In 1974 an article appeared in Science magazine with the dry-sounding title “Judgment Under Uncertainty: Heuristics and Biases” by a pair of psychologists who were not well known outside their discipline of decision theory. In it Amos Tversky and Daniel Kahneman introduced the world to Prospect Theory, which mapped out how humans actually behave when faced with decisions about gains and losses, in contrast to how economists assumed that people behave. Prospect Theory turned Economics on its head by demonstrating through a series of ingenious experiments that people are much more concerned with losses than they are with gains, and that framing a choice from one perspective or the other will result in decisions that are exactly the opposite of each other, even if the outcomes are monetarily the same. Prospect Theory led cognitive psychology in a new direction that began to uncover other human biases in thinking that are probably not learned but are part of our brain’s wiring.

Thinking fast and slow.

Enclosed is a copy of the Board of Governors’ Semiannual Agenda of Regulations for the period August 1, 1980 through February 1, 1981. The Semiannual Agenda provides you with information on those regulatory matters that the Board now has under consideration or anticipates considering over the next six months, and is divided into three parts: (1) regulatory matters that the Board had considered during the previous six months on which final action has been taken; (2) regulatory matters that have been proposed for public comment and that require further Board consideration; and (3) regulatory matters that the Board may consider over the next six months.

Federal Reserve Bank of New Yorkの制定せる財務諸表様式について

https://www2.econ.iastate.edu/tesfatsi/ComplexityConcentrationContagion.JME.GaiHaldaneKapdia2011.pdf

Complexity, concentration and contagion

This paper introduces a new indicator of contemporaneous stress in the financial system named Composite Indicator of Systemic Stress (CISS). Its specific statistical design is shaped according to standard definitions of systemic risk. The main methodological innovation of the CISS is the application of basic portfolio theory to the aggregation of five market-specific subindices created from a total of 15 individual financial stress measures. The aggregation accordingly takes into account the time-varying cross-correlations between the subindices. As a result, the CISS puts relatively more weight on situations in which stress prevails in several market segments at the same time, capturing the idea that financial stress is more systemic and thus more dangerous for the economy as a whole if financial instability spreads more widely across the whole financial system. Applied to euro area data, we determine within a * We thank Philipp Hartmann for inspiring and supporting this project throughout all stages. Philipp also invented the indicator’s name and its abbreviation CISS (pronounced like “kiss”). We thank Tommy Kostka for excellent research assistance and for several good ideas which helped improving the CISS. Very helpful comments from Geert Bekaert, Wolfgang Lemke, Simone Manganelli and an anonymous referee are gratefully acknowledged. We finally thank participants at the Euro Area Business Cycle Network conference “Econometric Modelling of Macro-Financial Linkages” in Florence and the 5th CSDA International Conference on Computational and Financial Econometrics in London for fruitful discussions and comments. However, the views expressed in this paper are those of the authors and do not necessarily reflect those of the European Central Bank, the Eurosystem or the Magyar Nemzeti Bank.  Corresponding author: Tel. +49 69 1344 7065.

/pdf/ciss-a-composite-indicator-of-systemic-stress-in-the-4aucfr62qw.pdf

CISS - A Composite Indicator of Systemic Stress in the Financial System *

We study the functioning and possible breakdown of the interbank market in the presence of counterparty risk. We allow banks to have private information about the risk of their assets. We show how banks JEL Classification: G01, G21, D82

Liquidity Hoarding and Interbank Market Spreads: The Role of Counterparty Risk

A major lesson of the recent financial crisis is that the interbank lending market is crucial for banks facing large uncertainty regarding their liquidity needs. This paper studies the efficiency of the interbank lending market in allocating funds. We consider two different types of liquidity shocks leading to di¤erent implications for optimal policy by the central bank. We show that, when confronted with a distribu- tional liquidity-shock crisis that causes a large disparity in the liquidity held among banks, the central bank should lower the interbank rate. This view implies that the traditional tenet prescribing the separation between prudential regulation and mon- etary policy should be abandoned. In addition, we show that, during an aggregate liquidity crisis, central banks should manage the aggregate volume of liquidity. Two di¤erent instruments, interest rates and liquidity injection, are therefore required to cope with the two di¤erent types of liquidity shocks. Finally, we show that failure to cut interest rates during a crisis erodes financial stability by increasing the risk of bank runs.

/pdf/bank-liquidity-interbank-markets-and-monetary-policy-54hfkqsbs8.pdf

Bank liquidity, interbank markets and monetary policy

https://www.newyorkfed.org/medialibrary/media/research/staff_reports/sr498.pdf

A model of liquidity hoarding and term premia in inter-bank markets

Large excess reserve balances are held by banks in the U.S. despite the ability of large banks to closely target end-of-day balances close to zero. We show that the friction faced by small banks to participate in the fed funds market leads to all banks holding precautionary reserves. The precautionary motive for reserves can explain that small banks hold relatively large amounts of excess reserves overnight, while at the same time lending large amounts to large banks. Small banks are large net lenders despite their reluctance to lend as large of a percentage of available balances during the day as large banks. We also explain an increase in the volatility of the fed funds rate late in the day,

/pdf/precautionary-reserves-and-the-interbank-market-4asgb6018p.pdf

Precautionary Reserves and the Interbank Market

Financial crises are associated with reduced volumes and extreme levels of rates for term inter-bank loans, reflected in the one-month and three-month Libor. We explain such stress by modeling leveraged banks’ precautionary demand for liquidity. Asset shocks impair a bank’s ability to roll over debt because of agency problems associated with high leverage. In turn, banks hoard liquidity and decrease term lending as their rollover risk increases over the term of the loan. High levels of short-term leverage and illiquidity of assets lead to low volumes and high rates for term borrowing. In extremis, inter-bank markets can completely freeze.

/pdf/a-model-of-liquidity-hoarding-and-term-premia-in-inter-bank-3nbzal2udy.pdf

A Model of Liquidity Hoarding and Term Premia in Inter-Bank Markets

The London Interbank Offered Rate (LIBOR) is a widely used indicator of funding conditions in the interbank market. As of 2013, LIBOR underpins more than $300 trillion of financial contracts, including swaps and futures, in addition to trillions more in variable-rate mortgage and student loans. LIBOR's volatile behavior during the financial crisis provoked questions surrounding its credibility. Ongoing regulatory investigations have uncovered misconduct by a number of financial institutions. Policymakers across the globe now face the task of reforming LIBOR in the aftermath of the scandal and crisis.

/pdf/libor-origins-economics-crisis-scandal-and-reform-54111g6w32.pdf

David R. Skeie

Papers

Bank liquidity, interbank markets and monetary policy

A model of liquidity hoarding and term premia in inter-bank markets

Precautionary Reserves and the Interbank Market

A Model of Liquidity Hoarding and Term Premia in Inter-Bank Markets

LIBOR: Origins, economics, crisis, scandal, and reform