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Economic Research

A Retrospective on the Life Insurance Sector after the Failure of Silicon Valley Bank
Following the Silicon Valley Bank collapse, the stock prices of U.S. banks fell amid concerns about the exposure of the banking sector to interest rate risk. The S&P 500 Bank index dropped relative to S&P 500 returns, and the stock prices of insurance companies tumbled as well. Yet, insurance companies’ direct exposure to the three banks that failed during this period was modest. The authors examine the possible factors behind the reaction of insurance investors to the failure of Silicon Valley Bank.
By Fulvia Fringuellotti and Saketh Prazad
Decorative image of a drop of water hitting a pool of water with dollar bills under the water.
Internal Liquidity’s Value in a Financial Crisis
Should U.S. financial firms affiliate themselves with bank-holding companies (BHCs)? This affiliation brings benefits, such as access to liquidity from other affiliated entities, as well as costs, particularly a larger regulatory burden. The authors use confidential data on the population of broker-dealers to study the benefits of being affiliated with a BHC, with a focus on the global financial crisis. They find that the affiliation makes broker-dealers more resilient to aggregate liquidity shocks and more willing to hold riskier securities on their balance sheet.
By Cecilia Caglio and Adam Copeland
Physical Climate Risk and Insurers
Can the insurance sector withstand the stress of climate change? To answer this question, it is necessary to first understand insurers' exposure to physical climate risk—such as natural disasters. The authors construct a novel factor to measure the aggregate physical climate risk in the financial market and discuss its applications, including the assessment of insurers’ exposure to climate risk and the expected capital shortfall under climate stress scenarios.
By Hyeyoon Jung, Robert Engle, Shan Ge, and Xuran Zeng
Learning by Bouncing: Overdraft Experience and Salience
One fundamental concern about overdraft credit is whether account holders know how often they overdraw and how much it costs them. To shed light on this question, the authors asked participants in the New York Fed’s Survey of Consumer Expectations. They found that a large majority knew how often they overdrew their accounts and by how much, but also that, although experienced overdrafters knew the fee, they were relatively unaware of other overdraft terms and practices.
By Donald P. Morgan and Wilbert van der Klaauw
Deposits and the March 2023 Banking Crisis—A Retrospective
The bank runs in March 2023 revealed that deposit funding is highly sensitive to depositor behavior. The authors evaluate how deposits have evolved over the latter portion of the current monetary policy tightening cycle, finding that while deposit betas have continued to rise, they did not accelerate following the events in March 2023. In addition, overall deposit funding has remained stable, with super-regional banks growing their deposit funding relative to the broader banking industry.
By Stephan Luck and Matthew Plosser
What Happens to U.S. Activity and Inflation if China’s Property Sector Leads to a Crisis?
The authors consider the potential impact to the U.S. economy if China’s ongoing property sector slump were to take another leg down, precipitating an economic hard landing and financial crisis. They find that, while this scenario is less likely than a potential manufacturing-led boom in China, the materialization of a property crash scenario would tilt the balance of risks for U.S. growth and inflation to the downside.
By Ozge Akinci, Hunter Clark, Jeff Dawson, Matthew Higgins, Silvia Miranda-Agrippino, Ethan Nourbash, and Ramya Nallamotu
Geopolitical Risk and Decoupling: Evidence from U.S. Export Controls
Amid the current U.S.-China technological race, the U.S. has imposed export controls to deny China access to strategic technologies. The authors document that these measures prompted a broad-based decoupling of U.S. and Chinese supply chains. As a result of these disruptions, affected suppliers have negative abnormal stock returns, wiping out $130 billion in market capitalization, and experience a drop in bank lending, profitability, and employment.
Matteo Crosignani, Lina Han, Marco Macchiavelli, and André F. Silva, Staff Report 1096, April 2024
Investor Attention to Bank Risk During the Spring 2023 Bank Run
The bank run that started in March 2023 in the U.S. transpired at an unusually rapid pace, suggesting that depositors became aware of bank liquidity risk quite suddenly. The authors examine how investors’ perception of bank balance sheet risk evolved before and during the March-April 2023 bank run. Their findings suggest that investors with limited attention focused on April announcements of additional downgraded banks to update their priors on balance sheet risk, even though the authors found these announcements to be uninformative.
Natalia Fischl-Lanzoni, Martin Hiti, Nathan Kaplan, and Asani Sarkar, Staff Report 1095, April 2024
The Global Credit Cycle
Do global credit conditions affect local credit and business cycles? Using a large cross-section of equity and corporate bond market returns around the world, the authors construct a novel global credit factor and a global risk factor that jointly price the international equity and bond cross-section. They uncover a global credit cycle in risky asset returns and show that the global pricing of corporate credit is a fundamental factor in driving local credit conditions and real outcomes.
Nina Boyarchenko and Leonardo Elias, Staff Report 1094, March 2024
Paradoxes and Problems in the Causal Interpretation of Equilibrium Economics
Equilibrium assumptions posit relations between different people's beliefs and behavior without describing a process which causes these relations to hold. The author shows that because equilibrium models don't describe a causal process whereby one endogenous variable affects another, attempts to decompose the effects of shocks into “direct” and “indirect” effects can suggest misleading predictions about how these models work. This makes equilibrium models unreliable tools to study how economic systems coordinate activity and aggregate dispersed information.
Keshav Dogra, Staff Report 1093, March 2024
Miss-Allocation: The Value of Workplace Gender Composition and Occupational Segregation
Although women’s labor market outcomes have improved markedly relative to men’s in the last several decades, women and men still do very different jobs. The author analyzes the value workers ascribe to the gender composition of their workplaces and the consequences of these valuations for occupational segregation, tipping, and welfare. The finding of her novel survey show that the gender composition of a workplace is an important amenity that can have large consequences for occupation choice and worker welfare.
Rachel Schuh, Staff Report 1092, March 2024
International Banking and Nonbank Financial Intermediation: Global Liquidity, Regulation, and Implications
Global liquidity flows are largely channeled through banks and non-bank financial institutions. The common drivers of global liquidity flows include monetary policy in advanced economies and risk conditions. At the same time, the sensitivities of liquidity flows to changes in these drivers differ across institutions and have been evolving over time. Current policy initiatives target linkages across different types of financial institutions and associated risks, but significant gaps remain.
Claudia M. Buch and Linda S. Goldberg, Staff Report 1091, March 2024
Micro Responses to Macro Shocks
The authors study estimation and inference in panel data regression models when the regressors of interest are macro shocks, which speaks to a large empirical literature that targets impulse responses via local projections. They show that inference in regressions with macro shocks has two main features: strong spatial dependence and limited serial correlation.
Martín Almuzara and Víctor Sancibrián, Staff Report 1090, March 2024
Spillovers and Spillbacks
The recent policy debate on the impact of monetary policy tightening in advanced economies has rekindled concerns about global spillovers among interdependent economies and associated spillback effects. The authors study international monetary policy spillovers and spillbacks in a tractable two-country Heterogeneous Agent New Keynesian model. They introduce a precautionary-savings channel, as households in both countries face uninsurable income risk, and a real-income channel, as households have heterogeneous marginal propensities to consume.
Sushant Acharya and Paolo Pesenti, Staff Report 1089, March 2024
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