Student loan balances and delinquency rates have soared to unprecedented levels in recent years, forming what many commentators have termed a “student loan bubble” and creating a major public policy issue. Given the importance of student loans for human capital formation and economic growth, understanding student loans and repayment behavior is essential from a policy perspective. Yet research in this area has been limited. The authors seek to fill the gap by examining student loan performance over time by institution type and degree program. Using detailed data collected as part of RAND’s American Life Panel survey, they find that, relative to the preceding two decades, the 2000-10 period was characterized by 1) large increases in student loan balances at college exit and 2) deterioration in loan performance among students seeking associate’s degrees, undergraduate certificates, master’s degrees, and professional degrees at private institutions, compared with trends seen among students seeking corresponding degrees at public institutions. The declines in repayment behavior were by far most prominent for associate’s degrees and undergraduate certificates, and were statistically and economically different from the changes observed with other degrees. While deterioration was also seen with public associate’s degree programs, the deterioration was more prominent in such programs in private institutions. The results suggest that the worsening of loan performance at private institutions in the past decade is to a significant extent attributable to student loans extended for study at for-profit institutions.
Market participants have been surprised by the decline of U.S. interest rate swap rates relative to Treasury yields of equal maturity over the past two years, with interest rate swap spreads becoming negative for many maturities. This movement of swap spreads into negative territory has been attributed anecdotally to idiosyncratic factors such as changes in foreign reserve balances and liability duration management by corporations. However, we argue in this article that regulatory changes affected the willingness of supervised institutions to absorb shocks. In particular, we find that increases in the required leverage ratio may have changed the breakeven level of the swap spread at which market participants are willing to enter into spread trades. We present a stylized example of these economics, illustrating how a higher leverage ratio can help explain these historic movements in swap spreads.
In 2017, the Federal Reserve Bank of New York initiated a project to examine the effects of post-crisis reforms on bank performance and vulnerability. The project, which was completed in June 2018, consisted of twelve studies evaluating a wide set of regulatory changes. The primary focus was how these regulatory changes affected the risk taking, funding costs, and profitability of banks, as well as their impact on liquidity. In this article, the authors survey the twelve papers that make up the project and place the principal findings in the context of the current academic and policymaking debate on the effects of post-crisis changes to financial regulation.
The authors examine the connection between government mortgage programs and economic outcomes during and after the financial crisis. They find a strong correlation between counties that participated more heavily in Federal Housing Administration (FHA)/Veterans Affairs (VA) and government-sponsored enterprise (GSE) mortgage lending before the crisis and better economic outcomes during and after the crisis. Although the financial crisis was a substantial shock to all counties, those more reliant on FHA/VA or GSE lending experienced smaller increases in unemployment rates; smaller declines in new automobile purchases, home prices, home sales, and mortgage purchase originations; and smaller increases in mortgage delinquency rates. Moreover, the authors find that the FHA was a more effective countercyclical tool during and after the 2007-09 financial crisis than the GSEs. This finding may have implications for GSE reform: Greater access to government backing during crises may mitigate tighter underwriting standards and rising securitization costs in mortgage markets.
We summarize and evaluate Fannie Mae and Freddie Mac’s credit risk transfer (CRT) programs, which have been used since 2013 to shift a portion of credit risk on more than $1.8 trillion of mortgages to private sector investors. We argue that the CRT programs have been successful in reducing the exposure of the federal government to mortgage credit risk without disrupting the liquidity or stability of mortgage secondary markets. In the process, the programs have created a new financial market for pricing and trading mortgage credit risk, which has grown in size and liquidity over time. The CRT programs provide an important building block to help facilitate reform of the U.S. housing finance system.
Housing equity is an important component of borrowers’ wealth and a critical determinant of their vulnerability to shocks. In this article, the authors use a unique, newly created data set to analyze the evolution of household leverage—defined here as the ratio of housing debt to housing values—over time and across locations in the United States, at the micro level. They find that leverage was at a very low point just prior to the large declines in house prices that began in 2006, and rose very quickly through 2012, in spite of reductions in housing debt. As of early 2017, leverage statistics were falling back toward their pre-crisis levels, reflecting a more than 30 percent increase in home prices nationally since 2012. Using borrower-level leverage measures and another unique feature of the data—updated borrower credit scores—the authors conduct “stress tests” in which they project leverage and defaults under various adverse house price scenarios. They find that while the riskiness of the household sector has declined significantly since 2012, when home prices were at their low, the sector remains vulnerable to very severe declines in house prices.
Mortgage backed securities (MBS) funded the US housing bubble, while the bust resulted in systemic risk and the Global Financial Crisis. The pricing of MBS and the ABX securitization index failed to reveal growing credit risk. This paper draws lessons from this failure for the use of Credit Risk Transfers (CRT) to price credit risk. The central question is would the CRT market, as constituted today, have behaved differently than financial asset markets in the bubble years? If no, then this is a problem. If yes, then why?
The authors examine the connection between government mortgage programs and economic outcomes during and after the financial crisis. They find a strong correlation between counties that participated more heavily in Federal Housing Administration (FHA)/Veterans Affairs (VA) and government-sponsored enterprise (GSE) mortgage lending before the crisis and better economic outcomes during and after the crisis. Although the financial crisis was a substantial shock to all counties, those more reliant on FHA/VA or GSE lending experienced smaller increases in unemployment rates; smaller declines in new automobile purchases, home prices, home sales, and mortgage purchase originations; and smaller increases in mortgage delinquency rates. Moreover, the authors find that the FHA was a more effective countercyclical tool during and after the 2007-09 financial crisis than the GSEs. This finding may have implications for GSE reform: Greater access to government backing during crises may mitigate tighter underwriting standards and rising securitization costs in mortgage markets.
A growing debate centers on how best to recognize (and price) government interventions in the capital markets. This study applies a method for estimating and valuing the government?s exposure to credit risk through its loan and guarantee programs. The authors use the mortgage portfolios of Fannie Mae and Freddie Mac as examples of how policymakers could employ this method in pricing the government?s program credit risk. Building on the cost of capital approach, the method captures each program?s possible tail loss over and above its expected value. The authors then use a capital allocation approach to obtain each program?s marginal risk contribution. They show that the current practice of pricing the programs as stand-alone entities overestimates the value of the guarantee. By explicitly capturing the interaction of program losses, their method implies that the government?s overall capital reserve required to insulate taxpayers from losses can be lower than the reserve required when each program is evaluated in isolation. The authors also point out that the extent of this reduction hinges on the strength of (tail) dependence among the expected losses across the programs.
Before 2008, the government?s ?implicit guarantee? of the securities issued by the government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac led to practices by these institutions that threatened financial stability. In 2008, the Federal Housing Finance Agency placed these GSEs into conservatorship. Conservatorship was intended to be temporary but has now reached its tenth year, and policymakers continue to weigh options for reform. In this article, the authors assess both implicit and explicit government guarantees for the GSEs. They argue that adopting a legislatively defined ?explicit guarantee,? as advocated by some, may be problematic for a variety of reasons, including the difficulty of pricing such a guarantee and the potential high cost for mortgage holders or the government. In addition to the creation of an explicit guarantee, they recommend that steps be taken to limit systemic risk in housing markets. To that end, they advocate the wider adoption of mortgages?such as the ?Fixed-COFI? mortgage?that build homeowner equity faster than the thirty-year fixed-rate mortgage favored by the GSEs. With such mortgages, homeowners are better able to weather economic downturns.
At the height of the financial crisis of 2007-09, the Federal Reserve conducted emergency lending under authority granted to it in the third paragraph of Section 13 of the Federal Reserve Act. This article explores the political and legislative origins of the section, focusing on why Congress chose to endow the central bank with such an authority. The author describes how in the initial passage of the act in 1913, Congress demonstrated its steadfast commitment to the ?real bills? doctrine in two interrelated ways: 1) by limiting what assets the Fed could purchase, discount, and use as collateral for advances, and 2) by ensuring that any newly created government-sponsored credit enterprises were kept separate from the Federal Reserve System. During the Great Depression, however, Congress passed legislation that blurred the line between monetary and credit policy, slowly chipping away at the real bills doctrine as it sought to combat the crisis. It was in this context that Congress added Section 13(3) to the Federal Reserve Act. In tracing this history, the author concludes that the original framers of Section 13(3) meant to sanction direct Federal Reserve lending to the real economy, rather than simply to a weakened financial sector, in emergency circumstances. This Depression-era history provides insights into the evolving role of the Federal Reserve as an emergency provider of liquidity.
This article highlights areas where economic research is needed to guide federal policymakers addressing the challenge of improving housing affordability. The author places these research recommendations in the framework of five key issues, reflecting policymakers? need to identify a rationale for government action; to employ a single, clear measure to gauge affordability; to understand the unintended consequences of current housing policies; to ensure that the political environment is considered when developing policy; and to decide whether to use housing finance reform as a means of achieving housing affordability. New research in these areas would reduce uncertainty in policy design choices, strengthen the evidence base on effective policy interventions, help policymakers evaluate risks, and make salient the trade-offs between different policy objectives.
This article describes the Federal Reserve?s (?the Fed?s?) operating framework for monetary policy prior to the expansion of the Fed?s balance sheet during the financial crisis. To implement the Fed?s mandate of promoting price stability consistent with full employment, the Federal Open Market Committee (FOMC) sets a target for the overnight rate in the federal funds market, where banks trade reserve balances. In the pre-crisis framework, aggregate reserves were scarce, so relatively small changes in the level of reserves would affect rates in the fed funds market. The Federal Reserve Bank of New York?s Open Market Trading Desk (?the Desk?) forecasted the demand for and supply of reserves on a daily basis, and then conducted repo operations with primary dealers with the objective of supplying enough reserves to maintain the equilibrium rate close to its target. The Desk was successful in achieving this objective, since the fed funds rate generally did remain close to its target, and any deviations were quickly corrected. However, the pre-crisis operating procedures deployed by the Desk were more complex and opaque than alternative operating frameworks, required substantial intraday overdrafts from the Fed to meet banks? short-term payment needs, and had to be abandoned once the Fed?s balance sheet expanded in response to the financial crisis. Since the crisis, the Desk has successfully controlled the policy rate using a new framework, suggesting that effective monetary control may be achieved through different frameworks.
Despite its vast size, liquidity, and global importance, the U.S. government securities market was one of the last major securities markets to benefit from centralized clearance and settlement services. The development of these services began in 1986 with the establishment of the Government Securities Clearing Corporation (GSCC)—now part of the Fixed Income Clearing Corporation, a unit of the Depository Trust & Clearing Corporation. This article traces the history of the GSCC. The author describes the state of the government securities market in the 1980s and the events that led to GSCC’s formation, then details the adoption by GSCC of an automated comparison and netting system, which boosted efficiency and reduced risk. Subsequent sections cover the addition of Treasury auction awards to the system; the extension of comparison and netting services to repurchases and reverse repurchases of government securities, and subsequently to brokered repos; and the launch of the General Collateral Finance Repo service (GCF Repo®).
(ProQuest: ... denotes formulae omitted.)1.IntroductionIt is important, from both a scholarly and a policy perspective, to understand the impact of the Great Recession and the subsequent federal stimulus program on school finances. To this end, previous articles in the Economic Policy Review have studied the effects of these developments on school district finances in New York (Chakrabarti, Livingston, and Setren 2015) and New Jersey (Chakrabarti and Sutherland 2013) and uncovered some important patterns. While both states faced declining revenues and widening budget gaps, their education finance experiences exhibited meaningful differences. These differences were evident both on the funding side and in the spending decisions of the states' school districts. The objective of this article is to present and study these differences, drawing from the two articles mentioned above. Such a comparative analysis promises to deepen our understanding of the experiences of school districts across our region, and may also help inform policymakers about appropriate responses to fiscal duress. To the best of our knowledge, this is the first article that seeks to understand how the impact of the Great Recession on school finances varied across states.1Our study reveals some interesting contrasts between districts in New York and New Jersey. In the two postrecession years we consider (2009 and 2010), New Jersey's total per pupil funding sustained deep cuts relative to trend, while New York's remained on trend. The composition of district funding also changed in different ways in the two states. Although both states experienced large increases in federal funding as a result of the stimulus, New York saw its per pupil federal aid more than double-a substantially larger increase than that in New Jersey. Additionally, while both states saw reductions in state funding, New Jersey districts experienced markedly larger cuts in state aid relative to their counterparts in New York. Total expenditures, meanwhile, followed a pattern similar to that of total funding, remaining on trend in New York and falling significantly in New Jersey.2To further understand the differences in school finance patterns between the two states, we take a detailed look at factors influencing the components of aid. Our analysis reveals that differences in demographic composition, in how state tax revenues fared, and in budget laws were important factors behind the patterns noted above. New Jersey's declines in state tax revenue and its strict budget laws combined to create particularly tough fiscal circumstances.We begin our analysis by exploring the funding differences between New York and New Jersey in detail.2.Contrasting School Funding Impacts: New York and New JerseyIn this section, we use trend shift analysis to identify the changes in education financing in New York and New Jersey brought about by the Great Recession and the federal stimulus program (see the box on the next page for details on our methodology and data). In Charts 1 through 8, the green bar represents the 2009 shift for each state and the gray bar represents the 2010 shift. Each of the charts shows values for both New York and New Jersey. We refer to school years by the year corresponding to the spring semester (for example, 2009 refers to the 2008-09 school year).Chart 1 shows the shifts in per pupil funding for both states, relative to the corresponding pre-recession trends. While per pupil funding remained on trend in New York, funding in New Jersey fell sharply. New York disrticts experienced only small declines, and they were not statistically significant. New Jersey experienced large declines of around 12 percent in both years, and each shift was statistically significant.In addition to differences in how overall funding changed, there were also important variations in how the composition of that funding changed. Most public school funding comes from three government sources: the federal government, the state government, and local government. …
(ProQuest: ... denotes formulae omitted.)1.IntroductionIn a speech in 2002, Peter Fisher, then under-secretary of for domestic finance, stated that the overarching objective for management of Treasury's marketable debt is to achieve lowest borrowing cost, over time, for federal government's financing needs (Fisher 2002). officials have followed Fisher's agenda ever since.In pursuit of financing at least cost over time, adheres to a and issuance program. As reported in Garbade (2007), initially moved toward regular issuance of short-term notes in 1972 and fully embraced practice in 1975 after rapid growth of deficit. In 1982, Mark Stalnecker, then deputy assistant secretary for federal finance, testified that regularity of debt management removes a major source of market uncertainty, and assures that debt can be sold at lowest possible interest rate consistent with market conditions at time of sale. In 1998, Gary Gensler, at time assistant secretary for financial markets, reinforced that principal, stating that Treasury does not seek to time markets; that is, we do not act opportunistically to issue debt when market conditions appear favorable.In practice, regular and predictable issuance entails prior announcement of issuance schedule and gradual adjustment of issuance sizes. Of course, taking a regular and predictable approach does not mean that debt management practices never vary. Borrowing requirements change frequently and constantly reevaluates issuance strategies and occasionally revises them to best serve debt management mission. The process requires definition of objectives and constraints, recognizing that, given multiple ways of satisfying financing needs, some approaches are better than others.This article focuses on potential impact of regular and predictable issuance on short-run cost of issuing bills. As an issuer of both bills and coupon-bearing securities (including fixed-rate and inflated-protected securities), and given a coupon issuance schedule, uses bills in part for short-term financing and in part for cash management. The overriding constraint is to raise enough cash to satisfy government's financing needs. In addition, cash balances need to be in an appropriate range-large enough to provide with a buffer against unexpected events, but not so large as to create inefficiencies through over-borrowing. In addition, since bills are used extensively in global financial system, it is desirable to maintain a steady supply for investors.The historical bill issuance and amounts outstanding during past fifteen years are shown in Chart 1. The figures reflect private issues only, and exclude rollovers in Federal Reserve's System Open Market Account (SOMA) and sales of Supplementary Financing Program (SFP) bills.1 Because of short maturity of bills, gross auction amount is astonishingly large, reaching a peak of almost $6.7 trillion in fiscal 2009 amid turbulence of financial crisis. Issuance subsequently decreased when moved to extend weighted average maturity of debt to reduce rollover risk-the risk of facing unfavorable interest rates when rolling over matured debt in future-and to take advantage of historically low term premia.A key question-which is simple, yet has important policy implications-is whether regular and predictable issuance raises Treasury's borrowing costs. Relevant studies in literature are scarce. Garbade (2007) relies on a natural experiment in which he compares nominal coupon issuance in 1971-75 (when bills were sold on a basis) with that in 1981-86 (when they were offered on a and schedule). Using root-mean-square change in yields over interval from close of business one business day before an auction announcement to close of business one business day after announcement, Garbade finds that most changes in yield are statistically significant in tactical period while all changes in yield are insignificant in regular period. …
A measure of underlying inflation that uses all relevant information, is available in real time, and forecasts inflation better than traditional underlying inflation measures?such as core inflation measures?would greatly benefit monetary policymakers, market participants, and the public. This article presents the New York Fed Staff Underlying Inflation Gauge (UIG) for the consumer price index and the personal consumption expenditures deflator. Using a dynamic factor model approach, the UIG is derived from a broad data set that extends beyond price series to include a wide range of nominal, real, and financial variables. This modeling approach also makes it possible to combine information simultaneously from the cross-sectional and time dimensions of the sample in a unified framework. In addition, the UIG can be updated on a daily basis to closely monitor changes in underlying inflation?a feature that is especially useful when sudden and large economic fluctuations occur, as was the case during the 2008 global financial crisis. Lastly, the UIG displays greater forecast accuracy than many measures of core inflation. Editor?s note: This article?s data appendix has been updated to reflect the removal of a duplicate price series (CPI-U: Other fresh vegetables). The article?s conclusions remain the same. (December 2017)
This report presents an overview of the Survey of Consumer Expectations, a new monthly online survey of a rotating panel of household heads. The survey collects timely information on consumers? expectations and decisions on a broad variety of topics, including but not limited to inflation, household finance, the labor market, and the housing market. There are three main goals of the survey: (1) measuring consumer expectations at a high frequency, (2) understanding how these expectations are formed, and (3) investigating the link between expectations and behavior. This report discusses the origins of the survey, the questionnaire design, the implementation of the survey and the sample, and computation of various statistics that are released every month. We conclude with a discussion of how the results are disseminated, and how the (micro) data may be accessed.
The Federal Reserve is responsible for the prudential supervision of bank holding companies (BHCs) on a consolidated basis. Prudential supervision involves monitoring and oversight to assess whether these firms are engaged in unsafe or unsound practices, as well as ensuring that firms are taking corrective actions to address such practices. Prudential supervision is interlinked with, but distinct from, regulation, which involves the development and promulgation of the rules under which BHCs and other regulated financial intermediaries operate. This paper describes the Federal Reserve?s supervisory approach for large, complex financial companies and how prudential supervisory activities are structured, staffed, and implemented on a day?to?day basis at the Federal Reserve Bank of New York as part of the broader supervisory program of the Federal Reserve System. The goal of the paper is to generate insight for those not involved in supervision into what supervisors do and how they do it. Understanding how prudential supervision works is a critical precursor to determining how to measure its impact and effectiveness.
1. INTRODUCTION We review the recent corporate governance literature that examines the role of financial reporting in resolving agency conflicts among a firm's managers, directors, and capital providers. We view governance as the set of contracts that help align managers' interests with those of shareholders, and we focus on the central role of information asymmetry in agency conflicts between these parties. In terms of the firm-specific information hierarchy, the literature typically views management as the most informed, followed by outside directors, then shareholders. We discuss research that examines the role of financial reporting in alleviating these information asymmetries and the role that financial reporting plays in the design and structure of incentive and monitoring mechanisms to improve the credibility and transparency of information. Most of this research is large-sample and does not pay particular attention to industry-specific characteristics that may influence a firm's governance structure. For example, the firm-specific governance structure and financial reporting systems of financial institutions and other regulated industries are expected to be endogenously designed. The design is also expected to be conditional on (in other words, take into account) the existence of certain external monitoring mechanisms (for example, regulatory oversight and constraints), which may either substitute for or complement internal mechanisms, such as the board. Similarly, the rationale for regulation in certain industries (for example, the existence of natural monopolies) is also expected to influence firms' governance structures. These and other differences between firms in different industries suggest that inferences drawn from studies spanning multiple industries may not necessarily hold for specific industries or research settings. (2) The same point can also be made about extrapolating inferences drawn from U.S. firms to their international counterparts. Different countries have their own (often unique) laws, regulations, and institutions that influence the design, operation, and efficacy of a firm's governance mechanisms as well as the output of its financial reporting system. We also highlight the distinction between formal and informal contracting relationships, and discuss how both play an important role in shaping a firm's overall governance structure and information environment. Formal contracts, such as written employment agreements, are often quite narrow in scope and are typically relatively straightforward to analyze. Informal contracts, govern implicit multiperiod relationships that allow contracting parties to engage in a broad set of activities for which a formal contract is either impractical or infeasible. For example, the complexity of the responsibilities and obligations of a firm's chief executive officer make it difficult to draft a complete state-contingent contract with the board that specifies appropriate actions under every possible scenario the firm could face. Consequently, although some CEOs have formal employment contracts, these contracts are necessarily incomplete and relatively narrow in scope. As a result, the board and the CEO develop informal rules and understandings that guide their behavior over time. Much of the governance literature emphasizes informal contracting based on signaling, reputation, and certain incentive structures. The general conclusion in this literature is that financial reporting is valuable because contracts can be more efficient when the parties commit themselves to a more transparent information environment. Another key theme of this article is that a firm's governance structure and its information environment evolve together over time to resolve agency conflicts. That is, certain governance mechanisms and financial reporting attributes work more efficiently within certain operating environments. Consequently, one should not necessarily expect to see every firm converge to a single dominant type of corporate governance structure or compensation contract, or to adopt a similar financial reporting system. …
