Value of Large Banks
OFR RELEASES REPORT COMPARING U.S. AND INTERNATIONAL G-SIBS. The OFR has released a report which found that the largest U.S. banks rank relatively high on systemic importance based on measures of size, interconnectedness, complexity, cross-jurisdictional activity, and the provision of services with limited substitutes. The report also found that banks with higher systemic importance scores do not, generally, have higher risk-based capital ratios. However, the report notes that fluctuations in exchange rates can have an impact on systemic importance indicators. 
Glasserman, Paul and Bert Loudis (2015), “A Comparison of U.S. and International Global Systemically Important Banks,” OFR Working Paper 15, 07, (August).

LARGEST U.S. BANKS INCREASING GLOBAL PRESENCE. A blog post from Liberty Street Economics entitled Around the World in 8,379 Foreign Entities, by Preston Mui and Friederike Niepmann, complements recent Fed research on large and complex banks. The blog post highlights trends in the largest U.S. financial institutions’ foreign ownership over the past twenty-five years. The authors document a decline in the importance of foreign branches for U.S. financial institutions, an increase in the complexity of foreign subsidiary networks, a shift of activity from Latin America and the Caribbean to Europe and other regions, and a high concentration of foreign ownership in a few firms. Additionally, the study finds that the global financial crisis appears to have had relatively little impact on banks’ foreign ownership, thus far.
Mui, Preston and Friederike Niepmann (2015), “Around the World in 8,379 Foreign Entities,” Web blog post. Liberty Street Economics. Federal Reserve Bank of New York, 11 Aug. 2015. Web. 16 Oct. 2015.

NEW ESTIMATES OF RETURNS TO SCALE FOR U.S. COMMERCIAL BANKS. The authors study cost, revenue and profit relationships and find that among the largest banks, revenues and profits are still increasing as output levels increase. Furthermore, the study shows that by 2012, the largest banks may have reached a size at which opportunities for scale economies are exhausted. 
Wheelock, David C. and Paul Wilson (2015), “The Evolution of Scale Economies in U.S. Banking” Federal Reserve Bank of St. Louis Working Paper Series 021A, (August).

Capital and Liquidity
COMPOSITION OF CAPITAL INFLOWS MATTERS. The authors find that capital inflows boost credit growth and increase the likelihood of credit booms for both the household sector and the corporate sector. Furthermore, only non-foreign direct investment inflows are significantly associated with higher credit growth rates and credit booms. These findings have some policy implications because a one-size-fits-all approach to regulation of capital inflows may not be the right one. Therefore, the paper suggests that policymakers should take these details into account when deciding whether to respond to a surge in capital inflows.
Igan, Deniz and Zhibo Tan (2015), “Capital Inflows, Credit Growth, and Financial Systems,” IMF Working Paper, 15, 193, (August).

PWC PUBLISHES STUDY ON LIQUIDITY OF GLOBAL FINANCIAL MARKETS. PricewaterhouseCoopers released a report commissioned by the IIF and GMFA, assessing current trends in financial liquidity. The report finds that the effect on liquidity for some end users has been concealed by “extraordinary monetary policy,” and that liquidity in secondary markets is “strained.” Moreover, the report notes that secondary market liquidity has spread to primary markets and the report informs that its findings are an “early warning signal.” Of note, the report finds that the cumulative impact of multiple regulatory initiatives that arose from post-crisis regulations may be causing market strain. 
PricewaterhouseCoopers (2015), “Global Financial Markets Liquidity Study,” (August). 

OFR PAPER STUDIES CRISES LIQUIDITY DYNAMICS. The authors study the vulnerability of market liquidity to crisis-like shocks. Financial crises are characterized by sharp reductions in liquidity followed by falling prices. The OFR researchers find that these sharp price declines may be exacerbated by funding constraints of large dealers and other market makers and by the slow reaction of liquidity providers.
Bookstaber, Richard and Mark Paddrik (2015), “An Agent-Based Model for Crisis Liquidity Dynamics,” OFR Working Paper, 15, 18, (September).

CCBS CONTRIBUTE TO FINANCIAL SECTOR’S OVERALL RESILIENCE. The authors provide the first empirical analysis of the countercyclical capital buffer (CCB) based on data from Switzerland – which became the first country to implement the buffer. The paper finds that: (i) capital-constrained banks with low capital cushions raise their mortgage rates more than their competitors; and (ii) specialized banks that operate a very mortgage-intensive business also raise their mortgage rates and try to pass on extra capital costs of previously issued mortgages to new customers. The paper concludes that “the CCB has achieved its intended effect in shifting mortgages from less resilient to more resilient banks, but stricter capital requirements do not appear to have discouraged less resilient banks from risky mortgage lending.”
Basten, Christoph and Catherine Koch (2015), “Higher Bank Capital Requirements and Mortgage Pricing: Evidence from the Countercyclical Capital Buffer (CCB),” BIS Working Papers 511, (September).

Financial Crisis
FED CONTRIBUTED TO DISCOUNT WINDOW STIGMA. A blog post from Liberty Street Economics reviews the history of the discount window and finds that some past Fed policies may have inadvertently contributed to a reluctance to borrow from the discount window, which persists to this day. For example, the Fed required a certain bank to prove that it had exhausted private sources of funding, which may have led market participants to presume that if a bank was borrowing from the discount window, it must be in trouble.
Armantier, Olivier, Helene Lee and Asani Sarkar (2015), “History of Discount Window Stigma,” Web blog post. Liberty Street Economics. Federal Reserve Bank of New York, 10 Aug. 2015. Web. 16. Oct. 2015.

WHAT ARE EARLY WARNING INDICATORS FOR BANKING CRISIS? The authors develop a framework for monitoring risks to financial stability. They compare their summary measures of system-wide vulnerabilities with some prominent indicators emphasized in the literature, such as the credit-to-GDP gap to find that their framework leads the credit-to-GDP gap (a key gauge in Basel III and related research) by a year or more. This indicates that their framework may provide useful information for guiding macroprudential policy tools, such as the countercyclical capital buffer.
Aikman, David, Michael T. Kiley, Seung Jung Lee, Michael G. Palumbo and Missaka N. Warusawitharana (2015), “Mapping Heat in the U.S. Financial System,” Finance and Economics Discussion Series 59. Board of Governors of the Federal Reserve System, (August).

WHY BANKS AVOID THE DISCOUNT WINDOW? The author explores two related issues: (i) whether banks are stigmatized after news is revealed that they received lender of last resort (LOLR) emergency loans, and (ii) if they are stigmatized, how can the LOLR effectively control the information environment to manage public reactions during a crisis. The paper finds that the presence of stigma was mitigated if the identities of nearly all banks in a given banking market were simultaneously revealed to have borrowed from the LOLR.
Anbil, Sriya (2015), “Managing Stigma During a Financial Crisis” (September).

ECB PREDICTS ‘POSITIVE’ IMPACT OF POST-CRISIS REGULATORY REFORMS. The paper argues that the impact of regulatory reforms will be positive because “banks’ cost of market debt is negatively influenced (i.e. reduced) by higher capital and liquidity resources – which new regulations seek to improve.”  Additionally, the ECB argues that since markets reward higher prudential standards with lower cost of debt issuance, the short-term costs of building up capital and liquidity resources are eventually more than offset.
Galiay, Artus and Laurent Maurin (2015),“Drivers of Banks’ Cost of Debt and Long-Term Benefits of Regulation – An Empirical Analysis Based on EU Banks,” ECB Working Paper Series 1849, (September).

Systemic Risk
UNIFORM REGULATIONS MAY INCREASE SYSTEMIC RISK. The paper examines whether the imposition of a uniform set of regulations on G-SIBs, by the FSB, led to uniform behavior and similar performances across G-SIBs. The authors use the banks’ credit default swap spreads and Fitch ratings to gauge the probability of each individual bank failing. They also study whether the joint probability of multiple banks simultaneously defaulting rose, based on changes in correlations of asset prices, V-Lab’s systemic risk measure, and the dispersion of accounting-based performance measures. The study finds that for G-SIBs nine of the 11 bank performance measures became more alike after they were designated as G-SIBs. Additionally, after the implementation of harmonized bank regulations, the default risks of G-SIBs increased relative to other large banks during unstable years, and the probability of multiple simultaneous bank defaults rose as well. 
Dewenter, Kathryn L. and Alan C. Hess (2015), “Harmonized Regulations and Systemic Risk: Evidence from Global-Systemically Important Banks,” (July).

Bank Structure
STRUCTURAL LAWS IN FINANCE. The author analyzes the Volcker rule as a structural law i.e. a type of law that aims to shape behavior indirectly by reshaping bank institutions and in so doing change their cultures. Coates analysis hopes to “cast light both on the Volcker rule and on the potential value (and risks) of legal mandates for cost-benefit analysis in administrative law generally.”
Coates, John C. IV (2015), “The Volcker Rule as Structural Law: Implications for Cost-Benefit Analysis and Administrative Law,” ECGI Law Working Paper 299, (August).

BANKS WITH LOWER FUNDING COSTS HAVE RISKIER LOAN PORTFOLIOS. The authors study whether better bank services have a hidden cost. The authors look at the relationships between a bank’s service quality (conveniently located branches, large ATM networks, user-friendly online banking) and its core deposit ratio, funding costs, and liquid asset holdings to find that banks with higher operating costs attract more core deposits and pay less for their funding. However, those banks also make lower-quality loans.
Choi, Dong Beom and Ulysses Velasquez (2015), “Do Better Bank Services Have a Hidden Cost?” Web blog post. Liberty Street Economics. Federal Reserve Bank of New York, 22, Sept. 2015. Web 16 Oct. 2015.

Payments
SURVEY FINDS LIMITED IMPACT OF DURBIN AMENDMENT ON MERCHANTS’ DEBIT ACCEPTANCE COST. The Richmond Fed’s new Economic Quarterly features a report on the impact of the Durbin Amendment on the cost to merchants of accepting debit cards. The report finds that the regulation has had limited impact on merchants’ debit acceptance cost. About two-thirds of merchants in the survey reported no change or did not know the change of debit costs post-regulation.
Wang, Zhu, Scarlett Schwartz and Neil Mitchell (2015), “The Impact of the Durbin Amendment on Merchants: A Survey Study,” Federal Reserve Bank of Richmond Economic Quarterly 100(3) 183-208.

RAISING SETTLEMENT SERVICE FEES CAUSE FOR EXITING FEDWIRE. A new report by the NY Fed finds that a sizeable number of banks withdrew from Fedwire over the 2011-13 timeline. For these banks, an increase in average price had a large impact on their exit. Of note, the authors analyze National Unrecovered Financial Services Interbank Payments System (CHIPS), the closest competing service to Fedwire. They find the main difference between CHIPS and Fedwire is that payments sent over CHIPS are netted. As a result, an institution participating in CHIPS needs to settle its net obligation only against other institutions participating in CHIPS. Therefore, this liquidity saving mechanism allows an institution to settle a potentially large gross amount of obligations with a small net amount of cash.
Copeland, Adam and Rodney Garratt (2015), “Nonlinear Pricing with Competition: The Market for Settling Payments,” Federal Reserve Bank of New York Staff Report 737, (August).

Bank Resolution
BANKING NEEDS A GLOBAL RESOLUTION FRAMEWORK. The author describes a credible worldwide resolution scheme that would address the problem of financial stability caused by systemically important financial institutions’ excessive risk-taking.
Ringe, Wolf-Georg (2015), “Arbitrage and Competition in Global Financial Regulation - The Case for a Special Resolution Regime,” Oxford Legal Studies Research Paper 49, (September).

PAPER PROPOSES TRIGGERS FOR BANK RESOLUTION. The authors propose an objective metric for triggering a bank recovery phase. Such a metric could be constructed using these principles: (i) adequate loss absorption; (ii) distinguishing between weak and sound banks; (iii) little susceptibility to manipulation; (iv) timeliness; and (v) scalable from the individual bank to the system.
Goodhart, C.A.E. and Miguel A. Segoviano Basurto (2015),”Optimal Bank Recovery,” IMF Working Paper 15, 217, (September).

FED FIN WHITE PAPER COMPARES DIRECT AND INDIRECT COSTS OF SYSTEMIC REGULATION. On August 6, 2015 Federal Financial Analytics released a white paper assessing the direct and indirect costs of imposing the systemic-regulatory and resolution framework codified in Dodd-Frank on U.S. BHCs with assets greater than $50 billion. The white paper finds that subjecting BHCs with more than $50 billion in assets to enhanced prudential standards under Dodd-Frank could cost BHCs “at least $2 billion a year.” Additionally, the white paper notes that “[d]ue to the absence of like-kind regulation for like-kind financial products, significant market distortions are already evident.” However, the study finds that eliminating statutory requirements for many systemic standards would have minimal effect on applicable prudential and resolution standards since regional BHCs are already subject to stringent stress testing, resolution-planning, credit-exposure limits, and risk-management standards, among other things. 
Federal Financial Analytics (2015), “The Consequences of Systemic Regulation for U.S. Regional Banks,” (August).

Corporate Governance
When to Blame the Board? The paper reviews seven beliefs about board of directors that are not substantiated by empirical evidence. Those beliefs are: (i) the chairman should be independent; (ii) staggered boards are bad for shareholders; (iii) directors that meet NYSE independence standards are independent; (iv) interlocked directorships reduce governance quality; (v) CEOs make the best directors; (vi) directors have significant liability risk; and (vii) the failure of a company is the board’s fault.
Larcker, David F. and Brian Tayan (2015), “Seven Myths of Board of Directors,” Stanford Closer Look Series, CGRP51, (September).

LOBBYING INCREASES PREFERENTIAL TREATMENT OF BANKS IN DISTRESS. The European Central Bank has released a study which assesses whether banks can leverage lobbying activities or political connections to influence their regulatory treatment when they are in distress. Using a sample of about 780 U.S. banks, the paper finds that banks that have lobbied in the past and fall below the undercapitalized threshold have a 12% lower probability of receiving a Prompt Corrective Action directive (PCA). Furthermore, the paper finds that past lobbying activities lead to an improvement of about 1.6 points in the Fitch support ratings compared to banks that do not engage in lobbying. However, according to the study, lobbying is no longer effective in averting bank closure when banks are in deep financial distress.
Ignatowski Magdalena, Charlotte Werger and Josef Korte (2015), “Between Capture and Discretion – The Determinants of Distressed Bank Treatment and Expected Government Support,” ECB Working Paper Series 1835, (August).