The Covid-19 Pandemic and policy response rattled the US Treasury markets. Conventional US Treasuries, inflation adjusted US Treasuries, and the relationship between the two developed in ways such that ignoring changes in real interest rates yielded distorted inflation expectations estimates. Since the beginning of the pandemic, monetary policy kept nominal rates low and close to zero, but positive. Real rates, on the other hand, became increasingly negative. The relationship between the two market rates became negatively correlated, and distorted because of the fourth round of quantitative easing, along with the Fed preventing nominal yields from turning negative. Federal Reserve actions during the Covid-19 pandemic drove a larger wedge between nominal interest rates and real interest rates in the inflation adjusted market.

Today, banks in the U.S. hold almost $20 trillion in total financial assets; ten times that held by all credit unions, but less than three times that held by the Federal Reserve. The average annual growth of financial asset holdings of credit unions (12%) has generally exceeded the average annual growth of financial asset holdings of banks (7%) over the last seventy years.Since the turn of the century, the average annual growth of financial asset holdings of both credit unions (8%) and banks (6%) has slowed relative to the prior fifty years.The slower growth of financial asset holdings of both credit unions and banks in recent years coincides with a much more rapid expansion of the Federal Reserve’s financial asset holdings, suggesting that monetary authority actions have “crowded out” financial asset expansion by other depository institutions.Both bank and credit union executives should recognize that the monetary expansion by the Federal Reserve has resulted in reduced financial intermediation on their part.To the extent that the Federal Reserve’s current quantitative tightening is shrinking the financial asset holdings of the monetary authority, bank and credit union executives should look forward to an era of greater financial asset growth.

This paper examines U.S. Treasury securities and their reflection on increased inflationary fears in the US. Implications from recent monetary policy suggests conventional Treasury yields have not shown the full extent of rising fears of inflation in financial markets. In this monetary environment, the yields on Treasury Inflation Protected Securities (TIPS) have been more reflective of rising inflation fears. TIPS yields have become increasingly negative in absolute terms during 2020 and 2021. The negative yields on TIPS further suggests that even conventional Treasury investors should be expecting lost purchasing power when they hold onto such securities.

This short research paper documents the fact that exclusively watching for rising yields on conventional U.S. Treasury securities to reflect increased inflationary fears in the U.S. is no longer appropriate. With the Federal Reserve seeking to keep short-term nominal yields near zero for an extended period, conventional Treasury yields have not shown the full extent of rising fears of inflation in financial markets. In this monetary environment, the yields on Treasury Inflation Protected Securities (TIPS) have been more reflective of rising inflation fears. TIPS yields have become increasingly negative in absolute terms during the latter part of 2020. The negative yields on TIPS further suggests that all Treasury investors should be expecting lost purchasing power when they hold onto such securities.

A seldom discussed part of the 2010 Dodd–Frank Act (DFA) is how the deposit insurance assessment alteration impacted different types of banks. We provide details of the reform and investigate the effects on the banking industry. The DFA called for an expansion of the assessment base used to determine deposit insurance fees, along with a simultaneous reduction in assessment rates, so as to not raise additional fees paid. This reform did not affect all banks the same as a result of very different business models. The reform was aimed to benefit community banks at the expense of non-community banks. We estimate that community banks in the aggregate benefitted by more than $3.7 billion in deposit insurance fee reductions since the reform’s implementation in 2011. While non-community banks initially experienced increased fees, offsetting the benefits to community banks, we find evidence that non-community banks in the aggregate adjusted their funding behavior so that all but the largest banks also enjoyed benefits from the reform during our sample period.

The Term Auction Facility (TAF) was designed by the Federal Reserve during the financial crisis to inject emergency short-term funds into banks as a supplement to the lender of last resort discount window offerings. We describe how the Federal Reserve altered the design of the Term Auction Facility (TAF) over the course of the financial crisis. Most specifically we detail the impact of the greatly increased offering amounts in all auctions after October 2008, which resulted in the facility no longer auctioning scarcely available funds. We also document significantly different usage of the facility by FDIC-insured community and non-community banks, consistent with the notion of a two-tiered banking system in the U.S. Community banks were far less likely to use the facility than larger, non-community banks.

The U.S. Federal Reserve (Fed) was reluctant to release the names of firms that borrowed, and the amounts borrowed, from the emergency loan facilities during the financial crisis. We show that when the details of this information were finally made public by the Fed, there was no stock market reaction, contrary to the thought that this was valuable information. However, further investigation shows that stock returns for publicly traded borrowing institutions declined significantly and almost immediately after the Fed borrowing was initiated, although the information had not been made public by the Fed at the time. The underperformance of borrowing institutions was greatest for those that received the largest loans or had the largest amount of loans outstanding. This evidence is consistent with the idea that investors were able to trade on the information about the Fed’s emergency loan program, although the Fed purposely tried to keep the information private.

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This paper examines the effects of two major macro-economic forces argued by opposing renowned U.S. economists to have contributed most significantly to the U.S. housing price bubble that preceded the recent global financial crisis. The first force examined, as argued by John Taylor, is the Federal Reserve's loose monetary policy stance from 2002 to 2005. The second force examined, as argued by Ben Bernanke, is the substantial global inflow of capital to the U.S. over the same time period. We develop and estimate a reduced form model for U.S. housing prices, and find evidence consistent with both factors' contributing significantly to the recent macro-housing price behavior in the U.S. (C) 2015 Elsevier Inc. All rights reserved.

Starting on December 18, 2008 the Federal Reserve began paying 25 basis points (bps) on the reserves of depository institutions. Theory argues that the rate paid on reserves establishes a floor for the federal funds market. Nonetheless, the effective federal funds rate has stayed well below this theoretical floor value, on occasion by as much as 18 bps. This suggests the possibility of an arbitrage opportunity. This paper offers an explanation of this ongoing puzzle by explaining the limits to arbitrage and arguing that the anomaly persists, in part, due to costs associated with the Federal Deposit Insurance Corporation (FDIC) assessment on the liabilities of depository institutions and capital charges. The size of the difference is also found to increase with the Federal Reserve’s quantitative easing programs.

In September 2008, the US government placed Fannie Mae and Freddie Mac into conservatorship and entered into preferred stock purchase agreements with each. Since that time, these two government-sponsored enterprises (GSEs) have received $148 billion in taxpayer-injected equity. By contrast, the other housing-oriented GSE, the Federal Home Loan Bank System, has remained profitable throughout the crisis on a consolidated basis. This paper offers explanations as to why the Federal Home Loan Bank System did not meet the same fate as Fannie Mae and Freddie Mac, with a primary focus on differences in their respective business models, and important regulatory and charter/governance differences. The paper concludes with a financial condition update of the Federal Home Loan Bank System.

In the second quarter of 2009, the FDIC imposed a special assessment on insured banks to replenish the deposit insurance fund. While the traditional assessment base for regular deposit insurance premiums was all insured deposits, the special assessment was applied to a bank's total assets minus Tier 1 capital (total liabilities), with the maximum ‘capped’ at 10 basis points of insured deposits. We find that the cap yielded the greatest savings for banks with assets above $10 billion and that the FDIC would have raised a substantially greater amount of funds using holding company adjusted assets or could have applied a lower assessment rate to collect the same amount of proceeds.

Using Merton’s (1974) structural model corporate debt default, this paper argues that correlation between firm level corporate bond yield changes and stock returns should be informative about firm level default risk of this corporate debt. In particular, as the absolute value of the correlation increases, Merton’s framework suggests that default risk increases. We estimate the contemporaneous correlation between firm level corporate bond yield changes and stock returns using daily data, and investigate how this variable sheds light on firm level default risk, as measured by distance to default. We find evidence that as the stock-bond correlations increase in absolute value, the default risks of bonds increase, as expected. In addition, we examine if changes in the stock-bond correlation and the probability of future credit rating changes are related. We find that as the stock-bond correlation increases in absolute value, the probability of credit rating downgrades increases, which is consistent with the finding that the stock-bond correlation is a proxy for default risk.

Recent attention has been focused on how Federal Home Loan Bank lending to commercial banks may create a new significant risk exposure to the Federal Deposit Insurance Corporation. This concern is prompted by the potential moral hazard created by the FHLBank policy of lending at one rate, its government sponsored enterprise status, and its preferential rights as a secured creditor in receiverships, often referred to as the "super-lien." We argue, however, that this moral hazard is overstated because the Federal Home Loan Banks have an incentive to carefully monitor their borrowers based on their rights as a secured lender under the Uniform Commercial Code - that are not mitigated by the super lien. Consequently, the FHLBanks carefully underwrite advances and make adjustments to pricing based on risk - often through collateral valuation that effectively prices credit risk for FHLBank borrowers. We provide empirical evidence to support the claim that ex-ante and ex-post members are no riskier than non-members.

Financial service providers have increasingly offered customers new remote access to such services, with Internet banking being the latest example. While Internet banking has been available for years, the early adoption by customers of this technology was disappointing to most. This paper examines the demand for remote access to banking accounts by consumers and finds that when the technology is new, the traditional risk return models including variables allowing for heterogeneous risk add power in modeling the adoption decision. Perceived risks in Internet banking are seen to be responsible for some of the hesitation to adopt. Ironically, older consumers are found to be less likely to adopt Internet banking regardless of their risk tolerances. However, younger consumers are found to be early adopters only when they have relatively high levels of risk tolerance.

This research uses an event study methodology to examine the effect of Hurricane Floyd and the associated scientific and media releases on the market value of insurance firms. The research is unique in that information describing the development of the storm over time and space is incorporated to determine how the financial market reacted to changing news about a storm's characteristics. Key empirical results can be summarized as follows. Overall, there was a negative effect on insurer stock price changes around the synoptic life cycle of the storm; however, this effect was neither constant nor was it always negative on each day of the cycle. Significant market reaction to the news concerning the path and strength of the storm prior to the storm landfall was found. The results herein suggest that markets find reliable time-sensitive reports provided by the National Weather Service, the National Hurricane Center, and other media outlets to be valuable information.

In 1997, the U.S. Treasury introduced Inflation Protected Securities, commonly known as TIPS. Several in the finance field have since described these securities as “tax disadvantaged” relative to conventional securities, leading to serious questions regarding their appropriateness outside of tax-deferred accounts. In this article, we develop a framework that demonstrates that at least in a real sense the tax treatment of TIPS is trivially different from that of conventional Treasury securities. Moreover, empirically we find evidence that TIPS generally have after-tax yields comparable to, if not exceeding, conventional fixed-rate Treasury securities. We also show that TIPS have generally outperformed matched-maturity conventional Treasury securities in terms of after-tax rates of return.