Speech At The Economic Club of New York New York, New York
Speech At the Large Bank Directors Conference, Chicago, Illinois
Speech At "Fostering a Dynamic Global Recovery," a symposium sponsored by the Federal Reserve Bank of Kansas City, Jackson Hole, Wyoming
Speech At the Conference to Celebrate Arminio Fraga’s 60 Years, Casa das Garcas, Rio de Janeiro, Brazil
Speech At the Conference for the 2017 Summer Training and Scholarship Program sponsored by the American Economic Association and the National Science Foundation and hosted by the Department of Economics, Michigan State University, East Lansing, Michigan
Speech At the National Bureau of Economic Research’s Monetary Economics Summer Institute, Cambridge, Massachusetts
Speech At the "Washington Transformation? Politics, Policies, Prospects," a forum sponsored by the Summer Institute of Martha’s Vineyard Hebrew Center, Vineyard Haven, Massachusetts
Speech At the American Enterprise Institute, Washington, D.C.
Speech At the IMF Workshop on Financial Surveillance and Communication: Best Practices from Latin America, the Caribbean, and Advanced Economies, Washington, D.C.
Speech At the Salzburg Global Seminar, Salzburg, Austria
WASHINGTON — The FINRA Investor Education Foundation (FINRA Foundation) today released a new study that shows veterans are faring slightly better financially than civilians, even as they struggle under the weight of credit card debt and underwater mortgages.
WASHINGTON — The FINRA Investor Education Foundation (FINRA Foundation) today announced that it has awarded Dr. J. Michael Collins the inaugural Ketchum Prize for outstanding service and research to advance investor protection and financial capability in the U.S.
WASHINGTON — The Financial Industry Regulatory Authority (FINRA) announced today that a FINRA extended hearing panel censured Albany, NY-based broker-dealer C.L. King & Associates, Inc. and fined the firm $750,000 for negligently making material misrepresentations and omissions to issuers in connection with the firm’s redemptions of debt securities on behalf of a hedge fund customer. The hearing panel also found that C.L.
WASHINGTON — The Securities and Exchange Commission (SEC), Financial Industry Regulatory Authority (FINRA) and the Municipal Securities Rulemaking Board (MSRB) today announced the opening of registration for the Compliance Outreach Program for Municipal Advisors.
WASHINGTON — Robert W. Cook, President and CEO of the Financial Industry Regulatory Authority (FINRA) today testified before the U.S. House of Representatives Subcommittee on Capital Markets, Securities, and Investment about FINRA’s operations and regulatory programs, and how FINRA is fulfilling its mission to protect investors and ensure market integrity while facilitating vibrant capital markets.
WASHINGTON — FINRA issued an Investor Alert today warning investors to beware of potential scams touting stocks and other investments promising huge financial gains in the wake of Hurricane Harvey.
The Investor Alert, Beware of Stock Fraud in the Wake of Hurricane Harvey, explains how investors can spot and protect themselves from investment scams associated with the clean-up or rebuilding of the devastated areas.
FINRA today issued an Investor Alert warning investors about the potential risks of participating in initial coin offerings, commonly referred to as ICOs.
WASHINGTON — The Financial Industry Regulatory Authority (FINRA) announced today the election of Governors to its Board of Governors.
Stephen M. Cutler, Executive Vice President and Vice Chairman, JPMorgan Chase & Co., was elected as a Large Firm Governor, one of three representatives of large firms on the Board. Cutler has been a FINRA Governor since November 2016, when he was appointed to fill an unexpired term.
WASHINGTON — The Financial Industry Regulatory Authority (FINRA) announced today that it has expelled New York-based Hallmark Investments, Inc. and barred its Chief Executive Officer, Steven G. Dash, in connection with a scheme to sell shares of stock to customers at fraudulently inflated prices. FINRA also suspended Hallmark representative Stephen P. Zipkin for two years and required him to pay more than $18,000 in restitution to affected customers.
The Securities and Exchange Commission has approved interpretive guidance to assist companies in their efforts to comply with the pay ratio disclosure requirement mandated by Section 953(b) of the Dodd-Frank Wall Street Reform and Consumer Protection Act. Under the Commission’s rule implementing the pay ratio requirement, companies are required to begin making pay ratio disclosures in early 2018.
“It’s our priority to make sure that we implement disclosure rules mandated by Congress in a way that is true to the mandate and, to the extent practicable, allows companies to use operational data and otherwise readily available information to produce the disclosures,” said Chairman Jay Clayton. “Today’s guidance on pay ratio reflects the feedback the SEC has received and encourages companies to use the flexibility incorporated in our prior rulemaking to reduce costs of compliance.”
In particular, the guidance:
The Commission’s staff is also providing guidance separately about the pay ratio rule. Bill Hinman, Director of the Division of Corporation Finance noted, “This additional staff guidance, which includes examples illustrating how reasonable estimates and statistical methodologies may be used, is intended to assist companies with their compliance efforts and reduce the costs associated with preparing disclosures. We encourage companies to contact the division staff if additional interpretive questions arise as the compliance date approaches.”
Sweden-based telecommunications provider Telia Company AB has agreed to pay $965 million in a global settlement with the Securities and Exchange Commission, U.S. Department of Justice, and Dutch and Swedish law enforcement to resolve charges related to violations of the Foreign Corrupt Practices Act (FCPA) to win business in Uzbekistan.
According to the SEC’s order, Telia entered the Uzbek telecommunications market by offering and paying at least $330 million in bribes to a shell company under the guise of payments for lobbying and consulting services that never actually occurred. The shell company was controlled by an Uzbek government official who was a family member of the President of Uzbekistan and in a position to exert significant influence over other Uzbek officials, causing them to take official actions to benefit Telia’s business in Uzbekistan.
“Corporate bribery is not just unfair and illegal, it has terribly corrosive effects on business, government, and society,” said Stephanie Avakian, Co-Director of the SEC’s Enforcement Division. “As this global settlement demonstrates, the SEC continues to work closely with our counterparts at home and abroad to expose and pursue such corruption.”
Telia consented to the SEC’s order requiring the company to pay $457 million in disgorgement, and the company also agreed to pay a criminal fine of more than $508 million imposed by the Department of Justice. Portions of each amount could be offset by payments made in overseas settlements or proceedings brought by the Dutch Openbaar Ministerie or the Swedish Åklagarmyndigheten. Telia’s overall payment to the four agencies must be at least $965 million.
The SEC appreciates the assistance of the Department of Justice Criminal Division’s Fraud and Money Laundering and Asset Recovery Sections as well as the Internal Revenue Service, Department of Homeland Security, Dutch Openbaar Ministerie, National Authority for Investigation and Prosecution of Economic and Environmental Crime in Norway, Swedish Prosecution Authority, Office of the Attorney General in Switzerland, and Corruption Prevention and Combating Bureau in Latvia. The SEC also appreciates the assistance from regulators and law enforcement in France, Spain, and Hong Kong as well as the Financial Conduct Authority, British Virgin Islands Financial Services Commission, Cayman Islands Monetary Authority, Bermuda Monetary Authority, Cyprus Securities and Exchange Commission, and Central Bank of Ireland.
SEC Chairman Jay Clayton today issued a statement highlighting the importance of cybersecurity to the agency and market participants, and detailing the agency’s approach to cybersecurity as an organization and as a regulatory body.
The statement is part of an ongoing assessment of the SEC’s cybersecurity risk profile that Chairman Clayton initiated upon taking office in May. Components of this initiative have included the creation of a senior-level cybersecurity working group to coordinate information sharing, risk monitoring, and incident response efforts throughout the agency. The statement provides an overview of the Commission’s collection and use of data and discusses key cyber risks faced by the agency, including a 2016 intrusion of the Commission’s EDGAR test filing system. In August 2017, the Commission learned that an incident previously detected in 2016 may have provided the basis for illicit gain through trading. Specifically, a software vulnerability in the test filing component of the Commission’s EDGAR system, which was patched promptly after discovery, was exploited and resulted in access to nonpublic information. It is believed the intrusion did not result in unauthorized access to personally identifiable information, jeopardize the operations of the Commission, or result in systemic risk. An internal investigation was commenced immediately at the direction of the Chairman.
“Cybersecurity is critical to the operations of our markets and the risks are significant and, in many cases, systemic,” said Chairman Clayton. “We must be vigilant. We also must recognize—in both the public and private sectors, including the SEC—that there will be intrusions, and that a key component of cyber risk management is resilience and recovery.”
The statement also outlines the management of internal cybersecurity risks, including the incorporation of cybersecurity considerations in disclosure-based and supervisory efforts, coordination with other government entities, and the enforcement of the federal securities laws against cyber threat actors and market participants that do not meet their disclosure obligations.
Chairman Clayton writes, “By promoting effective cybersecurity practices in connection with both the Commission’s internal operations and its external regulatory oversight efforts, it is our objective to contribute substantively to a financial market system that recognizes and addresses cybersecurity risks and, in circumstances in which these risks materialize, exhibits strong mitigation and resiliency.”
The Securities and Exchange Commission today announced that Thomas J. Butler has been named an Associate Regional Director for the Investment Adviser and Investment Company examination program in the agency's New York Regional Office. Mr. Butler is leaving his current position as Director of the SEC's Office of Credit Ratings (OCR), a position he has held since June 2012.
"I am delighted to welcome Tom to the team," said Pete Driscoll, Acting Director of the Office of Compliance Inspections and Examinations. "The New York region is responsible for more than 2,800 registered investment advisers with more than $18 trillion in assets under management and over 200 investment company complexes. Tom's significant industry experience and leadership prior to and at the SEC will be invaluable to the experienced and dedicated staff in the New York examination program."
Prior to his 2012 appointment as the inaugural Director of OCR, Mr. Butler was a Managing Director at Morgan Stanley Smith Barney and Citigroup, held senior financial advisory and structuring roles at UBS and Babcock & Brown, and worked at two major law firms. Mr. Butler received his undergraduate degree from Rutgers College and his law degree from Rutgers School of Law at Newark.
Jessica Kane, Director of the SEC's Office of Municipal Securities (OMS), has been appointed to serve as Acting Director of OCR on an interim basis following Mr. Butler's departure. In turn, Rebecca Olsen, Deputy Director of OMS, will serve as Acting Director of that office while Ms. Kane is assigned to OCR.
The Securities and Exchange Commission today charged the former CEO of a Silicon Valley-based fiber optics company with insider trading in company stock by using secret brokerage accounts held in the names of his wife and brother.
The SEC alleges that Peter C. Chang, who also was the founder and chairman of the board at Alliance Fiber Optic Products, generated more than $2 million in illicit profits and losses avoided by trading on nonpublic information and tipping his brother ahead of two negative earnings announcements and the company’s merger.
According to the SEC’s complaint, Chang was the company’s largest shareholder and required under the federal securities laws to disclose his ownership of company securities as an officer and director. Chang allegedly traded company shares secretly in the family member accounts, often times from his work computer after attending board meetings where confidential information was discussed. He also allegedly tipped his brother in Taiwan with nonpublic information to trade ahead of the earnings announcements in 2015 and an announcement in 2016 that the company would be acquired via tender offer by Corning.
Chang allegedly tried to hide his control over one of the accounts by posing as his brother in communications with one of the brokerage firms, and he allegedly obscured his relationship with his wife in response to a market surveillance inquiry by the Financial Industry Regulatory Authority.
“As alleged in our complaint, Chang betrayed his company and its shareholders for his personal gain by trading in clandestine accounts right after learning extremely confidential information in board meetings,” said Jina L. Choi, Director of the SEC’s San Francisco Regional Office.
The SEC’s complaint charges Chang with violating Sections 10(b), 14(e), and 16(a) of the Securities Exchange Act of 1934 and Rules 10b-5, 14e-3, and 16a-3. The complaint seeks disgorgement with prejudgment interest plus a penalty, permanent injunction, and officer-and-director bar.
In a separate action by the U.S. Attorney’s Office for the Northern District of California, criminal charges were unsealed against Chang.
The SEC’s investigation, which is continuing, has been conducted by Serafima Krikunova and supervised by Jennifer J. Lee of the San Francisco office with assistance from John Rymas of the Enforcement Division’s Market Abuse Unit. The SEC’s litigation will be led by Susan F. LaMarca. The SEC appreciates the assistance of the U.S. Attorney’s Office for the Northern District of California, Federal Bureau of Investigation, Financial Industry Regulatory Authority, and Options Regulatory Surveillance Authority.
The Securities and Exchange Commission today announced that Catherine McGuire, Counsel in the Division of Trading and Markets, is retiring after 44 years at the SEC.
Ms. McGuire has received more than a dozen awards for her service, including the Distinguished Service Award, the SEC’s highest award, in 1992, and the Presidential Meritorious Executive Award, in 2000. She began her SEC career in 1973 in what was then the Division of Market Regulation and was promoted to positions of increasing responsibility, including serving as Counsel to Commissioner Bevis Longstreth from 1982 to 1983. She was named Chief Counsel and Associate Director of the division in 1993 and has advised the division as Counsel since 2008.
“Catherine McGuire has been an outstanding advocate for investors and a guardian of safe and efficient markets throughout her career at the Commission,” said Division of Trading and Markets Acting Director Heather Seidel. “She has been dedicated to the Commission’s mission to protect investors, maintain fair and orderly markets, and facilitate capital formation, and her continuing legacy is a talented and committed division staff, many of whom she mentored, supported, and advised.”
Ms. McGuire said: “I am grateful to have spent my legal career at the Commission. I am extremely proud of the work by the Division of Trading and Markets and the dedication of its staff. Their commitment to the agency’s mission is inspiring and represents the best of government service. It has been a privilege to work with them on behalf of investors.”
Ms. McGuire’s numerous and significant contributions include work to implement the Securities Reform Act of 1975, the Securities Exchange Act Amendments of 1983, the Secondary Mortgage Market Enhancement Act, the Market Reform Act, the Government Securities Act, the National Securities Markets Improvements Act, the Gramm-Leach-Bliley Act, the Commodity Futures Modernization Act, and the Dodd-Frank Wall Street Reform and Consumer Protection Act. She also worked on rules involving trade confirmations, regulation of municipal securities and government securities dealers, municipal securities disclosure, retail sales practices, securities arbitration, anti-money laundering, options, and derivatives.
Ms. McGuire is a graduate of the University of Michigan and the University of Kansas School of Law, which honored her with the Distinguished Alumna Award in 2004.
The Securities and Exchange Commission today announced that Ken C. Joseph, Head of Investment Adviser/Investment Company Examination Program in the New York Regional Office, is planning to leave the agency.
Since 2012, Mr. Joseph has led a team of over 130 accountants, examiners, attorneys, and support staff responsible for the examination of investment companies and investment advisers in New York and New Jersey. During that time, the IA/IC Examination Program in the New York Regional Office has steadily increased the number of exams of investment advisers and investment companies and has made many changes that have led to a more efficient and effective examination program.
Before joining the National Exam Program, Mr. Joseph started at the SEC as a Law Clerk. He went on to serve as an Assistant Director in the SEC's Enforcement Division, New York. When the division was reorganized in 2010, he joined the newly formed Asset Management Unit.
During his tenure with the Enforcement Division, Mr. Joseph investigated a wide array of alleged violations of the federal securities laws, including those involving financial fraud, auction rate and subprime securities, credit default swaps, reinsurance transactions, hedge funds, private equity funds, Ponzi schemes, special purpose entities, auditors, investment advisers, investment companies, self-regulatory organizations, transfer agents, and broker-dealers.
"Throughout his over two decade career at the SEC, Ken has served the Commission with dedication, leadership and integrity," said Pete Driscoll, Acting Director of the SEC's Office of Compliance Inspections and Examinations. "We and the investing public have greatly benefitted by his outstanding stewardship of the IA/IC Examination Program in New York and his commitment to the SEC's mission."
"Ken is the quintessential public servant, who has worked tirelessly for investors these last 21 years. He is, without a doubt, one of the most gifted and talented managers I have ever encountered – a true visionary with a mighty work ethic who has spent night and day thinking about how to do his job better," said Andrew M. Calamari, Director for the SEC's New York Regional Office. "After a stellar enforcement career, Ken took on leadership of our investment management program and in five short years transformed the program in many positive ways including innovative ideas and changes that contributed to the National Exam Program. It has been my privilege to serve with Ken, and I will miss him greatly."
Mr. Joseph said, "It has been a privilege and an honor to be entrusted with ever increasing responsibility for fulfilling the Commission's mission. I have been fortunate to work cooperatively and collegially with professionals, all of whom have been bound by our deep commitment to public service. I also wish to acknowledge the support my teams have received over the years from law enforcement partners at the state, local and federal levels."
Under Mr. Joseph's supervision, the examination team has referred a number of impactful matters to the Division of Enforcement, which resulted in the payment of significant disgorgement and penalties. These impactful actions included:
Mr. Joseph earned his B.S., M.B.A., and post-graduate degrees from St. John’s University, New York, and his J.D. from the University of North Carolina at Chapel Hill School of Law.
The Securities and Exchange Commission today charged the investment services subsidiary of SunTrust Banks with collecting more than $1.1 million in avoidable fees from clients by improperly recommending more expensive share classes of various mutual funds when cheaper shares of the same funds were available.
SunTrust Investment Services has agreed to pay a penalty of more than $1.1 million to settle the charges. SunTrust separately began refunding the overcharged fees plus interest to affected clients after the SEC started its investigation. SEC examiners cited the practice during a compliance review of the firm in mid-2015. More than 4,500 accounts were affected.
According to the SEC’s order, the Atlanta-based firm breached its fiduciary duty to act in clients’ best interests by recommending and purchasing costlier mutual fund share classes that charge a type of marketing and distribution fee known as 12b-1 fees. Investors were not informed that they were eligible for less costly share class options that did not charge 12b-1 fees. The avoidable fees flowed back to SunTrust in the form of higher commissions from the funds.
“SunTrust made self-serving investment recommendations to the detriment of everyday investors who rely on mutual funds to secure their financial futures,” said Aaron W. Lipson, Associate Regional Director for Enforcement in the SEC’s Atlanta office. “The story has a happy ending for customers with the extra fees back in their accounts, and an obvious lesson for investment advisory representatives that you must always recommend the best deal for your clients, not yourselves.”
The SEC’s order finds that SunTrust violated Sections 206(2), 206(4) and 207 of the Investment Advisers Act of 1940 and Rule 206(4)-7. Without admitting or denying the findings, SunTrust agreed to pay the penalty totaling $1,148,071.77 as well as disgorgement plus interest on any leftover amount of the avoidable 12b-1 fees that are being refunded to clients. The firm also agreed to be censured.
The SEC’s investigation was conducted by Brian M. Basinger and supervised by Mr. Lipson and Stephen E. Donahue in the Atlanta office with support from the Division of Economic Risk and Analysis. The SEC examination that led to the investigation was conducted by Vincent H. Catrini and Samra Fleschner of the Atlanta office.
Federal Reserve Board and Federal Open Market Committee release economic projections from the September 19-20 FOMC meeting
Federal Reserve issues FOMC statement
Federal Reserve Board announces termination of enforcement action with AB&T Financial Corporation
Federal Reserve Board issues enforcement action with First Nebraska Bank
Federal Reserve Board announces approval of notice by The Toronto-Dominion Bank, TD Group US Holdings LLC, and TD Bank US Holding Company
Agencies to propose amending CRA regulations to conform to HMDA regulation changes, and remove references to the neighborhood stabilization program
Federal Reserve Board issues enforcement action with Markesan State Bank
Federal Reserve Board announces approval of application by Synovus Bank
Federal and state banking agencies issue statement on supervisory practices regarding financial institutions and borrowers affected by Hurricane Irma
Federal Reserve outlines next steps for payment system improvement
What is aggregate demand?
The Board's Law Enforcement Unit, which protects agency personnel and property, is subject to regulations governing its use of federal law enforcement powers. We examined the Board's most recent internal evaluation of the unit's compliance with . . .
The Work Plan presents the audits and evaluations that the OIG is conducting to help the Board and the CFPB fulfill their respective missions.
An Open Board meeting of the Board of Governors of the Federal Reserve System was held at 10:00 a.m. on September 1, 2017. Matter(s) considered: Final Rule Establishing Restrictions on Qualified Financial Contracts of Systemically Important U.S. Banking Organizations and the U.S. Operations of Systemically Important Foreign Banking Organizations.
A closed meeting of the Board of Governors of the Federal Reserve System was held at on July 14, 2017. Matter(s) considered: Periodic Briefing and Discussion on Financial Markets, Institutions, and Infrastructure.
A closed meeting of the Board of Governors of the Federal Reserve System will be held at 10:00 a.m. on July 14, 2017. Matter(s) considered: Periodic Briefing and Discussion on Financial Markets, Institutions, and Infrastructure.
Martin Bodenstein and Junzhu Zhao | We study optimal monetary policy when the empirical evidence leaves the policymaker uncertain whether the true data-generating process is given by a model with sticky wages or a model with search and matching frictions in the labor market. Unless the policymaker is almost certain about the search and matching model being the correct data-generating process, the policymaker chooses to stabilize wage inflation at the expense of price inflation, a policy resembling the policy that is optimal in the sticky wage model, regardless of the true model. This finding reflects the greater sensitivity of welfare losses to deviations from the model-specific optimal policy in the sticky wage model. Thus, uncertainty about important aspects of the structure of the economy does not necessarily translate into uncertainty about the features of good monetary policy.
Christoph Frei, Agostino Capponi, and Celso Brunetti | We study how banks manage their default risk before bilaterally negotiating the quantities and prices of over-the-counter (OTC) contracts resembling credit default swaps (CDSs). We show that the costly actions exerted by banks to reduce their default probabilities are not socially optimal. Depending on the imposed trade size limits, risk-management costs and sellers' bargaining power, banks may switch from choosing default risk levels above the social optimum to reducing them even below the social optimum. We use a unique and comprehensive data set of bilateral exposures from the CDS market to test the main model implications on the OTC market structure: (i) intermediation is done by low-risk banks with medium credit exposure; (ii) all banks with high credit exposures are net buyers of CDSs, and low-risk banks with low credit exposures are the main net sellers; and (iii) heterogeneity in post-trade credit exposures is higher for riskier banks and smaller for safer banks.
Alan Morrison, Michalis Vasios, Mungo Wilson, and Filip Zikes | We present the first micro-level evidence of the transmission of shocks through financial networks. Using the network of credit default swap (CDS) transactions between banks, we identify bank CDS returns attributable to counterparty losses. A bank's own CDS spread increases whenever counterparties from whom it has purchased default protection themselves experience losses. We find no such effect from losses of non-counterparties, nor from counterparties to whom the bank has sold protection. The effect on bank CDS returns through this counterparty loss channel is large relative to the direct effect on a bank's CDS returns from its own trading losses.
John Schindler | This paper answers two questions that help those analyzing FinTech understand its origins, growth, and potential to affect financial stability. First, it answers the question of why "FinTech" is happening right now. Many of the technologies that support FinTech innovations are not new, but financial institutions and entrepreneurs are only now applying them to financial products and services. Analysis of the supply and demand factors that drive "traditional" financial innovation reveals a confluence of factors driving a large quantity of innovation. Second, this paper answers the question of why FinTech is getting so much more attention than traditional innovation normally does. The answer to this question has to do with the 'depth' of innovation, a concept introduced in this paper. The deeper an innovation, the greater the ability of that innovation to transform financial services. The paper shows that many FinTech innovations are deep innovations and hence have a g reat er potential to change financial services. A greater potential to transform can also lead to a greater chance of affecting financial stability.
Michael T. Kiley and John M. Roberts | Nominal interest rates may remain substantially below the averages of the last half-century, as central bank's inflation objectives lie below the average level of inflation and estimates of the real interest rate likely to prevail over the long run fall notably short of the average real interest rate experienced over this period. Persistently low nominal interest rates may lead to more frequent and costly episodes at the effective lower bound (ELB) on nominal interest rates. We revisit the frequency and potential costs of such episodes in a low-interest-rate world in a dynamic-stochastic-general-equilibrium (DSGE) model and large-scale econometric model, the FRB/US model. Several conclusions emerge. First, monetary policy strategies based on traditional policy rules lead to poor economic performance when the equilibrium interest rate is low, with economic activity and inflation more volatile and systematically falling short of desirable levels. Moreover, the freque ncy and length of ELB episodes under such policy approaches is significantly higher than in previous studies. Second, a risk-adjustment to a simple rule in which monetary policymakers are more accommodative, on average, than prescribed by the rule ensures that inflation achieves its 2 percent objective and requires that policymakers aim at inflation near 3 percent when the ELB is not binding. Third, commitment strategies in which monetary accommodation is not removed until either inflation or economic activity overshoot their long-run objectives are very effective in both the DSGE and FRB/US model. Finally, our results suggest that the adverse effects associated with the ELB may be substantial at inflation targets near 2 percent if r* is low and monetary policy follows a traditional policy approach. Whether such adverse effects could justify a higher inflation target depends on whether monetary policy strategies substantially different from traditional approaches are feasible and an assessment of the effects of the inflation target on economic welfare.
John Kandrac and Bernd Schlusche | In this paper, we exploit a natural experiment in which thrifts in several states witnessed an exogenous reduction in supervisory attention to assess the effect of supervision on financial institutions' willingness to take risk. We show that the affected institutions took on much more risk than their unaffected counterparts in other districts that were subject to identical regulations. Subsequent to the emergency enlistment of examiners and supervisors from other parts of the country two years later, additional risk taking by the affected thrifts ceased. We find that the expansion in risk taking resulted in a higher incidence of failure as well as more costly failures. None of these patterns are present in commercial banks subject to a different primary supervisory agent but otherwise similar to the thrifts in our sample.
Maria D. Tito and Ruoying Wang | This paper investigates the impact of international trade on input market distortions. We focus on a specific friction, binding borrowing constraints in capital markets. We propose a theoretical model where a firm's demand for capital is constrained by an initial asset allocation and past sales. While the initial distribution of assets induces misallocation if the asset endowment at more productive firms does not fully cover their demand for capital, the dependence of the borrowing constraint from past sales proxies for cross-firm differences in the cost of default, which is empirically higher at larger firms. Overtime, an increase in sales relaxes the borrowing constraint; similarly, shocks to market access{such as opening to trade{contribute to easing the financial constraints, thus accelerating the convergence toward the frictionless allocation. To analyze the empirical relationship between market access and credit frictions, we draw on the annual surveys conducted by the Chinese National Bureau of Statistics (NBS) for 1998 to 2007, and we construct firm-level measures of distortions that control for firm heterogeneity. We find smaller labor and capital distortions across exporting firms; such distortions are even smaller in sectors where firms face lower tariffs or are more dependent on external financing, a proxy for the presence of binding financial constraints. Our empirical analysis also shows that export shocks significantly reduce the dispersion across input returns over time, with the effect mostly occurring at constrained firms. Our findings point to within-sector input reallocation as an important channel to overcome misallocation in open economies.
Robert Kurtzman and David Zeke | Central bank large-scale asset purchases, particularly the purchase of corporate bonds of nonfinancial firms, can induce a misallocation of resources through their heterogeneous effect on firms cost of capital. First, we analytically demonstrate the mechanism in a static model. We then evaluate the misallocation of resources induced by corporate bond buys and the associated output losses in a calibrated heterogeneous firm New Keynesian DSGE model. The calibrated model suggests misallocation effects from corporate bond buys can be large enough to make them less effective than government bond buys, which is not the case without accounting for misallocation effects.
Jeffrey Huther, Jane Ihrig, and Elizabeth Klee | We explore the historical composition of the Federal Reserve's Treasury portfolio and its effect on Treasury yields. Using data from 1985 to 2016, we show that the divergence of the composition of the Federal Reserve's portfolio from overall Treasury securities outstanding is associated with a statistically significant effect on interest rates. In aggregate, when the Federal Reserve's portfolio has shorter maturity than overall Treasury debt outstanding, measures of the term premium are higher at all horizons; likewise, when the Federal Reserve's portfolio has longer maturity, term premiums are lower. In addition, at the individual security level, differences in Federal Reserve holdings from overall Treasury debt outstanding are correlated with measures of pricing errors and liquidity premiums. We discuss the mechanism for this effect, which could include elements of preferred-habitat theory as well as the fiscal theory of the price level.
Mark D. Manuszak and Krzysztof Wozniak | We study the pricing of deposit accounts following a regulation that capped debit card interchange fees in the United States and provide the first empirical investigation of the link between interchange fees and granular deposit account prices. This link is broadly predicted by the theoretical literature on two-sided markets, but the nature and magnitude of price changes are key empirical issues. To examine the ways that banks adjusted their account prices in response to the regulatory cap on interchange fees, we exploit the cap’s differential applicability across banks and account types, while accounting for equilibrium spillover effects on banks exempt from the cap. Our results show that banks subject to the cap raised checking account prices by decreasing the availability of free accounts, raising monthly fees, and increasing minimum balance requirements, with different adjustment across account types. We also find that banks exempt from the cap adjusted prices as a competitive response to price changes made by regulated banks. Not accounting for such competitive responses underestimates the policy's impact on the market, for both banks subject to the cap and those exempt from it.
Robert Kurtzman, Stephan Luck, and Tom Zimmermann | Using confidential loan officer survey data on lending standards and internal risk ratings on loans, we document an effect of large-scale asset purchase programs (LSAPs) on lending standards and risk-taking. We exploit cross-sectional variation in banks' holdings of mortgage-backed securities to show that the first and third round of quantitative easing (QE1 and QE3) significantly lowered lending standards and increased loan risk characteristics. The magnitude of the effects is about the same in QE1 and QE3, and is comparable to the effect of a one percentage point decrease in the Fed funds target rate.
Jane Ihrig, Edward Kim, Ashish Kumbhat, Cindy Vojtech, and Gretchen C. Weinbach | Leading up to 2014, banks generally increased their holdings of excess reserves as they moved to become compliant with the liquidity coverage ratio (LCR) requirement. However, once the LCR requirement was met, some banks shifted the compositions of their high-quality liquid assets (HQLA), reducing shares of reserves and increasing shares of Treasury securities and certain mortgage-backed securities (MBS). This raises the question: For a given stock of HQLA, what is its optimal composition? We use standard optimal portfolio theory to benchmark the ideal composition of a given stock of HQLA and find that a range of "optimal" HQLA portfolios is plausible depending on banks' tolerance for risk. A bank that is highly risk averse (inclined) prefers a relatively large share of reserves (MBS). Of course, the LCR is not the only constraint on banks' operations. We discuss how other factors interact with the LCR, and then examine the data for individual BHCs to show that they are currently employing a range of approaches to managing the compositions of their HQLA. In addition, we find that the pattern of dispersion in the daily variance of banks' HQLA shares supports the view that such factors are important drivers of banks' management of HQLA. Finally, we discuss possible policy implications of our results regarding the Federal Reserve's longer-run implementation of monetary policy.
Accessible materials (.zip)
Wayne Passmore and Alexander H. von Hafften | The 30-year fixed-rate fully amortizing mortgage (or "traditional fixed-rate mortgage") was a substantial innovation when first developed during the Great Depression. However, it has three major flaws. First, because homeowner equity accumulates slowly during the first decade, homeowners are essentially renting their homes from lenders. With so little equity accumulation, many lenders require large down payments. Second, in each monthly mortgage payment, homeowners substantially compensate capital markets investors for the ability to prepay. The homeowner might have better uses for this money. Third, refinancing mortgages is often very costly. We propose a new fixed-rate mortgage, called the Fixed-Payment-COFI mortgage (or "Fixed-COFI mortgage"), that resolves these three flaws. This mortgage has fixed monthly payments equal to payments for traditional fixed-rate mortgages and no down payment. Also, unlike traditional fixed-rate mortgages, Fixed-COFI mortgages do not bundle mortgage financing with compensation paid to capital markets investors for bearing prepayment risks; instead, this money is directed toward purchasing the home. The Fixed-COFI mortgage exploits the often-present prepayment-risk wedge between the fixed-rate mortgage rate and the estimated cost of funds index (COFI) mortgage rate. Committing to a savings program based on the difference between fixed-rate mortgage payments and payments based on COFI plus a margin, the homeowner uses this wedge to accumulate home equity quickly. In addition, the Fixed-COFI mortgage is a highly profitable asset for many mortgage lenders. Fixed-COFI mortgages may help some renters gain access to homeownership. These renters may be, for example, paying rents as high as comparable mortgage payments in high-cost metropolitan areas but do not have enough savings for a down payment. The Fixed-COFI mortgage may help such renters, among others, purchase homes.
David Splinter, Jeff Larrimore, and Jacob Mortenson | Using a panel of household level tax data, we estimate the degree to which dependents are “reassigned” between tax units within households, and how these reassignments affect combined tax liabilities. Reassigning dependents reduces combined tax liabilities on average, suggesting some household level coordination. Additionally, when EITC benefits expanded in 2009, reassignments increasingly involved adding a third child to tax returns to claim these new benefits. However, the subgroup reassigning towards three child tax units actually increased total household tax liabilities, suggesting that some taxpayers may prioritize minimizing their own tax burden or focus on particularly salient aspects of tax policy.
Alison Weingarden | This paper studies employment decisions at U.S. companies over the 2007–2012 period, during and after the Great Recession. To this end, I build a panel dataset that matches publicly-listed companies' financial reports to their announced layoff episodes. Using limited dependent variable regressions, I find that layoffs respond to accumulated changes in a company's financial conditions. While recent financial changes have the largest impacts on layoff propensities, financial changes over at least four previous quarters appear to have additional marginal effects.
Marco Migueis | The Advanced Measurement Approach (AMA) to operational risk capital is vulnerable to gaming, complex, and lacks comparability. The Standardized Measurement Approach (SMA) to operational risk capital lacks risk sensitivity and is unlikely to be appropriately conservative for US banks. An alternative framework is proposed that addresses the weaknesses of these approaches by relying on an incentive-compatible mechanism to elicit forward-looking projections of loss exposure.
Neil Bhutta and Daniel Ringo | We study the effect of interest rates on the housing market by taking advantage of a sudden and unexpected price change in a large government mortgage program. The Federal Housing Administration (FHA) insures most mortgages to lower-downpayment, lower-credit score borrowers, including a majority of first-time homebuyers. The FHA charges borrowers an annual mortgage insurance premium (MIP), and in January, 2015 the FHA abruptly reduced the MIP, and thus FHA borrowers' effective interest rate, by 50 basis points. Using a regression discontinuity design, we find that the MIP reduction increased the number of home purchase originations among the FHA-reliant population by nearly 14 percent. The response to the premium cut was negatively correlated with borrower income, with no observable response among relatively high income borrowers. We trace part of the jump in home buying to the MIP reduction helping ease binding debt payment-to-income ratio limits thus allowing more applications to be approved. Finally, we find no evidence that the MIP reduction increased house prices.
Cristina Conflitti and Matteo Luciani | We estimate the oil price pass-through into consumer prices both in the US and in the euro area. In particular, we disentangle the specific effect that an oil price change might have on each disaggregate price, from the effect on all prices that an oil price change might have since it affects the whole economy. To do so, we first estimate a Dynamic Factor Model on a panel of disaggregate price indicators, and then we use VAR techniques to estimate the pass-through. Our results show that the oil price passes through core inflation only via its effect on the whole economy. This pass-through is estimated to be small, but statistically different from zero and long lasting.
Matteo Crosignani | I develop a model where the sovereign debt capacity depends on the capitalization of domestic banks. Low-capital banks optimally tilt their government bond portfolio toward domestic securities, linking their destiny to that of the sovereign. If the sovereign risk is sufficiently high, low-capital banks reduce private lending to further increase their holdings of domestic government bonds, lowering sovereign yields and supporting the home sovereign debt capacity. The model rationalizes, in the context of the eurozone periphery, the increase in domestic government bond holdings, the reduction of bank credit supply, and the prolonged fragility of the financial sector.
Timothy E. Dore and Rebecca Zarutskie | We provide new estimates of the wage costs of firms' debt. Our empirical approach exploits within-firm geographical variation in workers' expected unemployment costs due to variation in local labor market size and uses a large representative sample of public firms. We find that, following an increase in firm leverage, workers with higher unemployment costs experience higher wage growth relative to workers at the same firm with lower unemployment costs. Overall, our estimates suggest that a 10 percentage point increase in leverage increases wage compensation for the median worker by 1.9% and total firm wage costs by 17 basis points of firm value.
Sirio Aramonte, Mohammad R. Jahan-Parvar, Samuel Rosen, and John W. Schindler | We propose a method to extract individual firms' risk-neutral return distributions by combining options and credit default swaps (CDS). Options provide information about the central part of the distribution, and CDS anchor the left tail. Jointly, options and CDS span the intermediate part of the distribution, which is driven by moderatesized jump risk. We study the returns on a trading strategy that buys (sells) stocks exposed to positive (negative) moderate-sized jump risk unspanned by options or CDS individually. Controlling for many known factors, this strategy earns a 0.5% premium per month, highlighting the economic value of combining options and CDS.
M. Ali Choudhary and Anil Jain | We analyze reductions in bank credit using a natural experiment where unprecedented flooding differentially affected banks that were more exposed to flooded regions in Pakistan. Using a unique dataset that covers the universe of consumer loans in Pakistan and this exogenous shock to bank funding, we find two key results. First, banks disproportionately reduce credit to new and less-educated borrowers, following an increase in their funding costs. Second, the credit reduction is not compensated by relatively more lending by less-affected banks. The empirical evidence suggests that adverse selection is the primary cause for banks disproportionately reducing credit to new borrowers.
Anil Jain | The provision of public goods in developing countries is a central challenge. This paper studies a model where each agent’s effort provides heterogeneous benefits to the others, inducing a network of opportunities for favor-trading. We focus on a classical efficient benchmark – the Lindahl solution – that can be derived from a bargaining game. Does the optimistic assumption that agents use an efficient mechanism (rather than succumbing to the tragedy of the commons) imply incentives for efficient investment in the technology that is used to produce the public goods? To show that the answer is no in general, we give comparative statics of the Lindahl solution which have natural network interpretations. We then suggest some welfare-improving interventions.
Ricardo Reyes-Heroles and Gabriel Tenorio | Using a multi-country regime-switching vector autoregressive (VAR) model we document the existence of two regimes in the volatility of interest rates at which emerging economies borrow from international financial markets, and study the statistical relationship of such regimes with episodes of sudden stops. Periods of high volatility tend to be persistent and are associated with high interest rates, the occurrence of sudden stops in external financing, and large declines in economic activity. Most strikingly, we show that regime switches drive the countercyclicality of interest rates in emerging markets documented in previous literature (Neumeyer and Perri, 2005) and that high-volatility regimes forecast sudden stops 6 and 12 months ahead.
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Authors: Jesse Bricker, Meta Brown, Simona Hannon, and Karen Pence
Authors: David Aikman, Michael Kiley, Seung Jung Lee, Michael Palumbo, and Missaka Warusawitharana
Authors: Gazi Kara, Mary Tian, and Margaret Yellen
Author: Jeff Larrimore
Author: David Byrne
Authors: Marcelo Rezende and Mary-Frances Styczynski
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Authors: Jesse Bricker, Alice Henriques, Jacob Krimmel, and John Sabelhaus
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Authors: Marius Rodriguez and Emre Yoldas
Authors: John Ammer, Alexandra Tabova, and Caleb Wroblewski
Authors: Lucas Husted, John Rogers, and Bo Sun
Authors: Logan Lewis and Ryan Monarch
Authors: Mary Amiti, Tyler Bodine-Smith, Colin Hottman, and Logan Lewis
Authors: John Clark, Nathan Converse, Brahima Coulibaly, and Steve Kamin
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The Open Market Trading Desk at the Federal Reserve Bank of New York has released a statement regarding reinvestment in Treasury securities and agency mortgage-backed securities.
Results from the August 2017 Survey of Consumer Expectations show a mainly stable outlook.
The Federal Reserve Bank of New York today issued its Quarterly Report on Household Debt and Credit, which reported that total household debt increased by $114 billion (0.9%) to $12.84 trillion in the second quarter of 2017.
Results from the July 2017 Survey of Consumer Expectations show that inflation expectations held mostly steady: Median inflation expectations remained unchanged at the one-year horizon and fell only slightly at the three-year horizon.
The U.S. monetary authorities did not intervene in the foreign exchange markets during the April – June quarter, the New York Fed said today in its quarterly report to the U.S. Congress.
The New York Fed today issued the 2016 Small Business Credit Survey: Report on Startup Firms, the second in a series of reports that examines the results of an annual survey of small business owners.
The Open Market Trading Desk at the New York Fed has released a statement regarding a securities lending small value exercise.
The New York Fed today released results from its June 2017 Survey of Consumer Expectations (SCE) Credit Access Survey.
Results from the June 2017 Survey of Consumer Expectations show that inflation expectations fell slightly at the one-year horizon but increased noticeably at the three-year horizon.
The New York Fed today announced the appointment of Bridget-Ann Hart, chief executive officer and president of KPH Healthcare Services, Inc., to its Upstate New York Regional Advisory Board (UNYRAB).
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