Notes from the Vault - Federal Reserve Bank of Atlanta - FRB Atlanta en-us Atlanta Fed Logo Procyclicality: CECL versus Incurred Loss Model DEA7BA11-C0F5-4F4A-8674-C7B9D675660E Thu, 31 Oct 2019 14:29:00 EST Critics contend that switching from the incurred loss model for loan losses to current expected credit loss will make lending more procyclical (magnifying the fluctuations in an economic cycle). Notes from the Vault critiques that argument. Trusted Third Parties E5C48306-0199-4CA6-9C48-F0AC8B7D646D Wed, 28 Aug 2019 13:53:00 EST The creation of bitcoin was motivated by a desire to avoid trusted third parties in financial transactions. Notes from the Vault discusses the role of trusted third parties in reducing theft. Mapping the Financial Frontier 643609AF-3B97-4469-B366-2E02B7A7F85D Mon, 24 Jun 2019 10:51:00 EST Notes from the Vault discusses the Atlanta Fed's Financial Markets Conference on Mapping the Financial Frontier: What Does the Next Decade Hold? Topics include data privacy, blockchain technology, and mortgage finance. Cashless Stores and Cash Users 5BE3DB3F-F676-4875-B7B1-484257409D9D Mon, 20 May 2019 10:49:00 EST With the emergence of cashless stores, how does this change affect consumers who lack credit or debit cards? Notes from the Vault characterizes consumers who pay cash for in-person purchases and those who do not have credit or debit cards. Fractional Reserve Cryptocurrency Banks 4865108D-9D1E-41A2-9C33-2D3C9DDECA4A Thu, 25 Apr 2019 10:31:00 EST Some observers argue that widespread acceptance of cryptocurrency would eliminate banks. Notes from the Vault discusses the potential for cryptocurrency banks along with some related issues. Carry Factors: Characteristics and Informational Content DC372748-F388-4C45-BAFD-D97F77771D33 Fri, 29 Mar 2019 16:08:00 EST Notes from the Vault discusses the informational content of carry factors for policy analysis. It highlights the predictive content of the bond and commodity carry, respectively, for recessions and inflation, and the commonality in the currency carry. Tech-Driven Financial Innovation in Banking 933DBBB4-5111-427D-A458-01E7FD01CF4D Tue, 22 Jan 2019 13:15:00 EST Notes from the Vault draws on the authors’ recent working paper to highlight why research on financial innovation is important. It also discusses some data limitations that inhibit such research. Financial Stability Implications of New Technology 9CB3A921-42DD-4E7D-B97D-2538910B44D6 Thu, 29 Nov 2018 10:40:00 EST Notes from the Vault reviews papers and presentations from an Atlanta Fed research workshop about the effects of new technology on financial stability. Consumer Credit, Blockchains, and Machine Learning 5B56464D-65D8-468F-AEE1-CFD3AEB6624D Wed, 31 Oct 2018 09:59:00 EST Credit bureaus and credit scoring have had a profound impact on the consumer lending market. Notes from the Vault discusses the prospects for blockchains and machine learning to affect that market. China's Two-Pillar Policy for the Renminbi 43B13C23-BEC9-4713-8522-7E3B368B8BA6 Fri, 28 Sep 2018 13:57:00 EST Notes from the Vault documents that between December 2015 and May 2017, the People's Bank of China followed a two-pillar exchange rate policy designed to achieve both stability and flexibility. Blockchain Challenges and Governance F1C9A0BA-2F53-4F64-A50D-2A331ACC5D5F Mon, 30 Jul 2018 11:28:00 EST Some analysts are promoting blockchains as replacements for banks and other trusted third parties. In the second of a two-part series, Notes from the Vault discusses the governance of blockchains. Some Blockchain Challenges A51F6C18-37BE-4402-8098-476733E16818 Wed, 27 Jun 2018 16:17:00 EST Blockchain technology, the technology underlying bitcoin, is being widely promoted. In the first of two posts on blockchains, Notes from the Vault briefly reviews blockchain technology and discusses challenges with the way it is currently implemented. Machines Learning Finance 817E9F7D-7F08-4BE9-B88E-AC64D7B2ADEC Thu, 31 May 2018 10:54:00 EST Notes from the Vault discusses the Atlanta Fed's recent Financial Markets Conference on machine learning. The conference highlighted some of the strengths and weaknesses of machine learning in the financial system. The Initial Coin Offerings Market (Part 2) 74A9147B-8999-46E5-A4F9-191BC624BF65 Fri, 20 Apr 2018 10:15:00 EST Initial coin offerings (ICOs) compete with various other methods of raising funds to support new technology ventures. This second of a two-part Notes from the Vault post compares ICOs with those alternatives. The Initial Coin Offerings Market 67C26E2C-F045-4346-94C7-EE868FCFC2DB Fri, 09 Mar 2018 15:26:00 EST Initial coin offerings (ICOs) have become a popular way for new tech firms to raise funds. Notes from the Vault discusses various economic aspects of the ICO market in the first of a two-part series. Good Models, Bad Models 8623B0B8-C953-401D-B002-0E6A1BA25569 Wed, 17 Jan 2018 15:28:00 EST Notes from the Vault discusses the incompleteness of economic models used to inform decision makers. It contends that aggregating information from multiple models would better reflect this specification uncertainty. Financial Regulation: Fit for the Future? 88C481A6-6372-4E07-8B52-51EC83DFB1CE Thu, 21 Dec 2017 15:47:00 EST Notes from the Vault discusses some of the research on postcrisis developments in financial regulation presented at a recent workshop hosted by the Atlanta Fed. Risk-On/Risk-Off in the Long Run B3994247-44BB-41CB-B8A1-C768E70FFEB0 Tue, 28 Nov 2017 11:59:00 EST Notes from the Vault discusses the problem of reliably identifying priced risks in financial markets over short horizons. It also provides evidence on the pricing of two risks over longer horizons. Enhanced Safety: the EU's Data Protection Rules 7AF84674-6DBE-4EC2-A6DB-E07EEEBBD169 Mon, 30 Oct 2017 12:36:00 EST In light of some of the issues raised by the recent breach at Equifax, Notes from the Vault discusses pending changes in the European Union's data security regulations. Government Debt Subsidies and Financial Stability 70E924D0-0BEC-4E6C-B5F7-1B8A197102CB Thu, 28 Sep 2017 14:22:00 EST Analyzes various government programs that encourage greater reliance on debt financing. Fintech and Financial Inclusion 0C2ED737-8BA7-44A4-8C68-75F29C0C82D8 Wed, 30 Aug 2017 11:17:00 EST The post considers the potential for technology to increase financial inclusion. Congressional Control over the Banking Agencies' Budgets F71DD1C1-23D1-4B15-BBDE-596E2F21EB3F Mon, 31 Jul 2017 17:24:00 EST Congress provides an annual appropriation to most agencies but not the bank regulators. Notes from the Vault considers the banking agencies' budget independence and the potential consequences of ending it. The Evolving Financial Supermarket 7D13978D-97DE-4F0D-A297-652C89A38A30 Thu, 22 Jun 2017 13:56:00 EST The past and possible future evolution of retail financial supermarkets. Managing Global Financial Risks F420C544-CD08-4207-B89B-535BA6A60852 Tue, 30 May 2017 15:39:00 EST Notes from the Vault discusses the Atlanta Fed's recent Financial Markets Conference. Conflicts of Interest in Securitization and the U.S. Housing Crisis 24EE8843-D2F5-4E4B-8B82-13E576848478 Wed, 26 Apr 2017 12:30:00 EST This Notes from the Vault post assesses the recent literature on whether conflicts of interest in securitization contributed to the U.S. housing crisis. Interest on Reserves 2197C4A5-BBCE-4316-9CF8-8465B2807B3D 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 Notes from the Vault post considers the implications of such payments. The Revolving Door 7AD93BD6-6F73-473F-AF91-495269BA27C8 Mon, 30 Jan 2017 14:47:00 EST The so-called revolving door between industry and the regulatory agencies is a recurring concern. This Notes from the Vault post provides a high-level overview of this issue. The Impact of Extraordinary Policy on Intermediaries 01A55D7B-2AA1-4708-A300-E9F66D8A41D9 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 Notes from the Vault post discusses research findings. Prudential Regulation, Big Data, and Machine Learning 2608D269-4CA9-48F5-8031-C862A079376D 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 Notes from the Vault post considers the extent to which these developments may influence prudential regulation of financial firms and markets. Avoiding Regulation: FinTech versus the Sharing Economy 4F1DEF84-32C8-4A8C-A7BE-EB62A9888CD1 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 Notes from the Vault post discusses the relationship between fintech and the financial supervisory agencies. Market Expectations of Fed Policy: A New Tool C337C970-E9A2-47CC-9ACE-0FB14DD974D3 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 Notes from the Vault 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 59544245-A16E-49DA-9B52-80C7C6497285 Fri, 29 Jul 2016 14:40:00 EST Smart contracts that rely on computer code are being promoted as possible replacements for paper contracts. Notes from the Vault 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? 9D32BA62-69D1-4002-9F6D-CAC86C1B9AFD 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. Notes from the Vault discusses the reasons for the TAF's success and some implications for the future. Getting a Grip on Liquidity: Conference Takeaways 7C4CE33A-2D7C-4985-9C21-E8AB321C4563 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. Notes from the Vault 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 7957DBF3-C584-4286-AD0D-B1D0308775B9 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). Notes from the Vault 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 F1B8A2C3-00D6-4481-A3ED-37492698CB88 Thu, 31 Mar 2016 14:11:00 EST Liquidity is a slippery concept but one that has important implications for the financial system. This Notes from the Vault 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 E2E36C75-C1BB-415A-A4C5-A959A8480170 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 Notes from the Vault 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 054AC1A5-A2A5-4E31-ACA0-84189487EE5C 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. Notes from the Vault 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 9F574CE1-BE10-4D45-8092-15431B3A7E1F 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. Notes from the Vault 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 64558699-C962-446F-A88B-305F9E688EFB 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." Notes from the Vault discusses research on financial liquidity presented at a recent Atlanta Fed conference. Using Market Information for Fail-Safe Supervisory Triggers E0994BF8-0CCD-47CA-B483-CA29F3113897 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. Notes from the Vault discusses potential problems with using market information and methods to mitigate those problems. Marketplace Lending's Role in the Consumer Credit Market 78DC1C09-F1EC-4A89-B0CB-464C6AB4E1BD Wed, 30 Sep 2015 14:28:00 EST Peer-to-peer lenders have evolved into what can more accurately be called marketplace lenders. Notes from the Vault 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 80678FE3-56C6-45E7-A4D5-DA4D2087300D 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. Notes from the Vault 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 40FCE10F-D8BF-4B3E-B524-38069196511E 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. Notes from the Vault 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 EAD7723F-E190-417E-ABE5-94731DF19622 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 Notes from the Vault explains these differences and discusses their implications for shadow banks. Lessons for E-Money from the U.S. Experience with Bank Notes 12348C89-CC46-4333-800B-AEC5A17469BB 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 Notes from the Vault draws on that experience to develop some implications for government policy regarding e-money. Who Will Be Central to the Financial System? AF93F30C-4DD6-41D2-804C-06A7CCED26E1 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? Notes from the Vault summarizes the discussion of these issues at the Atlanta Fed's recent Financial Markets Conference. The Change in the FDIC Assessment Base 331F8105-441D-44B9-B415-9CD29A07D7F8 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 Notes from the Vault post analyzes the merits of that shift. Liquidity Regulation and Financial Stability 9530D55D-9DEC-4458-BEEC-DE3DED77564F 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 Notes from the Vault post raises questions about these regulations' overall contribution to financial stability. The Impact of Regulation on Monetary Policy 863AC068-E406-4304-8E6C-D19B346A7497 Fri, 30 Jan 2015 10:30:00 EST Banking regulation can have unintended consequences for the conduct of monetary policy. A new Notes from the Vault discusses two regulatory actions that may impair the cost-effectiveness of the FOMC's preferred tool for normalizing monetary policy. Central Banking in the Shadows D22AA1CB-10CE-4F7F-BEA6-B42C8E55E024 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? Notes from the Vault introduces the theme of the 2015 Financial Markets Conference. Nonbank Financial Firms and Financial Stability A2960543-1326-4C48-A9C5-3AB4C5AEE25B 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 Notes from the Vault 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? A0437495-A347-481B-A03F-508519DD0372 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? C614B0BA-ABC5-4891-8EB7-03E493A362CF 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 Notes from the Vault discusses the importance of timely resolution for this approach to be effective. State of Distress? BF72990F-327C-40F0-B67D-39FCE308D4EB 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? 65920BBC-DE77-4665-B911-BDE313155B74 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? B683CE83-D26F-450F-87CD-D7A7DFD65D36 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. Notes from the Vault contends that these payments fall far short of the economic value of the Treasury's support. Two Drivers of Financial Innovation 423A89B5-3CE1-45B4-B3D7-4C5DB48BF70A Thu, 27 Feb 2014 00:00:00 EST Financial innovation is likely to accelerate as the postcrisis regulatory environment stabilizes. Notes from the Vault considers two of the biggest drivers of past innovation, technology and regulation, to better understand likely future trends. Simple Concept, Complex Regulation C842419A-E3BB-43C2-9639-228666FDBE2A Tue, 28 Jan 2014 00:00:00 EST Simple regulatory concepts often result in long, complex regulations. Notes from the Vault discusses why that happens and draws implications for the future of prudential regulation. Notes from the Vault 4DDCEAE9-F43B-465A-BB71-FB6A542DF6AE Fri, 17 Jan 2014 00:00:00 EST Basel III and Stress Tests C72F8640-4048-40C6-9542-A7ABC32B30A2 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. Notes from the Vault discusses how the stress tests could mitigate weaknesses in Basel III's measures of capital and credit risk. Supervising Bank Compensation Policies D55A25BE-7CC4-45AD-AE40-E25F0FA3F8D7 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. Notes from the Vault 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 7B5DFC81-C79B-45B5-BBBA-46EAAA280664 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. Notes from the Vault looks at the topic. FASB Proposes (Too?) Early Loan Loss Recognition 20919130-C8AF-433D-B660-D058B5B2C059 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. Notes from the Vault takes a look at FASB's proposal. Reducing Systemic Risk or Merely Transforming It? 7C330591-FA3A-46F0-9566-D1F8EB141070 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 Notes from the Vault. Value at Risk: A Valuable Tool That Was Greatly Oversold 1FF4DA22-93DE-406E-B65B-75AE85109BD1 Fri, 21 Jun 2013 00:00:00 EST Measuring financial risk continues to be a challenge after the financial crisis. A new Notes from the Vault 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 C9819FDC-D3A6-4E8F-9427-68D6F56C09EB Wed, 22 May 2013 00:00:00 EST Fannie Mae and Freddie Mac are back in the headlines, their future under debate. Notes from the Vault considers three important lessons these GSEs can provide to policymakers seeking to end too big to fail. Reflections on the 2013 Financial Markets Conference 2F5B7464-F074-491A-A678-439BF978F284 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. Notes from the Vault considers one presenter's perspective and offers some alternative views. Will Taxpayers Get a Truly Fair Deal with Housing Finance Reform? 17D069A1-9F70-4A4E-BCF5-BCDC9CA59ADF 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 Notes from the Vault discusses the topic. The TARGET2 Settlement System in the Eurozone 6E71ECF9-D149-4BE9-BE1A-DBCB037E3A5E Fri, 23 Mar 2012 00:00:00 EST Positive and negative balances have built up in TARGET2, the payment system in the eurozone. The negative balances are debts of national central banks backed by collateralized loans to private banks. 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. Notes from the Vault was on hiatus after the March/April 2012 post; it restarted in March 2013. Sovereign Debt and Default FB1F180D-AA07-43B6-A3C2-9CC89528E5F3 Mon, 19 Dec 2011 00:00:00 EST The United States has a debt problem, even if it is not as intensely scrutinized as European debt.While market prices and markets are much maligned, the prices in markets provide information about underlying problems faced by governments.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. Credit Ratings and the U.S. Downgrade A89F5BFC-0AE1-4460-BD10-7E3B818C7930 Tue, 08 Nov 2011 00:00:00 EST 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. U.S. Treasury debt is nominally risk free but not really risk free. 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. The Financial Crisis and Recovery: Why so Slow? FAD4A100-F20B-4FF3-BA21-EB29DC1DD6E1 Tue, 08 Nov 2011 00:00:00 EST The U.S. economy has recovered slowly from the recession of 2007 to 2009. U.S. history provides no support for linking low employment and high unemployment in the current recovery with the financial crisis of 2007–2008. The recent recovery and the recovery after the Great Depression are similar, both of which differ from other recoveries. 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. Three Individually Reasonable Decisions, One Unintended Consequence, and a Solution 57725926-C0F2-4C30-99FC-66E27BF5A2A0 Mon, 13 Jun 2011 00:00:00 EST 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). 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. 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.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. Capital at Banks 4D16F2C8-BC74-4E7D-8ED2-6F12158C6A61 Mon, 11 Apr 2011 00:00:00 EST There have been numerous calls for banks to raise their capital and decrease the probability of failure. 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. 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. Economic Effects of Banking Crises: A Bit of Evidence from Iceland and Ireland 1751431C-150D-4EBE-942B-81B605C0435A Mon, 21 Mar 2011 00:00:00 EST Iceland and Ireland responded to the banking crises in their countries in quite different ways. While the countries are similar in many respects, they have some significant differences, the most prominent being their exchange-rate regimes. 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. Municipal Bond Woes 0186D62C-82E4-45B1-8E14-906CADFAAFF2 Tue, 08 Feb 2011 00:00:00 EST 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. Decreases in tax revenue and increases in debt are informative, relatively simple measures of fiscal pressures faced by governments. The available data do not support a forecast of widespread defaults and losses on municipal bonds. International Dimensions of the Financial Crisis of 2007 and 2008 4DF8CE8F-5F3A-492C-8535-562EAAB147BF Mon, 10 Jan 2011 00:00:00 EST The Center for Financial Innovation and Stability cosponsored a conference in December 2010 to examine international aspects of the financial crisis. Faster growth of credit and higher leverage before the crisis were associated with larger decreases in projected output in 2009. 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. The Economics of Regulating Systemic Risk FA9139F3-5F9F-48D8-83A0-5EAA8BE345EF Wed, 08 Dec 2010 00:00:00 EST Systemic risk in financial markets is the risk or probability of a breakdown in the ability to transact in an economy using customary procedures. Regulation can reduce systemic risk by changing the behavior of financial market participants and by making the financial system more resilient to shocks. Private Deleveraging and Large Government Deficits 18BAB690-BB66-4353-8C66-B383A0C74CDC Tue, 26 Oct 2010 00:00:00 EST 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.A standard Keynesian analysis indicates that such government deficits can reduce adverse effects of deleveraging on output and employment.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. Credit Default Swaps on Government Debt: Mindless Speculation? 1E8674F0-0A79-47FF-BECC-DEDA4D753E5E Tue, 26 Oct 2010 00:00:00 EST Credit default swaps (CDSs) continue to be controversial, with concern that trades in them drive prices of government debt down.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.This examination of Ireland's CDS spreads is consistent with the proposition that the spreads reflect fundamental developments, not mindless speculation. A Global Financial Crisis? 65AD9D27-C011-421E-BCC5-ED648F86B935 Mon, 23 Aug 2010 00:00:00 EST The so-called global financial crisis was not truly global because many countries did not have a financial crisis.Nevertheless, the effects of the crisis have extended far beyond the countries that experienced crises themselves.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. The Financial System after the Crisis: Policy Fallout 76ACA632-4106-4B5D-84DC-E4499D449FFD Mon, 12 Jul 2010 00:00:00 EST 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.Contingent convertible bonds are one likely way to reduce the bad effects of some banks being too big to fail.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. The Financial System after the Crisis: Structured Finance and Credit Rating Agencies F33C0188-6637-4926-A1C5-5D80E60F4EEB Mon, 12 Jul 2010 00:00:00 EST 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.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.Credit rating agencies were instrumental in creating CDOs, and that role spotlights problems with their current place in U.S. securities markets. Bailouts 0EF21E75-6A2D-4E4B-9ED0-FFAFEE509D79 Mon, 10 May 2010 00:00:00 EST 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.The bailouts of Fannie Mae and Freddie Mac provide an excellent case study for learning about bailouts.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. Too Big to Fail: No Simple Solutions 047B638E-7350-407D-A028-C66B51BCDF8D Mon, 19 Apr 2010 00:00:00 EST "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.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.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. Financial Speculation in Credit Default Swaps 3D88454D-2293-4C9A-973A-02A396E6EFA6 Thu, 18 Mar 2010 00:00:00 EST A speculator is someone who assumes a risk with the hope of gain.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.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. Too Big to Fail 8E9A1EB1-D919-4329-93CE-E5AB9FA3EEDF Wed, 17 Feb 2010 00:00:00 EST "Too big to fail" is a policy that results from authorities' choices that shield creditors of failed banks from losses in the failed bank.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.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. Excess Reserves in the 1930s: A Precautionary Tale 5FDA8CD7-78BE-4766-B3A5-E2024246EF61 Tue, 12 Jan 2010 00:00:00 EST Excess reserves generally are not excess in the sense of being surplus or extra.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.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. Regulating Systemic Risk 22D15D79-6692-43C9-B9D3-1F74D2E7EAB5 Mon, 14 Dec 2009 00:00:00 EST The financial crisis of 2008 is a clear example of systemic risk becoming real and affecting financial markets.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.Financial regulation that considers the international dimensions of financial markets and institutions is both desirable and feasible.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. Short Selling: Costs and Benefits 7CAB6EB8-A570-40B0-9DC8-EBD60610D4B5 Tue, 10 Nov 2009 00:00:00 EST Financial economists and practitioners generally have a positive view of short selling, a view on evidence at CenFIS's conference on short selling.The ban on short sales in some firms did not increase trading in options, an effect that might have been expected.Short sales might be made more efficient by a centralized listing of stock that can be borrowed and sold short.Policy changes that are quick responses to financial difficulties can create uncertainty about future policies. Interest on Reserves and the Current High Level of Excess Reserves 488B60D9-6AF7-4A0D-A54C-7F5E5514E1B7 Mon, 19 Oct 2009 00:00:00 EST Banks are holding substantially more excess reserves than in August 2008.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.Payment of interest on reserves accounts for much, though probably not all, of the increase in excess reserves. Stock Prices in the Financial Crisis 567E3AE3-3366-495D-A184-20BB175F7D82 Tue, 22 Sep 2009 00:00:00 EST Stock prices fell roughly 50 percent from peak to trough from October 2007 to March 2009.These drops in stock prices are large relative to those associated with earlier recessions since World War II.This extraordinary plunge in stock prices may reflect effects of the financial crisis rather than lower earnings from an especially severe recession. Credit Ratings and Derivatives B4A6B589-87A0-46F5-8F9E-5F7873E3E962 Mon, 17 Aug 2009 00:00:00 EST Credit ratings are not complete summaries of securities' riskiness.Structured securities change securities' cash flows and riskiness in nonobvious ways.The old-fashioned advice "If you don't understand it, don't buy it" seems to apply quite well here.