Notes from the Vault - Federal Reserve Bank of Atlanta - FRB Atlanta en-us Atlanta Fed Logo The Evolving Financial Supermarket Thu, 22 Jun 2017 13:56:00 EST The past and possible future evolution of retail financial supermarkets. Managing Global Financial Risks Tue, 30 May 2017 15:39:00 EST <em>Notes from the Vault</em> discusses the Atlanta Fed's recent Financial Markets Conference. Conflicts of Interest in Securitization and the U.S. Housing Crisis Wed, 26 Apr 2017 12:30:00 EST This <em>Notes from the Vault</em> post assesses the recent literature on whether conflicts of interest in securitization contributed to the U.S. housing crisis. Interest on Reserves Mon, 27 Feb 2017 15:39:00 EST The Federal Reserve's payment of interest on reserves has generated some controversy and may result in more as rates increase. This <em>Notes from the Vault</em> post considers the implications of such payments. The Revolving Door Mon, 30 Jan 2017 14:47:00 EST The so-called revolving door between industry and the regulatory agencies is a recurring concern. This <em>Notes from the Vault</em> post provides a high-level overview of this issue. The Impact of Extraordinary Policy on Intermediaries Fri, 16 Dec 2016 10:07:00 EST The Atlanta Fed recently hosted a workshop on the impact of extraordinary monetary policy on the financial sector since the financial crisis. This <em>Notes from the Vault</em> post discusses research findings. Prudential Regulation, Big Data, and Machine Learning Mon, 21 Nov 2016 11:52:00 EST The financial services industry is being increasingly influenced by trends in big data and machine learning. This <em>Notes from the Vault</em> post considers the extent to which these developments may influence prudential regulation of financial firms and markets. Avoiding Regulation: FinTech versus the Sharing Economy Thu, 29 Sep 2016 11:02:00 EST Many fintech firms have made the unpleasant discovery that the financial services industry is one of the most highly regulated sectors. This <em>Notes from the Vault</em> post discusses the relationship between fintech and the financial supervisory agencies. Market Expectations of Fed Policy: A New Tool Wed, 31 Aug 2016 16:49:00 EST The market's view of the path of Federal Reserve monetary policy has an important impact on the term structure of interest rates and asset prices in general. This <em>Notes from the Vault</em> post discusses a new Atlanta Fed tool that uses Eurodollar options prices to infer market expectations about future short-term rates. "Smart Contracts" in a Complex World Fri, 29 Jul 2016 14:40:00 EST Smart contracts that rely on computer code are being promoted as possible replacements for paper contracts. <em>Notes from the Vault</em> uses the recent diversion of funds at the smart contract the Distributed Autonomous Organization (DAO) to analyze the two types of contracts. TAF: The Cure-All for Stigma? Thu, 30 Jun 2016 17:17:00 EST Stigma has long inhibited use of the Federal Reserve's discount window. The Fed's Term Auction Facility (TAF) overcame stigma during the recent crisis. <em>Notes from the Vault</em> discusses the reasons for the TAF's success and some implications for the future. Getting a Grip on Liquidity: Conference Takeaways Tue, 31 May 2016 16:14:00 EST The Atlanta Fed's recent Financial Markets Conference analyzed liquidity from the perspective of markets, institutions, and central banks. <em>Notes from the Vault</em> discusses three takeaways from the conference related to improvements in measuring liquidity and the impacts of regulation and technology on liquidity. Ending Too Big to Fail: Lessons from Continental Illinois Fri, 29 Apr 2016 11:53:00 EST Some analysts have recently called for structural changes to the banking industry to end too big to fail (TBTF). <em>Notes from the Vault</em> looks back at the 1984 TBTF treatment of Continental Illinois to see whether these structural measures would have prevented the bailout. Getting a Grip on Liquidity Thu, 31 Mar 2016 14:11:00 EST Liquidity is a slippery concept but one that has important implications for the financial system. This <em>Notes from the Vault</em> post highlights some of the liquidity related issues that will be discussed in our upcoming Financial Markets Conference, Getting a Grip on Liquidity: Markets, Institutions, and Central Banks. Stress Testing with the Help of Bayes' Theorem Mon, 29 Feb 2016 17:10:00 EST Bank stress tests require forecasting income statements and capital ratios under extreme economic assumptions. These assumptions often go beyond historical experience, which makes sound forecasting with a quantitative model difficult. This <em>Notes from the Vault</em> post explains how Bayes' theorem can help deal with these extreme assumptions, resulting in better forecasts. The Role of Intermediary Competition in Government Interventions: The Case of HARP Fri, 29 Jan 2016 11:15:00 EST The federal government, Fannie Mae, and Freddie Mac developed the Home Affordable Refinance Program (HARP) to help distressed mortgage borrowers. <em>Notes from the Vault</em> shows that HARP initially gave a competitive advantage to current servicers, which resulted in limited competition. Financing the Fed's Balance Sheet: Implications for the Treasury Mon, 21 Dec 2015 16:10:00 EST The public discussion of the Federal Reserve's balance sheet has been focused on the asset side. <em>Notes from the Vault</em> provides a primer on liabilities and equity accounts, with an emphasis on the implication of funding alternatives for the Treasury's financial condition. The Role of Liquidity in the Financial System Mon, 30 Nov 2015 16:24:00 EST Several key moments in the financial crisis were marked by liquidity problems. Yet our understanding of liquidity is such that "we do not even know what to argue about." <em>Notes from the Vault</em> discusses research on financial liquidity presented at a recent Atlanta Fed conference. Using Market Information for Fail-Safe Supervisory Triggers Mon, 19 Oct 2015 12:43:00 EST The use of market information to trigger supervisory intervention has been proposed as a way of alleviating concerns about supervisory forbearance. <em>Notes from the Vault</em> discusses potential problems with using market information and methods to mitigate those problems. Marketplace Lending's Role in the Consumer Credit Market Wed, 30 Sep 2015 14:28:00 EST Peer-to-peer lenders have evolved into what can more accurately be called marketplace lenders. <em>Notes from the Vault</em> discusses the business models of two of the largest marketplace lenders and compares their operations to banks' more traditional consumer lending operations. Large, Complex Financial Regulation Mon, 31 Aug 2015 15:56:00 EST A common complaint about the Dodd-Frank Act is that it is too long and creates so many new legal requirements. <em>Notes from the Vault</em> offers a theory on why financial regulatory legislation tends to be lengthy, and it draws implications for development of financial regulatory policy. Breaking Down Geographic Barriers on Banks: U.S. and EU Recent Experiences Mon, 20 Jul 2015 16:14:00 EST The integration of a banking system across state boundaries impacts the bank system's soundness and efficiency. <em>Notes from the Vault</em> discusses progress towards such integration in the United States and European Union and how that progress affected their respective responses to the financial crisis. Liquidity Backstops and Dynamic Debt Runs Mon, 29 Jun 2015 15:12:00 EST Two similar types of municipal debt had very different outcomes during the crisis based on whether they had a liquidity backstop. A new <em>Notes from the Vault</em> explains these differences and discusses their implications for shadow banks. Lessons for E-Money from the U.S. Experience with Bank Notes Tue, 19 May 2015 14:56:00 EST Private banks issued the majority of the currency in the United States prior to 1933. A new <em>Notes from the Vault</em> draws on that experience to develop some implications for government policy regarding e-money. Who Will Be Central to the Financial System? Wed, 29 Apr 2015 16:29:00 EST Will commercial banks remain central to the financial system? If banks become less important, should macroprudential policy focus on shadow banks? <em>Notes from the Vault</em> summarizes the discussion of these issues at the Atlanta Fed's recent Financial Markets Conference. The Change in the FDIC Assessment Base Mon, 30 Mar 2015 12:24:00 EST The Dodd-Frank Act mandates a shift in the FDIC assessment base that moves more of the costs of deposit insurance onto the largest banks. A new <em>Notes from the Vault</em> post analyzes the merits of that shift. Liquidity Regulation and Financial Stability Mon, 23 Feb 2015 15:00:00 EST U.S. bank supervisors are adopting regulations intended to limit banks' provision of liquidity and maturity transformation services. A new <em>Notes from the Vault</em> post raises questions about these regulations' overall contribution to financial stability. The Impact of Regulation on Monetary Policy Fri, 30 Jan 2015 10:30:00 EST Banking regulation can have unintended consequences for the conduct of monetary policy. A new <em>Notes from the Vault</em> discusses two regulatory actions that may impair the cost-effectiveness of the FOMC's preferred tool for normalizing monetary policy. Notes from the Vault Wed, 31 Dec 2014 00:00:00 EST Central Banking in the Shadows Wed, 31 Dec 2014 00:00:00 EST As new financial regulations become phased in and monetary policy normalization gets closer, questions remain about the future role of the Federal Reserve. Will traditional banking become less central to central banking and should the Fed move into the shadows? <em>Notes from the Vault</em> introduces the theme of the 2015 Financial Markets Conference. Nonbank Financial Firms and Financial Stability Wed, 26 Nov 2014 00:00:00 EST The financial crisis highlighted that distress at nonbank financial firms can have a negative impact on financial stability. A new <em>Notes from the Vault</em> discusses various perspectives on this problem presented at a recent conference hosted by the Atlanta Fed. Should Financial Stability Be a Goal of Monetary Policy? Thu, 25 Sep 2014 00:00:00 EST There has been increased debate about using monetary policy to promote financial stability since the financial crisis. This post posits that the theoretical case for using policy to support stability is strong, but practical problems remain. Bail-in Debt: Will the Supervisors Pull the Trigger in Time? Mon, 25 Aug 2014 00:00:00 EST The United States and the European Union are planning on using bail-in debt to help reduce taxpayer exposure to systemically important financial institutions. A new <span class="citation">Notes from the Vault</span> discusses the importance of timely resolution for this approach to be effective. State of Distress? Thu, 17 Jul 2014 00:00:00 EST Systemically important financial institutions (SIFIs) like large banks and nonbank financial firms are required to have credible resolution plans in case they fail. Notes from the Vault raises the issue whether U.S. states should have a similar plan. Was the Third Amendment to the GSE Bailouts Fair? Mon, 19 May 2014 00:00:00 EST The Treasury amended the terms of its GSE bailouts in August 2012 in a way that effectively terminated private shareholders' interest in the firms. Notes from the Vault analyzes that agreement and its fairness to taxpayers and the GSEs' private shareholders. Have the Government-Sponsored Enterprises Fully Repaid the Treasury? Mon, 24 Mar 2014 00:00:00 EST Fannie Mae and Freddie Mac have paid dividends equal to the Treasury's total purchase of their senior preferred stock. <em>Notes from the Vault</em> contends that these payments fall far short of the economic value of the Treasury's support. Two Drivers of Financial Innovation Thu, 27 Feb 2014 00:00:00 EST Financial innovation is likely to accelerate as the postcrisis regulatory environment stabilizes. <em>Notes from the Vault</em> considers two of the biggest drivers of past innovation, technology and regulation, to better understand likely future trends. Simple Concept, Complex Regulation Tue, 28 Jan 2014 00:00:00 EST Simple regulatory concepts often result in long, complex regulations. <em>Notes from the Vault</em> discusses why that happens and draws implications for the future of prudential regulation. Basel III and Stress Tests Fri, 20 Dec 2013 00:00:00 EST The United States is now committed to the use of two complex and relatively costly measures of capital adequacy: Basel III and stress tests. <em>Notes from the Vault </em>discusses how the stress tests could mitigate weaknesses in Basel III's measures of capital and credit risk. Supervising Bank Compensation Policies Tue, 26 Nov 2013 00:00:00 EST Even bankers agree that the compensation structure in the financial services industry was one of the causes of the financial crisis. <em>Notes from the Vault</em> looks at a recent Atlanta Fed conference, which considered various aspects of banks' compensation policies and regulatory guidance. Systemically Important Failure versus Financial System Failure Fri, 27 Sep 2013 00:00:00 EST The Financial Stability Oversight Council's recent designation of two nonbank firms as SIFIs likely reduces the expected cost of their failure. However, reducing the expected cost of financial system failure will require a broader focus. <em>Notes from the Vault </em>looks at the topic. FASB Proposes (Too?) Early Loan Loss Recognition Fri, 30 Aug 2013 00:00:00 EST The Financial Accounting Standards Board proposes to give investors more accurate information about expected loan losses, but at the cost of systematically understating the value of unimpaired loans. <em>Notes from the Vault</em> takes a look at FASB's proposal. Reducing Systemic Risk or Merely Transforming It? Wed, 31 Jul 2013 00:00:00 EST Over-the-counter derivatives participants are now required to post higher quality collateral to satisfy the Dodd-Frank Act clearing requirements. Whether the resulting reshuffling of collateral will reduce systemic risk remains unclear, according to the latest <em>Notes from the Vault</em>. Value at Risk: A Valuable Tool That Was Greatly Oversold Fri, 21 Jun 2013 00:00:00 EST Measuring financial risk continues to be a challenge after the financial crisis. A new <em>Notes from the Vault</em> looks at one widely used tool, value at risk, and explores its usefulness and limitations. Lessons from the Housing GSEs for Resolving Too Big to Fail Wed, 22 May 2013 00:00:00 EST Fannie Mae and Freddie Mac are back in the headlines, their future under debate. <em>Notes from the Vault</em> considers three important lessons these GSEs can provide to policymakers seeking to end too big to fail. Reflections on the 2013 Financial Markets Conference Thu, 18 Apr 2013 00:00:00 EST The Atlanta Fed conference recently brought together economists, academics, and leaders of financial firms to discuss various issues related to financial stability. <em>Notes from the Vault</em> considers one presenter's perspective and offers some alternative views. Will Taxpayers Get a Truly Fair Deal with Housing Finance Reform? Wed, 13 Mar 2013 00:00:00 EST Since the federal takeover of Fannie Mae and Freddie Mac during the financial crisis, a number of groups have issued proposals to replace the two government-sponsored enterprises. But will taxpayers get a fair deal in the exchange? A new <em>Notes from the Vault</em> discusses the topic. The TARGET2 Settlement System in the Eurozone Fri, 23 Mar 2012 00:00:00 EST <ul class="listBulleted"> <li>Positive and negative balances have built up in TARGET2, the payment system in the eurozone.</li> <li>The negative balances are debts of national central banks backed by collateralized loans to private banks.</li> <li>The positive balances generate interest for national central banks that carry those balances, but the balances do not represent the risk exposure of the national central banks.</li> </ul> <p><em>Notes from the Vault</em> was on hiatus after the March/April 2012 post; it restarted in March 2013.</p> Sovereign Debt and Default Mon, 19 Dec 2011 00:00:00 EST <ul class="listBulleted"> <li>The United States has a debt problem, even if it is not as intensely scrutinized as European debt.</li> <li>While market prices and markets are much maligned, the prices in markets provide information about underlying problems faced by governments.</li> <li>Countries' responses to the sovereign debt crisis in Europe have been quite different, but the most successful ones to date involve radical, wrenching changes over a short period instead of long, drawn-out changes.</li> </ul> The Financial Crisis and Recovery: Why so Slow? Tue, 08 Nov 2011 00:00:00 EST <ul class="listBulleted"> <li>The U.S. economy has recovered slowly from the recession of 2007 to 2009.</li> <li>U.S. history provides no support for linking low employment and high unemployment in the current recovery with the financial crisis of 2007–2008.</li> <li>The recent recovery and the recovery after the Great Depression are similar, both of which differ from other recoveries.</li> <li>Current discussions about the recovery echo prominent interpretations of the Great Depression, focusing on low aggregate demand or government policies that increase uncertainty or decrease productivity.</li></ul> Credit Ratings and the U.S. Downgrade Tue, 08 Nov 2011 00:00:00 EST <ul class="listBulleted"> <li>Standard & Poor's (S&P) downgrade of the long-term credit rating of the United States has been criticized because the risk of default on U.S. government debt in dollars is zero.</li> <li>U.S. Treasury debt is nominally risk free but not really risk free.</li> <li>While S&P does include a monetary score in its assessment of creditworthiness, a higher inflation rate will earn a lower score, not a higher one.</li> </ul> Three Individually Reasonable Decisions, One Unintended Consequence, and a Solution Mon, 13 Jun 2011 00:00:00 EST <ul class="listBulleted"> <li>The Federal Reserve now pays interest on reserves held by banks, but cannot by law pay interest on reserves held by the government sponsored enterprises (GSEs).</li> <li>GSEs earn some interest on reserves by selling the reserves to banks, but the rates earned by the GSEs are far below rates received by the banks.</li> <li>The result is that banks earn risk-free profits at the expense both of the GSEs and of the U.S Treasury, given the Treasury's relationship with Fannie Mae and Freddie Mac, the two largest GSEs.</li> <li>A solution would be to allow the Federal Reserve to pay interest on reserves to GSEs so long as Treasury effectively owns the GSEs' marginal profits and losses.</li> </ul> Capital at Banks Mon, 11 Apr 2011 00:00:00 EST <ul class="listBulleted"> <li>There have been numerous calls for banks to raise their capital and decrease the probability of failure.</li> <li>Instead of merely increasing capital directly, bank owners could be required to post a bond—assets that generate income to the owners as long as the bank is open.</li> <li>Such a bond has the potential to lower the risk that bank owners are willing to undertake and thereby reduce the number of failed banks.</li> </ul> Economic Effects of Banking Crises: A Bit of Evidence from Iceland and Ireland Mon, 21 Mar 2011 00:00:00 EST <ul class="listBulleted"> <li>Iceland and Ireland responded to the banking crises in their countries in quite different ways.</li> <li>While the countries are similar in many respects, they have some significant differences, the most prominent being their exchange-rate regimes.</li> <li>Iceland's combination of a flexible exchange rate and a policy of closing its failed banks appears to have served the country well in the aftermath of the financial crisis.</li> </ul> Municipal Bond Woes Tue, 08 Feb 2011 00:00:00 EST <ul class="listBulleted"> <li>Interest rates on state and local government debt have exceeded rates on federal government debt since the onset of the financial crisis in 2007, presumably at least partly due to credit risk.</li> <li>Decreases in tax revenue and increases in debt are informative, relatively simple measures of fiscal pressures faced by governments.</li> <li>The available data do not support a forecast of widespread defaults and losses on municipal bonds.</li> </ul> International Dimensions of the Financial Crisis of 2007 and 2008 Mon, 10 Jan 2011 00:00:00 EST <ul class="listBulleted"> <li>The Center for Financial Innovation and Stability cosponsored a conference in December 2010 to examine international aspects of the financial crisis.</li> <li>Faster growth of credit and higher leverage before the crisis were associated with larger decreases in projected output in 2009.</li> <li>The evidence indicates that problems in Ireland, Spain, and the United Kingdom have similar causes as the U.S. crisis and are not effects of the U.S. crisis.</li> </ul> The Economics of Regulating Systemic Risk Wed, 08 Dec 2010 00:00:00 EST <ul class="listBulleted"> <li>Systemic risk in financial markets is the risk or probability of a breakdown in the ability to transact in an economy using customary procedures.</li> <li>Regulation can reduce systemic risk by changing the behavior of financial market participants and by making the financial system more resilient to shocks.</li> </ul> Private Deleveraging and Large Government Deficits Tue, 26 Oct 2010 00:00:00 EST <ul class="listBulleted"> <li>Members of the general public are deleveraging—reducing their debt—and the federal government is running substantial deficits, effectively undoing some of the private deleveraging.</li> <li>A standard Keynesian analysis indicates that such government deficits can reduce adverse effects of deleveraging on output and employment.</li> <li>The ability to counteract possible negative effects on output and employment presupposes that the general public either is unaware that higher deficits today are likely to be associated with higher taxes in the future or else is unable to respond to that realization.</li> </ul> Credit Default Swaps on Government Debt: Mindless Speculation? Tue, 26 Oct 2010 00:00:00 EST <ul class="listBulleted"> <li>Credit default swaps (CDSs) continue to be controversial, with concern that trades in them drive prices of government debt down.</li> <li>Evidence from the CDS spread for one country—Ireland—indicates that its CDS spread has been reacting to news about developments in Ireland, Greece, and the European Union.</li> <li>This examination of Ireland's CDS spreads is consistent with the proposition that the spreads reflect fundamental developments, not mindless speculation.</li> </ul> A Global Financial Crisis? Mon, 23 Aug 2010 00:00:00 EST <ul class="listBulleted"> <li>The so-called global financial crisis was not truly global because many countries did not have a financial crisis.</li> <li>Nevertheless, the effects of the crisis have extended far beyond the countries that experienced crises themselves.</li> <li>Evidence indicates that rapid credit growth and high leverage before the financial crisis in the United States and in some other countries left many countries vulnerable to adverse effects of the crisis.</li> </ul> The Financial System after the Crisis: Structured Finance and Credit Rating Agencies Mon, 12 Jul 2010 00:00:00 EST <ul class="listBulleted"> <li>The Federal Reserve Bank of Atlanta's 2010 Financial Markets Conference examined the financial system after the 2008 crisis, including structured finance and credit rating agencies.</li> <li>An important innovation associated with structured finance is the creation of differentiated securities, called tranched securities, that receive payments based on a portfolio of assets. Such differentiated securities were the basis of some collateralized debt obligations (CDOs), which played a significant role in the financial crisis of 2008.</li> <li>Credit rating agencies were instrumental in creating CDOs, and that role spotlights problems with their current place in U.S. securities markets.</li> </ul> The Financial System after the Crisis: Policy Fallout Mon, 12 Jul 2010 00:00:00 EST <ul class="listBulleted"> <li>Some banks apparently are too big to fail. It's unlikely that any policy will eliminate too big to fail or the effects of some firms being too big to fail.</li> <li>Contingent convertible bonds are one likely way to reduce the bad effects of some banks being too big to fail.</li> <li>Macroprudential supervision may be able to reduce the bad effects of some banks being too big to fail, but there are many unanswered questions including, even a basic approach.</li> </ul> Bailouts Mon, 10 May 2010 00:00:00 EST <ul class="listBulleted"> <li>A bailout need not benefit the owners of a firm much or even at all. Much of the benefit may flow to holders of the firm's debt.</li> <li>The bailouts of Fannie Mae and Freddie Mac provide an excellent case study for learning about bailouts.</li> <li>The biggest cost of an expected bailout can be distortion of investment toward firms with a bailout guarantee and encouragement of riskier activities, because the government and ultimately taxpayers bear the risk normally borne by holders of the firms' debt.</li> </ul> Too Big to Fail: No Simple Solutions Mon, 19 Apr 2010 00:00:00 EST <ul class="listBulleted"> <li>"Too big to fail" policies are not about bank size per se but rather about the impact of financial firms' failure on financial stability and the real economy.</li> <li>Abolishing all government authority to engage in too big to fail policies may only delay bailouts in the event of major financial instability that affects the real economy.</li> <li>Critical stumbling blocks to the true elimination of too big to fail policies include the problems of resolving cross-border financial groups and dealing with the too-many-to-fail problem.</li> </ul> Financial Speculation in Credit Default Swaps Thu, 18 Mar 2010 00:00:00 EST <ul class="listBulleted"> <li>A speculator is someone who assumes a risk with the hope of gain.</li> <li>Buyers of credit default swaps are in a similar position to short sellers of stock in some ways: They sell what they don't own and hope to gain from adverse developments affecting the underlying security.</li> <li>Complaints about speculators in the credit default swap market are more about the information reflected in market prices than the actual trading in credit default swaps.</li> </ul> Too Big to Fail Wed, 17 Feb 2010 00:00:00 EST <ul class="listBulleted"> <li>"Too big to fail" is a policy that results from authorities' choices that shield creditors of failed banks from losses in the failed bank.</li> <li>Too big to fail creates a situation in which banks' creditors expect to receive funds from others, such as taxpayers, when banks are unable to pay their obligations.</li> <li>While the FDIC Improvement Act of 1991 was expected to reduce the likelihood of banks being too big to fail, events during the 2008 financial crisis clearly indicate that too big to fail is alive and well, at least in financial crises.</li> </ul> Excess Reserves in the 1930s: A Precautionary Tale Tue, 12 Jan 2010 00:00:00 EST <ul class="listBulleted"> <li>Excess reserves generally are not excess in the sense of being surplus or extra.</li> <li>In the 1930s, excess reserves were considered to be surplus, and increases in reserve requirements during that decade were designed to mop up those excess reserves.</li> <li>Banks responded to increases in reserve requirements by reducing deposits and restoring some of the excess reserves. This historical observation indicates that reductions in excess reserves are best approached with caution.</li> </ul> Regulating Systemic Risk Mon, 14 Dec 2009 00:00:00 EST <ul class="listBulleted"> <li>The financial crisis of 2008 is a clear example of systemic risk becoming real and affecting financial markets.</li> <li>Differences in the regulatory environment from country to country appear to explain some but not all of the differences in how the crisis affected different countries.</li> <li>Financial regulation that considers the international dimensions of financial markets and institutions is both desirable and feasible.</li> <li>Two specific regulatory proposals to reduce the frequency and severity of financial crises are contingent capitalmdash;funds that convert to capital in bad times—and regulation of systemic risk by bank examiners.</li> </ul> Short Selling: Costs and Benefits Tue, 10 Nov 2009 00:00:00 EST <ul class="listBulleted"> <li>Financial economists and practitioners generally have a positive view of short selling, a view on evidence at CenFIS's conference on short selling.</li> <li>The ban on short sales in some firms did not increase trading in options, an effect that might have been expected.</li> <li>Short sales might be made more efficient by a centralized listing of stock that can be borrowed and sold short.</li> <li>Policy changes that are quick responses to financial difficulties can create uncertainty about future policies.</li> </ul> Interest on Reserves and the Current High Level of Excess Reserves Mon, 19 Oct 2009 00:00:00 EST <ul class="listBulleted"> <li>Banks are holding substantially more excess reserves than in August 2008.</li> <li>The Federal Reserve began paying interest on reserves in October 2008 and currently is paying an interest rate on reserves similar to rates on short-term Treasury securities.</li> <li>Payment of interest on reserves accounts for much, though probably not all, of the increase in excess reserves.</li> </ul> Stock Prices in the Financial Crisis Tue, 22 Sep 2009 00:00:00 EST <ul class="listBulleted"> <li>Stock prices fell roughly 50 percent from peak to trough from October 2007 to March 2009.</li> <li>These drops in stock prices are large relative to those associated with earlier recessions since World War II.</li> <li>This extraordinary plunge in stock prices may reflect effects of the financial crisis rather than lower earnings from an especially severe recession.</li> </ul> Credit Ratings and Derivatives Mon, 17 Aug 2009 00:00:00 EST <ul class="listBulleted"> <li>Credit ratings are not complete summaries of securities' riskiness.</li> <li>Structured securities change securities' cash flows and riskiness in nonobvious ways.</li> <li>The old-fashioned advice "If you don't understand it, don't buy it" seems to apply quite well here.</li> </ul>