Predatory trading,Stigma and the Fed׳s Term Auction Facility

Predatory trading may affect the incentives for banks to raise liquidity in times of financial distress. In these periods, borrowing becomes a signal of illiquidity, exposing borrowers to predatory trading and possible insolvency. A stigma of borrowing thus arises, leading distressed banks to take on more illiquid positions than they would otherwise. The Fed׳s Term Auction Facility (TAF) can alleviate this problem. The TAF׳s competitive auction format allows auction winners to signal that they are illiquid but relatively strong. The TAF may therefore be an effective policy tool during financial crises: by altering the signal value of borrowing, this facility supports the injection of liquidity into distressed banks. In normal times, however, this auction facility becomes counterproductive: by cream-skimming the relatively strong banks, the weakest banks are left as potential prey for predators. This suggests that the TAF is a policy best reserved for times of crisis.     

The effect of the Federal Reserve’s lending facility on PPP lending by commercial banks

We investigate whether the Federal Reserve’s Paycheck Protection Program Liquidity Facility (PPPLF) boosted commercial bank Paycheck Protection Program (PPP) lending. To determine whether this facility had a causal effect, we use pre-existing familiarity with the Federal Reserve’s discount window as an instrumental variable. We show that the PPPLF materially bolstered bank PPP lending and provided a meaningful funding backstop for banks that did not use the facility. Our paper is one of the first to quantitatively illustrate the effectiveness of a central bank facility as a funding backstop.     

The Federal Reserve’s operating procedure,nonborrowed reserves,borrowed reserves and the liquidity effect

Recently, a number of researchers (Christiano and Eichenbaum, 1992; Christiano et al., 1996a,b, 1997; Evans and Marshall, 1998; Strongin, 1995; Pagan and Robertson, 1995; Brunner, 1994) claim to have found evidence of a statistically significant liquidity effect in a recursive structural VAR using nonborrowed reserves (NBR). It is claimed that innovations to NBR reflect the exogenous policy actions of the Fed. This paper argues that the opposite is true. Specifically, I show that the Fed has an incentive to offset bank-initiated discount window borrowing when it implements the Federal Open Market Committee’s policy directive, and that it has done so since the late 1950s. This practice has created a negative contemporaneous covariance between NBR and the funds rate that has been incorrectly attributed to the liquidity effect. By showing that these models capture the endogenous response of the Fed to bank borrowing on NBR, rather than the effect of exogenous policy actions on the funds rate, this paper also resolves the puzzle of the vanishing liquidity effect noted by Pagan and Robertson (1995) and Christiano (1995).     

The determinants of household’s bank switching

We investigate households’ bank switching exploiting a unique representative dataset from Bank of Italy Survey on Household Income and Wealth that follows the households and their bank(s) over time. First, we document that bank switching is quite prevalent in our sample, with almost a quarter of households changing their main bank in a biannual horizon. Next, we relate the decision to switch to the features and dynamics of household bank relationship, and to the characteristics of both households and banks. In line with the switching cost theory, we find that using more than a single bank, as well as the intensity (number of services used), and the scope (bank services used) of the relationship with the main bank play a role in shaping the households’ decision to switch. Moreover, bank switching is strongly and positively correlated with both taking out and having paid off a mortgage.     

Banks’ reserve management,transaction costs,and the timing of Federal Reserve intervention

We use daily data on bank reserves and overnight interest rates to document a striking pattern in the high-frequency behavior of the US market for federal funds: depository institutions tend to hold more reserves during the last few days of each “reserve maintenance period”, when the opportunity cost of holding reserves is typically highest. We then propose and analyze a model of the federal funds market where uncertain liquidity flows and transaction costs induce banks to delay trading and to bid up interest rates at the end of each maintenance period. In this context, the central bank’s interest-rate-smoothing policy causes a high supply of liquid funds to be associated with high interest rates around reserve-settlement days.     

Risk-shifting and the regulation of bank CEOs’ compensation

This paper analyzes the effects of two regulatory mechanisms, namely a regulation of the structure of bank CEOs incentive pay and sanctions for the CEOs of failed banks, on bank risk shifting. We extend a standard model of CEO compensation by incorporating leverage and an investment decision. To the extent that bank depositors and creditors are even partially protected by public guarantees, we show that it is in the interests of bank shareholders to choose more risky investments than would be socially optimal, and therefore to design a CEO contract with excessive risk taking incentives. Thus, we argue that current corporate governance arrangements in the banking sector are not efficient. In this setting, we show that putting in place one of the aforementioned mechanisms could yield the socially optimal outcome at no cost. We also identify some limitations and potential perverse effects of these mechanisms.     

A multivariate analysis of the determinants of Moody’s bank financial strength ratings

In 1995 Moody’s Investors Services inaugurated a new rating service, bank financial strength ratings (BFSRs), that assesses the safety and soundness of banks in over 50 countries. Our study sets out to do some preliminary investigations of this new type of credit rating. We develop logistic regression models to help explain or predict BFSRs. Using bank-specific accounting and financial data we are able to correctly classify or predict BFSRs. These fundamental variables cover the dimensions of risk, loan provision ratios, and profitability. Of the three, loan provisions is the most important factor, followed by risk, and then profitability. Country risk ratings do not appear to be significant explanators of BFSRs. We also find that traditional debt ratings accurately classify BFSRs and this raises the question of whether BFSRs add incremental information. The paper also highlights future directions for our research. One such area is to examine how well BFSRs predict banking crises such as the credit problems currently affecting Asia and Latin America.     

Policy uncertainty and bank’s funding costs: The effects of the financial crisis,Covid-19 pandemic,and market discipline

This paper examines the impacts of economic policy uncertainty (EPU) on bank funding costs using the 2001–2021 data of US banks. We document consistent evidence of a negative relationship between EPU and bank funding costs, implying lower bank funding costs during a time of high EPU, consistent with the hypothesis that economic agents tend to reallocate their assets into safer investments, such as bank deposits during high uncertainty. Large banks are likely to benefit most during high EPU when experiencing lower costs of funds compared with other banks, suggesting the “too-big-to-fail” perception of depositors. Cross-sectional analysis indicates that depositors require safer banks to pay lower rates, indicating the existence of market discipline. The cost-decreasing effects of policy uncertainty are less pronounced during the global financial crisis than the Covid-19 crisis.     

The effect of TARP on lending: Evidence from the lead bank’s share in syndicated loans

Review of Quantitative Finance and Accounting - We investigate the effect of the Troubled Asset Relief Program (TARP) on the shares of lead banks in syndicated loans by using quarterly data for the...     

Comments on “Financial Stability and Resolution of Federal Reserve Goal and Implementation Conflicts”

Eisenbeis, Kwan and Wall argue that there is a material conflict between the monetary policy and financial stability mandate of the Federal Reserve. There is a conflict in concept, but the magnitude and importance of the conflict seems small in practice.     

How effective is central bank communication in emerging economies? An empirical analysis of the chinese money markets responses to the people’s bank of China’s policy communications

Review of Quantitative Finance and Accounting - Central banks, in both developed and developing economies, are responding to the increased demand for transparency in monetary policy formulation and...     

The measurement of harmonization in the form and content of the auditor’s report in the European Union

This study attempts to determine the degree of harmonization in the form and content of the auditor’s report in the European Union. To accomplish this goal, audit reports from 1995 annual reports of the largest industrial companies in Austria, Belgium, Denmark, Finland, France, Germany, Ireland, Italy, Netherlands, Portugal, Spain, Sweden and the United Kingdom are analyzed. The analysis uses the basic elements of the auditor’s report listed in the International Standard on Auditing, “The Auditor’s Report on Financial Statements” as the control. Comparability is tested using the chi-square statistic which tests for equality of the proportions of the various elements in the auditor’s report across the Member States. The results reveal that harmonization exists in three of the five elements in the auditor report relating to form (appropriate title, the dating of the report and the listing of the location of the auditor’s office). Harmonization does not exist for the remaining two elements related to form, nor does it exist for any of elements related to content.     

The role of accounting in bank regulation on the eve of japan’s financial crisis: a failure of the new capital adequacy regulation

In contrast to previous examinations of the role of accounting in financial crises, this paper explores the way in which accounting has been woven into a new system of banking regulations. Although the regulatory reform of the mid-1980s was intended to maintain the soundness of banking businesses, it failed to prevent banks from excessive asset expansion in the latter half of the 1980s in Japan. One of the major causes of this regulatory failure is found in the way that the regulatory capital is defined for the new capital adequacy regulation. The latent revaluation reserves are partially counted as capital. Japanese domestic regulatory reform took place in the wider context of the international standardization of capital adequacy regulations (BIS standards). Japanese regulators utilized taken-for-granted practices of accounting to creatively comply with the BIS standards.     

The importance of service quality in British Muslim’s choice of an Islamic or non-Islamic bank account

Using an extended SERVQUAL model, this study identifies and compares the importance of service quality to Muslim consumers with an Islamic or non-Islamic bank account in a non-Muslim country, Britain. Eight group discussions and a survey of 300 Muslims were conducted. Five dimensions of service quality were identified, i.e. responsiveness, credibility, Islamic tangibles, accessibility and reputation. These differ in structure and content from the original SERVQUAL developed in a western context and the subsequent CARTER model constructed in a Muslim country. In addition, significant differences were found in the importance of items between Islamic bank account and non-Islamic bank account holders. This study is one of the first to identify and compare the importance of service quality between Islamic and non-Islamic bank account holders in a western non-Muslim country. The results advance our understanding of the impact of culture on SERVQUAL. The study provides insight into Muslims’ bank choice and helps bank managers of both Islamic and non-Islamic banks to focus their attention on the service quality dimensions that matter most to Muslim customers.     

The response of interest rates to the Federal Reserve's weekly money announcements: The ‘puzzle’ of anticipated money

Researchers, using the survey conducted by Money Market Services, Inc., have found that the anticipated component in the Federal Reserve's weekly money supply announcement is negatively correlated with the post-announcement change in market yields. We prove that eliminating a (downward) bias in the measure of anticipated money can, in theory, eliminate this puzzle, but that improving the efficiency of an already unbiased measure cannot. We find, using Canadian as well as U.S. interest rate data, that correcting the downward bias in the survey measure reduces, but does not eliminate, the role of anticipated money.     

The Role of People’s Expectation in the Recent US Housing Boom and Bust

This paper investigates how an important driver of the recent housing boom and bust, people’s expectation, influences housing asset returns. Specifically, it extends the volatility feedback model to study the relationship between housing volatility and asset returns during 19632007. The analysis considers two alternative breakpoints, 1984Q1 and 1999Q1, in order to distinguish the permanent structural break from temporary Markov-switching volatility. The novelty of this study lies in its insightful investigations into the recent U.S. housing boom and bust in the post-1999 period in four dimensions. First, the significantly negative volatility feedback effect in the housing market suggests a positive relationship between housing volatility and expected asset returns, and highly supports the important role of people’s expectations in the recent housing boom and bust. Second, the high-volatility regimes of the housing market delivered by this study indicate a strong association between housing cycles and business cycles, as well as a remarkable uncertainty in the U.S. housing market after the recession 2001. Third, the violated fundamental which refers to the broken negative relationship between housing volatility and realized asset returns during 2001–2004 implies the possible presence of a housing bubble during this period. Finally, volatility feedback anticipates the recent bubble-like housing market dynamics because high volatility during 2002–2003 implies low realized returns in the early housing-boom stage (2002–2003), as well as high expected returns in the second stage of the housing boom (2004–2005).     

The interplay of salesperson’s job performance and satisfaction in the financial services industry

Research has not yet provided conclusive confirmation or disconfirmation of any model that discusses the relationship between job satisfaction (JS) and job performance (JP). This article reviews the relationship in the financial services industry setting and examines in line with the precedents (perceived organizational support, role ambiguity, role conflict (RC), work-family conflict (WFC), emotional exhaustion (EE)) and the consequences (organizational commitment). Findings suggest that, in the financial services industry, JP causes JS and has a positive effect on organizational commitment. This study also finds that WFC serves as an antecedent to RC, EE and JS. Most importantly, the finding that WFC is significantly related to RC is new and thus needs to be confirmed in different industry settings.     

Investment bank monitoring and bonding of security analysts’ research

We assess investment banks’ influence over the agreement between their analysts’ research behavior and their clients’ interests, in the post-reform era. Competing banks discipline their analysts with worse career outcomes for producing biased reports, issuing shirking reports, and for involvement in the earnings guidance game, showing meaningful monitoring of their analysts. Highly reputable banks provide more monitoring discipline of their analysts and bonding of their moral hazard than other banks. The findings agree with the banks taking responsibility for aligning analysts’ behavior with clients’ interests.     

The economics of the welfare state in today’s world

This article is concerned both with the substantive policy issue of the implications of the European welfare state in a global setting and with the way in which economists analyse the welfare state. Economics has made a major contribution to our understanding of the welfare state through the provision of formal models. These have allowed us to see the implications of social protection for countries increasingly open to international competition. These models, however, leave out essential elements, and the standard Heckscher–Ohlin 2-good, 2-factor, 2-country assumptions impose too tight a straitjacket. We do not observe full factor price equalisation. The paper considers how we might relax this straitjacket to incorporate elements that are important in the public debate, while preserving tractability. The resulting 3×3×3 model is used to investigate the impact of globalisation on the welfare state, contrasting Europe and the US. The first version of this paper was written while I was visiting the Economic Research Department of the Bank of Italy. I am most grateful to the Research Department for their hospitality, but make clear that the contents of the paper are solely my responsibility. The paper was presented at the April 2006 Netspar Conference in the Hague. I thank the discussants, André de Jong and Cees Oudshoorn, and the conference participants, for their helpful comments. The revision has benefited from the valuable suggestions of the referees and editors, and the final version has been greatly improved as a result of a conversation with Peter Neary. None of the above are to be held responsible for the remaining shortcomings of the paper.     

How Effective Were the Federal Reserve Emergency Liquidity Facilities? Evidence from the Asset‐Backed Commercial Paper Money Market Mutual Fund Liquidity Facility

The events following Lehman's failure in 2008 and the current turmoil emanating from Europe highlight the structural vulnerabilities of short‐term credit markets and the role of central banks as back‐stop liquidity providers. The Federal Reserve's response to financial disruptions in the United States importantly included the creation of liquidity facilities. Using a differences‐in‐differences approach, we evaluate one of the most unusual of these interventions—the Asset‐Backed Commercial Paper Money Market Mutual Fund Liquidity Facility. We find that this facility helped stabilize asset outflows from money market funds and reduced asset‐backed commercial paper yields significantly.