Federal Reserve System

About: Federal Reserve System is a other organization based out in Washington D.C., District of Columbia, United States. It is known for research contribution in the topics: Monetary policy & Inflation. The organization has 2373 authors who have published 10301 publications receiving 511979 citations.

The Efficiency Cost of Market Power in the Banking Industry: A Test of the “Quiet Life” and Related Hypotheses

Abstract: Traditional concerns about concentration in product markets have centered on the social loss associated with the mispricing that occurs when market power is exercised. This paper focuses on a potentially greater loss from market power—a reduction in cost efficiency brought about by the lack of market discipline in concentrated markets. We employ data from the commercial banking industry, which produces very homogeneous products in multiple markets with differing degrees of market concentration. We find the estimated efficiency cost of concentration to be several times larger than the social loss from mispricing as traditionally measured by the welfare triangle.

Were There Regime Switches in U.S. Monetary Policy

Abstract: A multivariate model, identifying monetary policy and allowing for simultaneity and regime switching in coefficients and variances, is confronted with US data since 1959. The best fit is with a version that allows time variation in structural disturbance variances only. Among versions that allow for changes in equation coefficients also, the best fit is for a one that allows coefficients to change only in the monetary policy rule. That version allows switching among three main regimes and one rarely and briefly occurring regime. The three main regimes correspond roughly to periods when most observers believe that monetary policy actually differed, but the differences among regimes are not large enough to account for the rise, then decline, in inflation of the 70?s and 80?s. In versions that insist on changes in the policy rule, the estimates imply monetary targeting was central in the early 80?s, but also important sporadically in the 70?s.

How Accurate Are Value-at-Risk Models at Commercial Banks?

Abstract: In recent years, the trading accounts at large commercial banks have grown substantially and become progressively more diverse and complex. We provide descriptive statistics on the trading revenues from such activities and on the associated Value-at-Risk ~VaR! forecasts internally estimated by banks. For a sample of large bank holding companies, we evaluate the performance of banks’ trading risk models by examining the statistical accuracy of the VaR forecasts. Although a substantial literature has examined the statistical and economic meaning of Value-at-Risk models, this article is the first to provide a detailed analysis of the performance of models actually in use. IN RECENT YEARS, THE TRADING ACCOUNTS at large commercial banks have grown rapidly and become progressively more complex. To a large extent, this ref lects the sharp growth in the over-the-counter derivatives markets, in which commercial banks are the principal dealers. To manage market risks, major trading institutions have developed large scale risk measurement models. While approaches may differ, all such models measure and aggregate market risks in current positions at a highly detailed level. The models employ a standard risk metric, Value-at-Risk ~VaR!, which is a lower tail percentile for the distribution of profit and loss ~P&L!. VaR models have been sanctioned for determining market risk capital requirements for large banks by U.S. and international banking authorities through the 1996 Market Risk Amendment to the Basle Accord. Spurred by these developments, VaR has become a standard measure of financial market risk that is increasingly used by other financial and even nonfinancial firms as well. The general acceptance and use of large scale VaR models has spawned a substantial literature including statistical descriptions of VaR and examinations of different modeling issues and approaches ~for a survey and analysis see Jorion ~2001!!. Yet, because of their proprietary nature, there has been little empirical study of risk models actually in use, their VaR output, or * Berkowitz is from the University of California, Irvine and O’Brien is from the Federal Reserve Board. We gratefully acknowledge the support and comments of Denise Dittrich, Jim Embersit, Mike Gibson, Philippe Jorion, Matt Pritsker, Hao Zhou, and colleagues at the Federal Reserve Board and the New York Fed. The comments and suggestions of an anonymous referee were especially helpful in improving the paper. The opinions expressed do not necessarily represent those of the Federal Reserve Board or its staff.

The Age of Reason: Financial Decisions over the Life-Cycle with Implications for Regulation

Abstract: Many consumers make poor financial choices and older adults are particularly vulnerable to such errors. About half of the population between ages 80 and 89 either has dementia or a medical diagnosis of "cognitive impairment without dementia." We study lifecycle patterns in financial mistakes using a proprietary database that measures ten different types of credit behavior. Financial mistakes include suboptimal use of credit card balance transfer offers, misestimation of the value of one's house, and excess interest rate and fee payments. In a cross-section of prime borrowers, middle-aged adults make fewer financial mistakes than younger and older adults. We conclude that financial mistakes follow a U-shaped pattern, with the cost-minimizing performance occurring around age 53. We analyze regulatory regimes that may help individuals avoid making financial mistakes. Some of these regimes are designed to address the particular challenges faced by older adults, but much of our discussion is relevant for all vulnerable populations. We discuss disclosure, nudges, financial driving licenses, advanced directives, fiduciaries, asset safe harbors, ex-post and ex-ante regulatory oversight. Finally, we pose seven questions for future research on cognitive limitations and associated policy responses.