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

This paper incorporates a time-varying intensity of disasters in the Rietz-Barro hypothesis that risk premia result from the possibility of rare, large disasters. During a disaster, an asset’s fundamental value falls by a time-varying amount. This in turn generates time-varying risk premia and thus volatile asset prices and return predictability. Using the recent technique of linearity-generating processes (Gabaix 2007), the model is tractable, and all prices are exactly solved in closed form. In the “variable rare disasters” framework, the following empirical regularities can be understood qualitatively: (i) equity premium puzzle (ii) risk-free rate-puzzle (iii) excess volatility puzzle (iv) predictability of aggregate stock market returns with price-dividend ratios (v) value premium (vi) often greater explanatory power of characteristics than covariances for asset returns (vii) upward sloping nominal yield curve (viiii) a steep yield curve predicts high bond excess returns and a fall in long term rates (ix) corporate bond spread puzzle (x) high price of deep out-of-the-money puts. I also provide a calibration in which those puzzles can be understood quantitatively as well. The fear of disaster can be interpreted literally, or can be viewed as a tractable way to model time-varying risk-aversion or investor sentiment. (JEL: E43, E44, G12)

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Variable Rare Disasters: An Exactly Solved Framework for Ten Puzzles in Macro-Finance

We study the nature of sovereign credit risk using an extensive set of sovereign CDS data. We find that the majority of sovereign credit risk can be linked to global factors. A single principal component accounts for 64 percent of the variation in sovereign credit spreads. Furthermore, sovereign credit spreads are more related to the US stock and high-yield markets than they are to local economic measures. We decompose credit spreads into their risk premium and default risk components. On average, the risk premium represents about a third of the credit spread. (JEL F34, G15, O16, O19, P34)

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How Sovereign is Sovereign Credit Risk

We examine the pervasive view that "equity is expensive," which leads to claims that high capital requirements are costly for society and would affect credit markets adversely We find that arguments made to support this view are fallacious, irrelevant to the policy debate by confusing private and social costs, or very weak For example, the return on equity contains a risk premium that must go down if banks have more equity It is thus incorrect to assume that the required return on equity remains fixed as capital requirements increase It is also incorrect to translate higher taxes paid by banks to a social cost Policies that subsidize debt and indirectly penalize equity through taxes and implicit guarantees are distortive And while debt’s informational insensitivity may provide valuable liquidity, increased capital (and reduced leverage) can enhance this benefit Finally, suggestions that high leverage serves a necessary disciplining role are based on inadequate theory lacking empirical support We conclude that bank equity is not socially expensive, and that high leverage at the levels allowed, for example, by the Basel III agreement is not necessary for banks to perform all their socially valuable functions and likely makes banking inefficient Better capitalized banks suffer fewer distortions in lending decisions and would perform better The fact that banks choose high leverage does not imply that this is socially optimal Except for government subsidies and viewed from an ex ante perspective, high leverage may not even be privately optimal for banks Setting equity requirements significantly higher than the levels currently proposed would entail large social benefits and minimal, if any, social costs Approaches based on equity dominate alternatives, including contingent capital To achieve better capitalization quickly and efficiently and prevent disruption to lending, regulators must actively control equity payouts and issuance If remaining challenges are addressed, capital regulation can be a powerful tool for enhancing the role of banks in the economy

/pdf/fallacies-irrelevant-facts-and-myths-in-the-discussion-of-475e96dl3d.pdf

Fallacies, Irrelevant Facts, and Myths in the Discussion of Capital Regulation: Why Bank Equity is Not Expensive

We investigate whether a bank’s performance during the 1998 crisis, which was viewed at the time as the most dramatic crisis since the Great Depression, predicts its performance during the recent financial crisis. One hypothesis is that a bank that has an especially poor experience in a crisis learns and adapts, so that it performs better in the next crisis. Another hypothesis is that a bank’s poor experience in a crisis is tied to aspects of its business model that are persistent, so that its past performance during one crisis forecasts poor performance during another crisis. We show that banks that performed worse during the 1998 crisis did so as well during the recent financial crisis. This effect is economically important. In particular, it is economically as important as the leverage of banks before the start of the crisis. The result cannot be attributed to banks having the same chief executive in both crises. Banks that relied more on short-term funding, had more leverage, and grew more are more likely to be banks that performed poorly in both crises.

This Time Is the Same: Using Bank Performance in 1998 to Explain Bank Performance During the Recent Financial Crisis

Counterparty credit risk has become one of the highest-profile risks facing participants in the financial markets. Despite this, relatively little is known about how counterparty credit risk is actually priced. We examine this issue using an extensive proprietary data set of contemporaneous CDS transaction prices and quotes by 14 different CDS dealers selling credit protection on the same underlying firm. This unique cross-sectional data set allows us to identify directly how dealers’ credit risk affects the prices of these controversial credit derivatives. We find that counterparty credit risk is priced in the CDS market. The magnitude of the effect, however, is vanishingly small and is consistent with a market structure in which participants require collateralization of swap liabilities by counterparties.

https://papers.ssrn.com/sol3/Delivery.cfm/SSRN_ID2190086_code683384.pdf?abstractid=1830321&type=2

Counterparty Credit Risk and the Credit Default Swap Market

Counterparty credit risk and the credit default swap market

The largest commercial bank stocks, ranked by total size of the balance sheet, have significantly lower risk-adjusted returns than small- and medium-sized bank stocks, even though large banks are significantly more levered. We uncover a size factor in the component of bank returns that is orthogonal to the standard risk factors, including small minus big, which has the right covariance with bank returns to explain the average risk-adjusted returns. This factor measures size-dependent exposure to bank-specific tail risk. These findings are consistent with government guarantees that protect shareholders of large banks, but not small banks, in disaster states.

Size Anomalies in U.S. Bank Stock Returns

The largest commercial bank stocks, ranked by the total size of the balance sheet, have significantly lower risk-adjusted returns than small- and medium-sized bank stocks, even though large banks are significantly more levered. We uncover a size factor in the component of bank returns that is orthogonal to the standard risk factors, including small-minus-big, which has the right covariance with bank returns to explain the average risk-adjusted returns. This factor measures size-dependent exposure to bank-specific tail risk. These findings are consistent with the existence of government guarantees that protect shareholders of large banks, but not small banks, in disaster states.

Current measures of bank distress find marginal value in predictive variables beyond a capital adequacy ratio and tend to miss extreme events impacting the entire sector. The authors advoca...

Priyank Gandhi

Papers

Counterparty Credit Risk and the Credit Default Swap Market

Counterparty credit risk and the credit default swap market

Size Anomalies in U.S. Bank Stock Returns

Size Anomalies in U.S. Bank Stock Returns

Using Annual Report Sentiment as a Proxy for Financial Distress in U.S. Banks