“…a very valuable contribution.” - Larry Summers, former Secretary of the Treasury and director of the National Economic Council, president emeritus, Harvard University
“A full-throated defense of economic dynamism.” - The Wall Street Journal
“…a fresh argument for the productive value of inequality.” - David Autor, Professor of Economics, Massachusetts Institute of Technology
“Unintended Consequences represents the most cogent and persuasive analysis of the Financial Crisis to date.” - Andrei Shleifer, 1999 John Bates Clark Medal Winner
“…challenges misconceptions that distort our economic debates.” - Arthur Brooks, President of the American Enterprise Institute
“…a fresh argument for the productive value of inequality.” - David Autor, Professor of Economics, Massachusetts Institute of Technology
“…challenges misconceptions that distort our economic debates.” - Arthur Brooks, President of the American Enterprise Institute
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“Unintended Consequences should be read by anyone who takes for granted the superiority of progressive taxation and has not thought carefully about the trade-offs involved.” - The New Republic
“Unintended Consequences offers deep and well-argued analyses on almost every issue.” - The New York Times
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Token Resistance

Joseph Wang Fed Guy Blog

Date Posted:: January 23, 2024

Persistent QT could lead to a rise in longer-dated yields as the market digests “a few hundred billion more Treasuries” over the next two years. @FedGuy12

The potential stumbling block for risk assets is likely not the Fed, but a renewed rise in longer-dated bond yields from a re-emergence of inflation and an extended QT. The supply of Treasuries to private investors may be larger than expected due to a longer-than-expected QT. Recall, QT increases the amount of Treasuries private investors must hold. While QT is expected to be tapered this year, bank regulators are proposing regulatory changes that could further extend QT. Regulators are forcing banks to regularly borrow from the discount window in an attempt to destigmatize the facility. This would provide all banks with easy access to reserves and largely remove the Fed’s concern of shrinking its balance sheet too much and creating market disruptions. A longer QT could translate into a few hundred billion more Treasuries for the market to digest over the next two years.

The Disparate Outcomes of Bank‑ and Nonbank‑Financed Private Credit Expansions

Nina Boyarchenko and Leonardo Elias Federal Reserve Bank of New York

Date Posted:: August 22, 2024
Is Database:: Database

A @NewYorkFed analysis of 33 countries over 1966-2020 finds 1 s.d. higher growth rate in bank credit increases the probability of real GDP growth below -2% in two years’ time by 2.5 percentage points, while nonbank credit has the opposite effect.

Credit extended by the banking and nonbanking sector[s] do not always move together. One type of lending is [often] expanding while the other is contracting, which suggests a substitution between bank and nonbank lending. Overall booms in private credit can be driven by either. We find that bank and nonbank credit expansions predict differentially the downside risk to growth—that is, the probability of extreme negative real GDP growth realizations. The blue line in the chart shows that the likelihood of an extreme negative real GDP growth realization —which we define as year-on-year real GDP growth below -2%— increases following expansions in bank credit for horizons of one to three years, while at the same horizon, growth in nonbank credit actually lowers the probability of a large drop in real GDP growth. In particular, a 1 s.d. Increase in bank credit increases the probability of real GDP growth below -2% in two years’ time by 2.5 ppts relative to a baseline 6% probability in our sample. In contrast, a 1 s.d. higher growth rate in nonbank credit lowers the probability of real GDP growth below -2% in two years’ time by 1.9 ppts.

Deposit Insurance, Uninsured Depositors, and Liquidity Risk During Panics

Matthew Jaremski and Steven Sprick Schuster National Bureau of Economic Research

Date Posted:: April 9, 2024
Is Database:: Database

Jaremski and Schuster document that before the establishment of the FDIC, deposits fled to the safety of local insured postal banks, illustrating that lack of universal deposit coverage amplifies run risk. @ssprickschuster

Before the Federal Deposit Insurance Corporation (FDIC) became active in 1934, the only federally insured deposit accounts available to American households were through the U.S. Postal Savings System. To examine the role that postal savings played on bank closure, we collect the balance sheets of over 16,000 commercial banks just before the start of the Great Depression and match them with information on which post offices accepted deposits. We find banks that operated nearby a post office that accepted deposits were more likely to close between 1929 and 1935. The effect of postal savings is severely weakened after deposit insurance was installed across commercial banks in 1934. This lends evidence to the theory that we are capturing a competitive liquidity effect due to the lack of universal coverage.

The Secular Decline of Bank Balance Sheet Lending

Greg Buchak, Gregor Matvos, Tomasz Piskorski and Amit Seru National Bureau of Economic Research

Date Posted:: April 5, 2024
Is Database:: Database

Bank balance sheet lending has declined from 60% of total private lending in 1970 to 35% in 2023. Private credit is increasingly intermediated through arms-length transactions such as securitization. @NBERpubs

The role of traditional bank-led intermediation has declined sharply since the 1970s. Private credit is increasingly intermediated through arms-length transactions such as securitization. A structural model explores what can explain these shifts [and simulates] implications for macroprudential policies. Declines in securitization cost account for changes in aggregate lending quantities. Savers, rather than borrowers, are the main drivers of bank balance sheet size. Implicit banks’ costs and subsidies explain shifting bank balance sheet composition. Together, these forces explain the fall in the overall share of informationally sensitive bank lending in credit intermediation. Raising capital or liquidity requirements decreases lending in both early (1960s) and recent (2020’s) scenarios, but the effect is less pronounced in the latter. The substitution of bank balance sheet loans with debt securities in response to these policies explains why we observe only a fairly modest decline in aggregate lending despite a large contraction of bank balance sheet lending.

The Evolution of Banking in the 21st Century: Evidence and Regulatory Implications

Samuel Hanson, Victoria Ivanshina, Laura Nicolae, Jeremy Stein, Adi Sunderam and Daniel Tarullo Brookings Papers On Economic Activity

Date Posted:: April 4, 2024
Is Database:: Database
Is Important:: Important

Deposits – especially uninsured deposits that create run risk – have risen sharply, while banks with the most rapid growth in deposits have shifted assets away from lending towards longer-term MBS and Treasuries. @lauramnicolae

To inform the ongoing discussion of the appropriate regulatory response to [such events as] the failures of three regional banks 2023, we examine trends in the banking industry over the last twenty-five years. On the liability side of bank balance sheets, deposits—and especially uninsured deposits—have grown rapidly. On the asset side, there has been a notable shift away from the information-intensive lending traditionally associated with banks and towards longer-term securities such as MBS and long-term Treasuries. We assess the main regulatory options to reduce the risk of destabilizing bank runs—expanding deposit insurance and strengthening liquidity regulation— and argue that the industry trends we document favor the latter option. Regulators may be more comfortable tightening liquidity requirements on uninsured deposits, insofar as the substantial increase in those deposits in recent decades has not been correlated with an increase in information-intensive lending.

Manufacturing Demand

Joseph Wang Fed Guy Blog

Date Posted:: March 13, 2024
Is Database:: Database

.@FedGuy12 endorses a proposed adjustment to the Basel III leverage calculations that would increase demand for Treasuries from US banks as future issuances surge.

Banks were huge investors in Treasuries during World War II, but steadily reduced their holdings even as Treasury issuance climbed. The share of bank assets in Treasuries remains historically low as banks have preferred to make loans or invest in higher yielding securities. While banks are required to hold high quality liquid assets, they have chosen to meet those requirements with reserves and Agency MBS rather than Treasuries. A revision to Basel in the form of a revamped leverage calculation would not only boost liquidity across markets, but also potentially make banks significant investors in Treasuries just in time to meet increased future issuance.

Monetary Policy and Innovation

Yueran Ma and Kaspar Zimmermann Federal Reserve Bank of Kansas City

Date Posted:: August 29, 2023
Is Database:: Database

Historically monetary tightening has had an impact on risk capital: 100bps of tightening is associated with a 1-3pp decline in R&D spending and a 25% decline in VC investment over the following 1-3 year period.

We normalize the shock to tightening by 100bps. Investment in intellectual property products (IPP) in the national accounts (NIPA) declines by about 1%. The magnitude is comparable to the decline in traditional investment in physical assets. R&D spending in Compustat data for public firms declines by about 3%. VC investment is more volatile, and declines by as much as 25% at a horizon of 1 to 3 years after the monetary policy shock. Patenting in important technologies declines by up to 9% 2 to 4 years after the shock. An aggregate innovation index constructed using estimates of the economic value of patents also declines by up to 9%. Based on estimates of the output and total factor productivity (TFP) sensitivity to the aggregate innovation index, a 9% decline in the index can contribute to 1% lower real output and 0.5% lower TFP 5 years later.

Persistent QT could lead to a rise in longer-dated yields as the market digests “a few hundred billion more Treasuries” over the next two years. @FedGuy12

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A @NewYorkFed analysis of 33 countries over 1966-2020 finds 1 s.d. higher growth rate in bank credit increases the probability of real GDP growth below -2% in two years’ time by 2.5 percentage points, while nonbank credit has the opposite effect.

Related Articles:

Jaremski and Schuster document that before the establishment of the FDIC, deposits fled to the safety of local insured postal banks, illustrating that lack of universal deposit coverage amplifies run risk. @ssprickschuster

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Bank balance sheet lending has declined from 60% of total private lending in 1970 to 35% in 2023. Private credit is increasingly intermediated through arms-length transactions such as securitization. @NBERpubs

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Deposits – especially uninsured deposits that create run risk – have risen sharply, while banks with the most rapid growth in deposits have shifted assets away from lending towards longer-term MBS and Treasuries. @lauramnicolae

Related Articles:

.@FedGuy12 endorses a proposed adjustment to the Basel III leverage calculations that would increase demand for Treasuries from US banks as future issuances surge.

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Historically monetary tightening has had an impact on risk capital: 100bps of tightening is associated with a 1-3pp decline in R&D spending and a 25% decline in VC investment over the following 1-3 year period.

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