the Chairmen and Chief Executive of our respective agencies announce that the agencies will make collaborative efforts to prioritize the exploration of avenues, including industry input which will address these concerns and foster transparency, accountability, integrity, good conduct and investor protection in these markets. These collaborative efforts would not, of course, preclude other appropriate actions by our respective agencies or authority.
The Securities and Exchange Commission took another significant step toward establishing the regulatory regime for security-based swap dealers today by adopting a package of rules and rule amendments under Title VII of the Dodd-Frank Act. These and other rules previously adopted by the Commission are designed to enhance the risk mitigation practices of firms that stand at the center of our security-based swap market, thereby protecting their counterparties and reducing risk to the market as a whole.
“I once again would like to thank Commissioner Peirce for her excellent leadership on our efforts to stand up the Dodd-Frank Title VII regulatory regime. Today’s rules reflect another important step in this effort. These rules help ensure that the firms who are at the center of the security-based swap market manage counterparty risk appropriately and in so doing protect investors and the market more generally,” said SEC Chairman Jay Clayton. “Our colleagues at the SEC, including our teams in the Division of Trading and Markets and the Division of Economic and Risk Analysis, brought their extensive knowledge and expertise to bear in crafting these rules. Commissioner Peirce and I are grateful for their efforts and we also want to thank CFTC Chairman Giancarlo, CFTC Commissioner Quintenz, and their colleagues for their efforts and commitments to inter-agency cooperation.”
“These final rules are designed to ensure the financial integrity of dealers at the center of the critically important security-based swap market and represent an enormous effort on the part of our staff, particularly in the Divisions of Trading and Markets and Economic and Risk Analysis,” said Commissioner Hester Peirce. “In addition, working with Commissioner Quintenz and the CFTC on this important rule has been a wonderful opportunity to cooperate in a way that serves the American people. Throughout the process, our two staffs have drawn on one another’s experiences, expertise, and insights in an effort to build effective rules. I am grateful to Chairman Giancarlo and Chairman Clayton for their work on this rule and our broader cooperation efforts.”
Today’s rules address four key areas:
The accompanying fact sheet describes the rules in more detail.
* * *
FACT SHEET
Final Rules and Amendments June 21, 2019
The Commission adopted a package of new rules and rule amendments to establish capital, margin, and segregation requirements under Title VII of the Dodd-Frank Act.
Capital Rules for Nonbank SBSDs and Broker-Dealers
The Rules
Minimum Capital Requirements
Type of Registrant
Rule
Tentative Net Capital
(Net capital before haircuts)
Net Capital
Fixed-Dollar
Financial Ratio
Stand-alone SBSD (not using internal models)
18a-1
N/A
$20 million
2% margin factor
Stand-alone SBSD (using internal models)1
$100 million
Broker-dealer SBSD (not using internal models)
15c3-1
2% margin factor + Rule 15c3-1 ratio
Broker-dealer SBSD (using internal models)
$5 billion
$1 billion
1 Includes a stand-alone SBSD that also is an OTC derivatives dealer.
Computing Net Capital
Internal Risk Management Controls
Capital Rules for Nonbank MSBSPs
Margin Requirements for Nonbank SBSDs
Calculation
Collecting Collateral
Exceptions
Exception
Status of Exceptions to Collecting Margin
Status of Exceptions to Delivering VM
VM
IM
Commercial End User
Need Not Collect
Need Not Deliver
BIS or European Stability Mechanism
Multilateral Development Bank
Financial Market Intermediary
Must Collect
Must Deliver
Affiliate
Sovereign with Minimal Credit Risk
Legacy Account
IM Below $50 Million Threshold
Minimum Transfer Amount
Margin Requirements for Nonbank MSBSPs
Segregation Requirements for Broker-Dealers and SBSDs
Omnibus Segregation Requirements
Exemption from the Segregation Requirements
Alternative Compliance Mechanism
Cross-Border Application
What’s Next?
The rules will become effective 60 days after publication in the Federal Register. The compliance date for the rule amendments and new rules is 18 months after the later of: (1) the effective date of the final rules establishing recordkeeping and reporting requirements for SBSDs and MSBSPs; or (2) the effective date of the final rules addressing the cross-border application of certain security-based swap requirements.
Jurors in Manhattan federal court today returned a verdict in the Securities and Exchange Commission’s favor against a broker who was charged in January 2017 with fraud for excessively trading customer accounts using a trading scheme that generated hefty commissions for the broker but significant losses for his customers. A second broker, also charged in the same complaint for engaging in the same fraudulent practices, admitted to his misconduct and settled with the SEC on the eve of trial.
The SEC’s evidence at trial showed that the broker, Donald J. Fowler, while registered with J.D. Nicholas & Associates Inc., a now-defunct broker-dealer located in Syosset, New York, engaged in fraud when he deployed an in-and-out trading scheme that was unsuitable for his customers in order to generate large commissions for himself. The evidence showed that Fowler failed to do any reasonable due diligence to determine whether his trading, which involved frequent buying and selling of securities, could deliver a profit for his customers. Indeed, the SEC’s proof showed that the cumulative commissions Fowler charged were so high that investors would have needed to generate, on average, a 142% return simply to break even.
On June 10, the SEC obtained a final judgment against Fowler’s partner, Gregory T. Dean, who admitted, among other things, that he knowingly or recklessly made trade recommendations to his customers with no reasonable basis, and that his conduct violated the federal securities laws.
“Brokers must have a reasonable basis to recommend a trading strategy to their customers,” said Marc P. Berger, Director of the SEC’s New York Regional Office. “Today’s jury verdict marks an important victory in the SEC’s pursuit of brokers who engage in excessive trading in their customers’ accounts to enrich themselves at their customers’ expense.”
The jury found Fowler liable on all counts, finding that he violated the antifraud provisions of the federal securities laws.Dean consented to the entry of the final judgment, which enjoined him from violating the above antifraud provisions. In addition to admitting that his conduct violated the law, Dean agreed to pay $253,881 in disgorgement, $50,521 in prejudgment interest, and a civil penalty in the amount of $253,881. The court will determine remedies against Fowler at a later date.
The SEC’s litigation is being conducted by Kristin Pauley, David Stoelting, Jorge Tenreiro, and Thomas P. Smith, Jr. of the New York Regional Office. The investigation that led to the SEC’s action was conducted by Ms. Pauley, Mr. Stoelting, Barry O’Connell, Michael P. Fioribello, Jordan Baker, Leslie Kazon, and Mr. Smith. The case is being supervised by Sanjay Wadhwa.
The SEC has charged Ability Inc., an Israel-based intelligence communications company, its wholly-owned subsidiary, and two of its top executives with defrauding shareholders of a Florida-based special purpose acquisition company (SPAC), a company formed to raise capital for a merger or acquisition within a set timeframe.
The SEC’s complaint, filed June 18 in federal district court in Manhattan, alleges that Ability, CEO Anatoly Hurgin, and chief technology officer Alexander Vladimir Aurovsky defrauded SPAC shareholders who voted in favor of a merger between Ability and the SPAC, Cambridge Capital Acquisition Corp., in December 2015. According to the complaint, if Cambridge had not consummated a merger by December 2015, it would have been required, without an extension of the SPAC term, to return all of the capital to its shareholders. To convince shareholders to vote in favor of the merger proposal, the defendants allegedly lied to SPAC shareholders about Ability’s business prospects, including Ability’s purported ownership of a new “game-changing” cellular interception product, ULIN, Ability’s so-called backlog of orders from its largest customer, a police agency in Latin America, Ability’s lack of actual purchase orders backing its backlog, and Ability’s pipeline of possible future orders from customers. As alleged in the complaint, Ability and the two executives profited from the merger with Ability receiving approximately $19 million and Hurgin and Aurovsky each receiving approximately $9 million plus $6 million each in put options, while Cambridge shareholders lost $60 million.
“We allege that Cambridge shareholders were duped into merging the SPAC with Ability, resulting in large losses to investors,” said Michele Wein Layne, Director of the SEC’s Los Angeles Regional Office. “As alleged in our complaint, the defendants lied to shareholders to make sure the ill-fated merger was approved so they could line their pockets with tens of millions of dollars from the merger.”
The SEC’s complaint charges the defendants with violations of the antifraud and proxy statement provisions of the federal securities laws, and seeks permanent injunctions, disgorgement with prejudgment interest, and penalties. The complaint also seeks an officer-and-director bar against Hurgin.
For further information, see Release No. 33-10651 (June 20, 2019).
The SEC’s investigation was conducted by Jennifer T. Calabrese and supervised by Ansu N. Banerjee and John W. Berry. The litigation will be conducted by Donald Searles and supervised by Amy J. Longo of the Los Angeles Regional Office. The SEC appreciates the assistance of the Israel Securities Authority.
The Securities and Exchange Commission today charged Walmart with violating the Foreign Corrupt Practices Act (FCPA) by failing to operate a sufficient anti-corruption compliance program for more than a decade as the retailer experienced rapid international growth.
Walmart agreed to pay more than $144 million to settle the SEC’s charges and approximately $138 million to resolve parallel criminal charges by the U.S. Department of Justice for a combined total of more than $282 million.
According to the SEC’s order, Walmart failed to sufficiently investigate or mitigate certain anti-corruption risks and allowed subsidiaries in Brazil, China, India, and Mexico to employ third-party intermediaries who made payments to foreign government officials without reasonable assurances that they complied with the FCPA. The SEC’s order details several instances when Walmart planned to implement proper compliance and training only to put those plans on hold or otherwise allow deficient internal accounting controls to persist even in the face of red flags and corruption allegations.
“Walmart valued international growth and cost-cutting over compliance,” said Charles Cain, Chief of the SEC Enforcement Division’s FCPA Unit. “The company could have avoided many of these problems, but instead Walmart repeatedly failed to take red flags seriously and delayed the implementation of appropriate internal accounting controls.”
Walmart consented to the SEC’s order finding that it violated the books and records and internal accounting controls provisions of the Securities Exchange Act of 1934.
The SEC’s investigation was conducted by Jason Rose, Irene Gutierrez, and Laura Bennett. The case was supervised by David Reece. The SEC appreciates the assistance of the Department of Justice Criminal Division’s Fraud Section, the Federal Bureau of Investigation, and the Internal Revenue Service. The SEC also appreciates the assistance of regulators and law enforcement in Brazil, India, and Mexico.
Agencies issue final amendments to Regulation CC regarding funds availability
Federal Reserve Board releases results of supervisory bank stress tests
Federal Reserve Board announces approval of applications by Frost Bank
Federal Reserve issues FOMC statement
Federal Reserve Board and Federal Open Market Committee release economic projections from the June 18-19 FOMC meeting
Agencies release list of distressed or underserved nonmetropolitan middle-income geographies
Agencies issue final rule to streamline regulatory reporting requirements and commit to further review of reporting burdens for small institutions
Federal Reserve Board requests public comment on technical updates to its Freedom of Information Act procedures and on changes to its rules governing the disclosure of confidential supervisory information
Federal Reserve Board publishes summary of feedback from roundtable discussions on the current state of, and potential revisions to, the Community Reinvestment Act
Federal Reserve Board announces approval of application by Ameris Bancorp
Consumers have submitted over 1.7 million complaints about financial products and services with the Bureau since 2011. The agency shares complaint data internally to inform its work. The Bureau has developed tools to help staff search, summarize . . .
Summary of significant audit, evaluation, and investigative work concerning the Board of Governors of the Federal Reserve System and the Bureau of Consumer Financial Protection we completed from October 1, 2018, through March 31, 2019.
Our objective was to assess the adequacy of internal controls related to the management and administration of the Board's Fine Arts Program, including its process for acquiring artwork. Our scoping effort did not identify any potential internal . . .
We contracted with an independent public accounting firm to audit the Bureau Civil Penalty Fund's compliance with the Improper Payments Information Act of 2002, as amended, for fiscal year 2018. We reviewed and monitored the work of the contractor . . .
Report recommendations to the Board and to the Bureau that have been open for more than 12 months as of March 31, 2019.
The Work Plan presents the audits and evaluations we are conducting to help the Board and the Bureau fulfill their respective missions.
Workforce planning helps to address gaps between today's workforce and tomorrow's human capital needs. In light of the Board's level of retirement-eligible workers and its need for a workforce with specialized skills, we evaluated the Board's . . .
The Dodd-Frank Act authorizes the Bureau to supervise all depository institutions with more than $10 billion in total assets and their affiliates, along with thousands of nondepository institutions. The agency seeks to prioritize its examination . . .
A closed meeting of the Board of Governors of the Federal Reserve System was held at 11:30 a.m.on April 22, 2019. Matter(s) considered: Review and determination by the Board of Governors of the advance and discount rates to be charged by the Federal Reserve Banks.
A closed meeting of the Board of Governors of the Federal Reserve System will be held at 11:30 a.m. on April 22, 2019. Matter(s) considered: Review and determination by the Board of Governors of the advance and discount rates to be charged by the Federal Reserve Banks.
An Open Board meeting of the Board of Governors of the Federal Reserve System was held at 1:30 p.m. on April 23, 2019. Matter(s) considered: Proposal to Revise the Board's Control Rules.
Ayelen Banegas and Jessica Goldenring | Since the financial crisis, the markets for Bank Loan (BL) and High Yield Bond (HYB) mutual funds (MFs) have grown significantly, with assets under management increasing from $19 billion and $75 billion to close to $117 billion and $225 billion, respectively, as of December 2018. This short paper characterizes the universe of BL MFs and compare it against that of HYB MFs on several dimensions. We document that BL and HYB MFs' respective market share of leverage loans (LL) and high yield (HY) corporate bonds outstanding increased since the mid-2000s. We also show that in terms of portfolio allocations, HYB and BL MFs hold around 60 percent of B, BB and BBB-rated assets and that exposure to foreign fixed-income markets is relatively small for both types of MFs. Finally, we document that net flows as a share of assets were larger and more volatile for BL MFs than for their HYB counterparts and that HYB MFs significantly outperformed BL MFs since early 2000.
James A. Kahn and Benjamin S. Kay | We provide new evidence that credit supply shifts contributed to the U.S. subprime mortgage boom and bust. We collect original data on both government and private mortgage insurance premiums from 1999-2016, and document that prior to 2008, premiums did not vary across loans with widely different observable characteristics that we show were predictors of default risk. Then, using a set of post-crisis insurance premiums to fit a model of default behavior, and allowing for time-varying expectations about house price appreciation, we quantify the mispricing of default risk in premiums prior to 2008. We show that the flat premium structure, which necessarily resulted in safer mortgages cross-subsidizing riskier ones, produced substantial adverse selection. Government insurance maintained an even flatter premium structure even post-crisis, and consequently also suffered from adverse selection. But after 2008 it reduced its exposure to default risk through a combination of higher premiums and rationing at the extensive margin.
Előd Takáts and Judit Temesvary | We combine a rarely accessed BIS database on bilateral cross-border lending flows with cross-country data on macroprudential regulations. We study the interaction between the monetary policy of major international currency issuers (USD, EUR and JPY) and macroprudential policies enacted in source (home) lending banking systems. We find significant interactions. Tighter macroprudential policy in a home country mitigates the impact on lending of monetary policy of a currency issuer. For instance, macroprudential tightening in the UK mitigates the negative impact of US monetary tightening on USD-denominated cross-border bank lending outflows from UK banks. Vice-versa, easier macroprudential policy amplifies impacts. The results are economically significant.
R. Matthew Darst and Ehraz Refayet | We study how adverse selection distorts equilibrium investment allocations in a Walrasian credit market with two-sided heterogeneity. Representative investor and partial equilibrium economies are special cases where investment allocations are distorted above perfect information allocations. By contrast, the general setting features a pecuniary externality that leads to trade and investment allocations below perfect information levels. The degree of heterogeneity between informed agents' type governs the direction of the distortion. Moreover, contracts that complete markets dampen the impact of pecuniary externalities and change equilibrium distortions. Implications for empirical design in credit market studies and financial stability are discussed.
Daniel Dias and Carlos Robalo Marques | Using firm-level data, this paper shows that the Portuguese financial crisis was a period of intensified productivity-enhancing reallocation. Aggregate productivity gains, both in manufacturing and services, came from relatively higher contributions of entering and exiting firms and from reallocation of resources between surviving firms. At the microlevel, the crisis reduced the probability of survival for high- and low-productivity firms, but it hit low-productivity firms disproportionately harder. We also found important heterogeneous effects across economic sectors regarding input reallocation that underline the importance of using data for the entire economy whenever similar studies are conducted.
Christopher J. Curfman and John Kandrac | We investigate how liquidity regulations affect banks by examining a dormant monetary policy tool that functions as a liquidity regulation. Our identification strategy uses a regression kink design that relies on the variation in a marginal high-quality liquid asset (HQLA) requirement around an exogenous threshold. We show that mandated increases in HQLA cause banks to reduce credit supply. Liquidity requirements also depress banks' profitability, though some of the regulatory costs are passed on to liability holders. We document a prudential benefit of liquidity requirements by showing that banks subject to a higher requirement before the financial crisis had lower odds of failure.
Martin M. Andreasen, Kasper Jørgensen, and Andrew Meldrum | This paper documents a significantly stronger relationship between the slope of the yield curve and future excess bond returns on Treasuries from 2008-2015 than before 2008. This new predictability result is not matched by the standard shadow rate model with Gaussian factor dynamics, but extending the model with regime-switching in the (physical) dynamics of the factors at the lower bound resolves this shortcoming. The model is also consistent with the downwards trend in surveys on short rate expectations at long horizons, but requires a break in the level of its factors to closely fit the low level of these surveys since 2015.
Eva de Francisco | This paper proposes a model to jointly explain some of the heterogeneous individual consumption behavior found in the recent empirical literature, such as the existence of a significant size of wealthy hand-to-mouth consumers, and negative marginal propensities to consume associated with housing upgrades. Agents live for a finite horizon, are heterogeneous in initial wealth, and can save in a liquid asset, and in an illiquid housing asset, that also provides housing services. When housing choices are very limited, the model replicates these empirical findings. Moreover, in the presence of unanticipated income shocks and endogenous credit constraints, this richness in marginal propensities to consume has significant implications for aggregate consumption, and helps explain the consumption behavior documented during the Great Recession as well as the consumption responses to recent tax rebates.
Bora Durdu, Alex Martin, and Ilknur Zer | We examine the role of U.S. monetary policy in global financial stability by using a cross-country database spanning the period from 1870-2010 across 69 countries. U.S. monetary policy tightening increases the probability of banking crises for those countries with direct linkages to the U.S., either in the form of trade links or significant share of USD-denominated liabilities. Conversely, if a country is integrated globally, rather than having a direct exposure, the effect is ambiguous. One possible channel we identify is capital flows: If the correction in capital flows is disorderly (e.g., sudden stops), the probability of banking crises increases. These findings suggest that the effect of U.S. monetary policy in global banking crises is not uniform and largely dependent on the nature of linkages with the U.S.
Filippo Curti, Marco Migueis, and Robert Stewart | The Federal Reserve's Comprehensive Capital Analysis and Review (CCAR) requires large bank holding companies (BHCs) to project losses under stress scenarios. In this paper, we propose multiple benchmarks for operational loss projections and document the industry distribution relative to these benchmarks. The proposed benchmarks link BHCs' loss projections with both financial characteristics and metrics of historical loss experience. These benchmarks capture different measures of exposure and together provide a comprehensive view of the reasonability of model outcomes. Furthermore, we employ several approaches to assess the conservatism of BHCs' stress loss projections and our estimates for the conservatism of loss projections for the median bank range from the 90th percentile to above the 99th percentile of the operational loss distribution.
Lina Lu, Matthew Pritsker, Andrei Zlate, Ken Anadu, and James Bohn | This paper studies whether U.S. public pension funds reach for yield by taking more investment risk in a low interest rate environment. To study funds’ risk-taking behavior, we first present a simple theoretical model relating risk-taking to the level of risk-free rates, to their underfunding, and to the fiscal condition of their state sponsors. The theory identifies two distinct channels through which interest rates and other factors may affect risk-taking: by altering plans’ funding ratios, and by changing risk premia. The theory also shows the effect of state finances on funds’ risk-taking depends on incentives to shift risk to state debt holders. To study the determinants of risk-taking empirically, we create a new methodology for inferring funds’ risk from limited public information on their annual returns and portfolio weights for the interval 2002-2016. In order to better measure the extent of underfunding, we revalue funds’ liabilities using discount rate s that better reflect their risk. We find that funds on average took more risk when risk-free rates and funding ratios were lower, which is consistent with both the funding ratio and the risk-premia channels. Consistent with risk-shifting, we also find more risk-taking for funds affiliated with state or municipal sponsors with weaker public finances. We estimate that up to one-third of the funds’ total risk was related to underfunding and low interest rates at the end of our sample period.
Chunya Bu, John Rogers, and Wenbin Wu | Identification of Fed monetary policy shocks is complex, in light of the distinct policymaking regimes before, during, and after the ZLB period of December 2008 to December 2015. We develop a heteroscedasticity-based partial least squares approach, combined with Fama-MacBeth style cross-section regressions, to identify a US monetary policy shock series that usefully bridges periods of conventional and unconventional policymaking and is effectively devoid of the central bank information effect. Our series has moderately high correlation with well-known shocks in the literature, but has crucially important differences. Following conventional tests, we find scant evidence of the information effect in our measure. We attribute the source of these different findings to our econometric procedure and our use of the full maturity spectrum of interest rate instruments in constructing our measure. We then present evidence confirming an hypothesis in the literature that the information effect can lead to the result that shocks to monetary policy have transmission effects with signs that differ from traditional theory. We find that shocks to series that are devoid of (embody) the information effect display conventionally-signed (perverse) impulse responses of output and inflation. This provides evidence of first-order importance to staff at central banks undertaking quantitative theoretical modeling of the effects of monetary policy.
Original paper: PDF
Chunya Bu, John Rogers, and Wenbin Wu | Identification of Fed monetary policy shocks is complex, in light of the distinct policymaking regimes before, during, and after the ZLB period of December 2008 to December 2015. We develop a heteroscedasticity-based partial least squares approach, combined with Fama-MacBeth style cross-section regressions, to identify a US monetary policy shock series that usefully bridges periods of conventional and unconventional policymaking and is effectively devoid of the central bank information effect. Our series has moderately high correlation with the shocks identified by Nakamura and Steinsson (2018), Swanson (2018), and Jarocinski and Karadi (2018), but has crucially important differences. Following both the Nakamura-Steinsson and Jarocinski-Karadi empirical tests, we find scant evidence of the information effect in our measure. We attribute the source of these different findings to our econometric procedure and our use of the full maturity spectrum of interest rate instrume nts in constructing our measure. We then present evidence confirming an hypothesis in the literature that the information effect can lead to the result that shocks to monetary policy have transmission effects with signs that differ from traditional theory. We find that shocks to series that are devoid of (embody) the information effect display conventionally-signed (perverse) impulse responses of output and inflation. This provides evidence of first-order importance to staff at central banks undertaking quantitative theoretical modeling of the effects of monetary policy.
Michael J. Lamla, Damjan Pfajfar, and Lea Rendell | We explore the consequences of losing confidence in the price-stability objective of central banks by quantifying the inflation and deflationary biases in inflation expectations. In a model with an occasionally binding zero-lower-bound constraint, we show that an inflation bias as well as a deflationary bias exist as a steady-state outcome. We assess the predictions of this model using unique individual-level inflation expectations data across nine countries that allow for a direct identification of these biases. Both inflation and deflationary biases are present (and sizable) in inflation expectations of these individuals. Among the euro-area countries in our sample, we can document significant differences in perceptions of the European Central Bank's objectives, despite having a common monetary policy.
Hie Joo Ahn and James D. Hamilton | The underlying data from which the U.S. unemployment rate, labor-force participation rate, and duration of unemployment are calculated contain numerous internal contradictions. This paper catalogs these inconsistencies and proposes a reconciliation. We find that the usual statistics understate the unemployment rate and the labor-force participation rate by about two percentage points on average and that the bias in the latter has increased since the Great Recession. The BLS estimate of the average duration of unemployment overstates by 50 percent the true duration of uninterrupted spells of unemployment and misrepresents what happened to average durations during the Great Recession and its recovery.
Yang-Ho Park | Using positions data on bond futures, I document that speculators' spread trades contain private information about future economic activities and asset prices. Strong steepening trades are associated with negative payroll surprises in subsequent months and can predict asset markets' reaction to future payroll releases, suggesting that speculators hold superior information about future payrolls. Steepening trades can also predict the rise of stock prices within a few hours before subsequent FOMC announcements, implying that the pre-FOMC stock drift is driven by informed speculation. Overall, evidence highlights spread traders' superior information and its important role in explaining announcement returns and pre-announcement drifts.
Gianni Amisano and Oreste Tristani | We study the relationship between monetary policy and long-term rates in a structural, general equilibrium model estimated on both macro and yields data from the United States. Regime shifts in the conditional variance of productivity shocks, or "uncertainty shocks", are an important model ingredient. First, they account for countercyclical movements in risk premia. Second, they induce changes in the demand for precautionary saving, which affects expected future real rates. Through changes in both risk-premia and expected future real rates, uncertainty shocks account for about 1/2 of the variance of long-term nominal yields over long horizons. The remaining driver of long-term yields are changes in in ation expectations induced by conventional, autoregressive shocks. Long-term in ation expectations implied by our model are in line with those based on survey data over the 1980s and 1990s, but less dogmatically anchored in the 2000s.Appendix(PDF)
Tim Dore and Traci Mach | In 2005, Prosper launched the first peer-to-peer lending website in the US, allowing for consumers to apply for and receive loans entirely online. To understand the effect of this new credit source, we match application-level data from Prosper to credit bureau data. Post application, borrowers' credit scores increase and their credit card utilization rates fall relative to non-borrowers in the short run. In the longer run, total debt levels for borrowers are higher that of non-borrowers. Differences in mortgage debt are particularly large and increasing over time. Despite increased debt levels relative to non-borrowers, delinquency rates for borrowers are significantly lower.
Colin C. Caines and Fabian Winkler | We characterize optimal monetary policy when agents learn about endogenous asset prices. Learning leads to inefficient asset price fluctuations and distortions in consumption and investment decisions. We find that the policy-relevant natural real interest rate increases with subjective asset price beliefs. Optimal monetary policy therefore raises interest rates when expected capital gains are high. When the asset is not in fixed supply, optimal policy also "leans against the wind". In a simple calibration of the model, a positive response to capital gains in simple interest rate rules is beneficial. Our results are robust to alternative belief specifications.
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Juan M. Londono and Nancy R. Xu | In this paper, we document and explain the distinct behaviors of U.S. downside and upside variance risk premiums (DVP and UVP, respectively) and their international stock return predictability patterns. DVP, the compensation for bearing downside variance risk, is positive, highly correlated with the total variance premium, and countercyclical, whereas UVP is, on average, borderline positive and procyclical with large negative spikes around episodes of market turmoil. We then provide robust evidence that decomposing VP into its downside and upside components significantly improves domestic and international stock return predictability. DVP is a robust predictor at four to six months and exhibits a hump-shaped pattern, whereas UVP performs the best at very short horizons. These stylized facts highlight the importance of acknowledging asymmetry in equity risk premiums. Hence, in the second part of the paper, we rationalize the economic sources of DVP and UVP in an international dynamic asset pricing model featuring asymmetric and time-varying risk aversion and economic uncertainty in a partially integrated world economy. We show that DVP is mostly driven by the upside movements of risk aversion, whereas UVP loads significantly and negatively on downside economic uncertainty. Moreover, we find that DVP (UVP) transmits to international markets mostly through financial integration (real economic integration).
The New York Fed's Center for Microeconomic Data released the May 2019 Survey of Consumer Expectations, which shows a decline in short- and medium- term inflation expectations.
The New York Fed's Open Market Trading Desk plans to distribute secondary market Treasury reinvestment purchases across eleven different sectors, including nominal coupons, bills, Treasury Inflation-Protected Securities, and Floating Rate Notes.
Survey shows that households expect home prices to rise at a somewhat slower pace relative to last year.
On May 14, 2019, the New York Fed approved the applications under Section 3 of the Bank Holding Company Act of 1956, as amended, by Pioneer Bancorp, MHC and Pioneer Bancorp, Inc., both of Albany, New York, to become bank holding companies.
Credit Card Delinquencies Rise as User Demographics Shift.
The New York Fed’s Center for Microeconomic Data released the April 2019 Survey of Consumer Expectations, which shows a decline in short- and medium- term inflation expectations.
The Federal Reserve and U.S. Treasury did not intervene in foreign exchange markets during the January – March 2019 quarter, the Federal Reserve Bank of New York said today in its quarterly report to the U.S. Congress.
The New York Fed today announced the formation of the Education and Industry Forum on Financial Services Culture, a private-sector group sponsored by the New York Fed.
The New York Fed will incorporate selected deposits into the daily calculation of the Overnight Bank Funding Rate (OBFR) from May 2, 2019, reflecting underlying transactions from May 1, 2019.
Federal Reserve Banks’ Small Business Report Finds Strong Revenue and Employment Growth with Profitability Similar to Prior Year; Financing Demand Stable, Requests to Online Lenders Notably Increasing
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