In recent years, mergers, acquisitions and organic growth have meant that some of the largest and most complex financial groups have come to transcend national boundaries and traditionally defined business-lines. As a result, they have become a potential channel for the cross-border and cross-market transmission of financial shocks. This paper analyses the degree of comovement in the equity prices of a selected group of large complex financial institutions (LCFIs), and assesses the extent to which movements are driven by common factors. A relatively high degree of commonality is found for most LCFIs although there are still noticeable divisions between sub-groups of LCFIs, both according to geography and to a lesser extent primary business-line.

A number of recent policy initiatives have called for enhanced transparency of banking firms. While the hope is that enhanced transparency may improve incentives ex ante, it is less clear whether transparency is necessarily a good thing ex post, when a bank might have hit hard times and provision of information could have a destabilising effect. This paper provides a synopsis of these different effects and provides some new, bank-level evidence in an attempt to clarify empirically whether, taking ex ante and ex post effects together, transparency is likely to reduce or increase bank stability. The analysis suggests that, on balance, transparency reduces the chance of severe banking problems and thus enhances overall financial stability.

Using a large sample of accounting data for non-financial companies in France, this paper studies the interactions between macroeconomic shocks and companies’ financial fragility. We consider links in both directions, namely whether firms’ bankruptcies are affected by macroeconomic variables, and whether bankruptcies determine the business cycle. We estimate forecasting equations for firms’ bankruptcy using Shumway's (2001) approach and study the joint dynamics of bankruptcies and macroeconomic variables within an exogenous VAR type model estimated at the sector level. We find evidence of reciprocal links between the bankruptcy rate and the output gap and highlight significant “second round effects” of shocks to the output gap on bankruptcies. We show how taking into account the dynamic transmission of macroeconomic shocks matters in stress testing exercises.

In this paper, we study credit risk transfer (CRT) in an economy with endogenous financing (by both banks and non-bank institutions). Our analysis suggests that the incentive of banks to transfer credit risk is aligned with the regulatory objective of improving stability, and so the recent development of credit derivative instruments is to be welcomed. Moreover, we find the transfer of credit risk from banks to non-banks to be more beneficial than CRT within the banking sector. Intuitively, this is because it allows for the shedding of aggregate risk which must otherwise remain within the relatively more fragile banking sector. Therefore, regulators should act to maximize the benefits from CRT by encouraging the development of instruments favorable to the cross-sectoral transfer of aggregate credit risk (including basket credit derivatives such as collateralized debt obligations). Finally, we derive the optimal regulatory stance for banks relative to non-bank financial institutions. We show that a level playing field approach is sub-optimal. Regulatory stances should be set to actively encourage cross-sector CRT, first because of the higher fragility of the banking sector and second to induce banks to incur the costs of CRT which otherwise lead them to undertake an insufficient amount of CRT.

This paper investigates the optimal monetary instrument in a New-Keynesian model with multiple monetary assets. We compare a standard interest rate rule to a k-percent rule for three alternative monetary aggregates determined within our model: the monetary base, the simple sum measure of money, and the Divisia measure. Welfare results are striking. While the interest rate dominates the other two monetary aggregate k-percent rules, the Divisia k-percent rule outperforms the interest rate rule. Next we study the ability of Granger Causality tests – in the context of data generated from our model – to correctly identify welfare improving instruments. We find the interest rate Granger Causes both output and prices at extremely high significance levels. The same result is obtained for monetary base and the simple-sum monetary aggregate. The test results for Divisia are the weakest as Divisia fails to Granger Cause prices. We conclude that if the choice of instrument is based solely on its propensity to Granger Cause macroeconomic targets, a central bank may choose an inferior policy instrument.

We employ a new data set comprised of disaggregate figures on clearing house loan certificate issues in New York City to document how the dominant national banks were crucial providers of temporary liquidity during the Panic of 1907. Clearing house loan certificates were extensions of credit by the New York Clearing House to its members. These certificates were transferable to other clearing house members as a form of final payment for settlement of interbank payments. The certificate issues allowed borrowing banks to maintain (and increase) loans, fulfill cash payment upon depositor withdrawal demands, and enabled gold imports, which took two to three weeks to arrive. The large, New York City national banks acted as private liquidity providers by requesting (and the New York Clearing House issuing) a volume of clearing house loan certificates in excess of their own immediate liquidity needs, in accord with their role as central reserve city banks in the national banking system.

Credit contractions are costly, but policymakers have limited tools to counter them. In this paper, we examine the efficacy of public credit guarantees as antidotes to a credit crunch by studying the Paycheck Protection Program (PPP). We find that the program averted a historic credit crunch at a time when banks were unlikely to meet firm credit needs by risking their own capital. Our evaluation incorporates selection effects emanating from banks’ participation decision on both the extensive and intensive margins. Risk-aversion, rather than profitability, motivated bank participation in the program. Indeed, even as the program boosted loan growth among participants, it attenuated profitability.

This paper examines the policy issues associated with resolving the possible failure of Fannie Mae or Freddie Mac (housing enterprises). It compares and contrasts these issues with those raised in the context of large bank failures and also identifies important differences in the extant supervisory authorities. Based on these discussions, a number of policy suggestions are offered to minimize the cost of resolution and protect taxpayers from loss should a large bank or housing enterprise fail.