Bank liquidity, interbank markets and monetary policy

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 different implications for optimal policy by the central bank. We show that, when confronted with a distributional 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 monetary policy should be abandoned. In addition, we show that, during an aggregate liquidity crisis, central banks should manage the aggregate volume of liquidity. Two different instruments, interest rates and liquidity injection, are therefore required to cope with the two different 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.Bank liquidity, interbank markets, central bank policy, financial fragility, bank runs.

The Fragility of Short-Term Secured Funding Markets

This paper develops an infinite-horizon model of financial institutions that borrow short-term and invest in long-term assets that can be traded in frictionless markets. Because these financial intermediaries perform maturity transformation, they are subject to potential runs. We derive distinct liquidity, collateral, and asset liquidation constraints, which determine whether a run can occur as a result of changing market expectations. We show that the extent to which borrowers can ward off an individual run depends on whether it has sufficient liquidity, collateral, and asset liquidation capacity. These determinants depend on the borrower’s (endogenous) balance sheet and on (exogenous) fundamentals. Systemic runs are possible if shocks to the valuation of collateral held by outside investors are sufficiently strong and uniform, and if the system as a whole is exposed to high short-term funding risk. The theory has policy implications for prudential regulation and lender-of-last-resort interventions

Evaluating the quality of fed funds lending estimates produced from fedwire payments data

A number of empirical analyses of interbank lending rely on indirect inferences from individual interbank transactions extracted from payments data using algorithms. In this paper, we conduct an evaluation to assess the ability of identifying overnight U.S. fed funds activity from Fedwire® payments data. We find evidence that the estimates extracted from the data are statistically significantly correlated with banks' fed funds borrowing as reported on the FRY-9C. We find similar associations for fed funds lending, although the correlations are lower. To be conservative, we believe that the estimates are best interpreted as measures of overnight interbank activity rather than fed funds activity specifically. We also compare the estimates provided by Armantier and Copeland (2012) to the Y-9C fed funds amounts

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

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

Federal reserve tools for managing rates and reserves

Monetary policy measures taken by the Federal Reserve as a response to the 2007-09 financial crisis and subsequent economic conditions led to a large increase in the level of outstanding reserves. The Federal Open Market Committee (FOMC) has a range of tools to control short-term market rates in this situation. We study several of these tools, namely, interest on excess reserves (IOER), reverse repurchase agreements (RRPs), and the term deposit facility (TDF). We find that overnight RRPs (ON RRPs) may provide a better floor on rates than term RRPs because they are available to absorb daily liquidity shocks. Whether the TDF or RRPs best support equilibrium rates depends on the intensity of interbank monitoring costs versus balance sheet costs, respectively, that banks face. In our model, using the RRP and TDF concurrently may most effectively stabilize short-term rates close to the IOER rate when such costs are rapidly increasing

Modeling, Identification and Control at Telemark University College

Master studies in process automation started in 1989 at what soon became Telemark University College, and the 20 year anniversary marks the start of our own PhD degree in Process, Energy and Automation Engineering. The paper gives an overview of research activities related to control engineering at Department of Electrical Engineering, Information Technology and Cybernetics

The Atmospheric Chemistry and Climate Model Intercomparison Project (ACCMIP): Overview and description of models, simulations and climate diagnostics

The Atmospheric Chemistry and Climate Model Intercomparison Project (ACCMIP) consists of a series of time slice experiments targeting the long-term changes in atmospheric composition between 1850 and 2100, with the goal of documenting composition changes and the associated radiative forcing. In this overview paper, we introduce the ACCMIP activity, the various simulations performed (with a requested set of 14) and the associated model output. The 16 ACCMIP models have a wide range of horizontal and vertical resolutions, vertical extent, chemistry schemes and interaction with radiation and clouds. While anthropogenic and biomass burning emissions were specified for all time slices in the ACCMIP protocol, it is found that the natural emissions are responsible for a significant range across models, mostly in the case of ozone precursors. The analysis of selected present-day climate diagnostics (precipitation, temperature, specific humidity and zonal wind) reveals biases consistent with state-of-the-art climate models. The model-to-model comparison of changes in temperature, specific humidity and zonal wind between 1850 and 2000 and between 2000 and 2100 indicates mostly consistent results. However, models that are clear outliers are different enough from the other models to significantly affect their simulation of atmospheric chemistry

Modeling, Identification and Control at Telemark University College

Master studies in process automation started in 1989 at what soon became Telemark University College, and the 20 year anniversary marks the start of our own PhD degree in Process, Energy and Automation Engineering. The paper gives an overview of research activities related to control engineering at Department of Electrical Engineering, Information Technology and Cybernetics

Circulating vitamin D in relation to cancer incidence and survival of the head and neck and oesophagus in the EPIC cohort

Experimental and epidemiological data suggest that vitamin D play a role in pathogenesis and progression of cancer, but prospective data on head and neck cancer (HNC) and oesophagus cancer are limited. The European Prospective Investigation into Cancer and Nutrition (EPIC) study recruited 385,747 participants with blood samples between 1992 and 2000. This analysis includes 497 case-control pairs of the head and neck and oesophagus, as well as 443 additional controls. Circulating 25(OH)D3 were measured in pre-diagnostic samples and evaluated in relation to HNC and oesophagus cancer risk and post-diagnosis all-cause mortality. After controlling for risk factors, a doubling of 25(OH)D3 was associated with 30% lower odds of HNC (OR 0.70, 95% confidence interval [95% CI] 0.56–0.88, Ptrend = 0.001). Subsequent analyses by anatomical sub-site indicated clear inverse associations with risk of larynx and hypopharynx cancer combined (OR 0.55, 95CI% 0.39–0.78) and oral cavity cancer (OR 0.60, 95CI% 0.42–0.87). Low 25(OH)D3 concentrations were also associated with higher risk of death from any cause among HNC cases. No clear association was seen with risk or survival for oesophageal cancer. Study participants with elevated circulating concentrations of 25(OH)D3 had decreased risk of HNC, as well as improved survival following diagnosis