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NEW YORK FED: NEW RESEARCH DECEMBER 1 2008

New Research from the New York Fed: 12/1/08‏

Federal Reserve Bank of NY Research Publications

on behalf of Karen Carter (Karen.Carter@NY.FRB.ORG)

Mon 12/01/08

***Federal Reserve Bank of New York***
Electronic Research Alert
December 1, 2008

Featured Research
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1) “Which Bank Is the ‘Central’ Bank? An Application of Markov Theory to the Canadian Large Value Transfer System,” by Morten L. Bech, James T. E. Chapman, and Rod Garratt (Staff Report no. 356, November 2008)
2) “The Federal Home Loan Bank System: The Lender of Next-to-Last Resort?” by Adam B. Ashcraft, Morten L. Bech, and W. Scott Frame (Staff Report no. 357, November 2008)

1) “Which Bank Is the ‘Central’ Bank? An Application of Markov Theory to the Canadian Large Value Transfer System,” by Morten L. Bech, James T. E. Chapman, and Rod Garratt
Recently, economists have argued that a bank’s importance within the financial system depends not only on its individual characteristics but also on its position within the banking network. A bank is deemed to be “central” if, based on the authors’ network analysis, it is predicted to hold the most liquidity. In this paper, Bech, Chapman, and Garratt use a method similar to Google’s PageRank procedure to rank banks in the Canadian Large Value Transfer System (LVTS). In doing so, they obtain estimates of the payment processing speeds for the individual banks. These differences in processing speeds are essential for explaining why observed daily distributions of liquidity differ from the initial distributions, which are determined by the credit limits selected by banks.
Read the full report:
http://www.newyorkfed.org/research/staff_reports/sr356.html

2) “The Federal Home Loan Bank System: The Lender of Next-to-Last Resort?” by Adam B. Ashcraft, Morten L. Bech, and W. Scott Frame
The Federal Home Loan Bank (FHLB) System is a large, complex, and understudied government-sponsored liquidity facility that currently has more than $1 trillion in secured loans outstanding, mostly to commercial banks and thrifts. In this paper, the authors document the significant role played by the FHLB System at the onset of the ongoing financial crises and then provide evidence on the uses of these funds by the System’s bank and thrift members. Next, they identify the trade-offs faced by member-borrowers when choosing between accessing the FHLB System or the Federal Reserve’s Discount Window during the crisis period. Ashcraft, Bech, and Frame conclude by describing the fragmented U.S. lender-of-last-resort framework and finding that additional clarity about the respective roles of the various liquidity facilities would be helpful.
Read the full report:
http://www.newyorkfed.org/research/staff_reports/sr357.html

Adam B. Ashcraft’s web page:
http://www.newyorkfed.org/research/economists/ashcraft/index.html

Morten L. Bech’s web page:
http://www.newyorkfed.org/research/economists/bech/index.html

Other Research by Adam B. Ashcraft
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“Does the Market Discipline Banks? New Evidence from the Regulatory Capital Mix”

(Staff Report no. 244, March 2006)
Although bank capital regulation permits a bank to choose freely between equity and subordinated debt to meet capital requirements, lenders and investors view debt and equity as imperfect substitutes. It follows that the mix of debt in regulatory capital should isolate the role that the market plays in disciplining banks. The author documents that since the Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA) reduced the ability of the FDIC to absorb losses of subordinated debt investors, the mix of debt has had a positive effect on the future outcomes of distressed banks, as if the presence of debt investors has worked to limit moral hazard. To mitigate concerns about selection, Ashcraft uses the variation across banks in the mix of debt in capital generated by cross-state variation in state corporate income tax rates. Interestingly, instrumental variables (IV) estimates document that selection problems are indeed important, but suggest that the benefits of subordinated debt are even larger. He concludes that the market may play a useful direct role in regulating banks.
Read the full report:
http://www.newyorkfed.org/research/staff_reports/sr244.html

Other Research by Morten L. Bech
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“Technology Diffusion within Central Banking: The Case of Real-Time Gross Settlement,” with Bart Hobijn (Staff Report no. 260, September 2006)
The authors examine the diffusion of real-time gross settlement (RTGS) technology across all 174 central banks. RTGS reduces settlement risk and facilitates financial innovation in the settlement of foreign exchange trades. In 1985, only three central banks had implemented RTGS systems, and by year-end 2005, that number had increased to ninety. Bech and Hobijn find that the RTGS diffusion process is consistent with the standard S-curve prediction. Real GDP per capita, the relative price of capital, and trade patterns explain a significant part of the cross-country variation in RTGS adoption. These determinants are remarkably similar to those that seem to drive the cross-country adoption patterns of other technologies.
Read the full report:
http://www.newyorkfed.org/research/staff_reports/sr260.html

Back issues of Staff Reports:
http://www.newyorkfed.org/research/staff_reports/index.html

Related Information
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U.S. and Global Economies Charts, updated every Wednesday:
http://www.newyorkfed.org/research/national_economy/nationalindicators.html
http://www.newyorkfed.org/research/global_economy/globalindicators.html

Research Home Page
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http://www.newyorkfed.org/research/index.html

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New Research from the New York Fed: 12/1/08‏

Federal Reserve Bank of NY Research Publications

on behalf of Karen Carter (Karen.Carter@NY.FRB.ORG)

Mon 12/01/08