Stress Tests and Policy

Ten years after the Federal Reserve’s crisis-era bank stress test, it is time to recalibrate the stress tests for “peacetime.” Outside of a crisis, supervisors should tailor stress tests to focus on their comparative advantages by taking a macroprudential focus, with severe scenarios that enable them to learn about emerging risks in both traditional and shadow banking sectors. In peacetime, also, supervisors should emphasize risk- management practices and be wary of forcing rapid changes in capital levels for individual banks, while linking stress-test results with countercyclical capital buffers across the system

Monetization of Fiscal Deficits and COVID-19: A Primer

Monetization—also known as “money-financed fiscal programs” or “money-printing”—occurs when a government finances itself by issuing currency or other non-interest-bearing liabilities, such as bank reserves. It poses real risks—potentially excessive inflation and encroachment on central-bank independence—and some paint it as a relic of a bygone era. The onset of the COVID-19 crisis, however, forced governments to spend heavily to combat the considerable economic and public health impacts. As government deficits climbed, monetization re-entered the conversation as a way to avoid the massive debt burdens that some nations may face. This paper describes how monetization works, provides key historical examples, and examines recent central-bank measures. Based on our definition, much of what many are calling monetization today—in particular, central banks directly buying massive amounts of their own government’s bonds—is not necessarily monetization. To our knowledge, no central bank during the COVID-19 crisis took an action that meets our definition or explicitly stated that it was conducting monetization

Broad-Based Capital Injection Programs

This paper surveys 36 broad-based capital injection (BBCI) programs and attempts to identify some best (and worst) practices. We argue that it is crucial to distinguish between programs implemented during acute (“panic”) and chronic (“debt overhang”) phases of a crisis, where the goals of program design should be different. In an acute phase, programs should be designed to influence the behavior of bank counterparties, while in chronic phases, the focus should be on bank behavior itself. With this framing, we identify seven themes to guide program design, and provide many illustrative examples for the policymaker’s tool kit

Market Liquidity Programs: GFC and Before

The virulence of the Global Financial Crisis of 2007–09 (GFC) was explained in large part by the increased reliance of the global financial system on market-based funding and the lack of preexisting tools to address a disruption in that type of system. This paper surveys market liquidity programs (MLPs), which we define as government interventions in which the key motivation is to stabilize liquidity in a specific wholesale funding market that is under stress. Most of the MLPs surveyed in this paper were launched during and after the GFC, but two pre-GFC MLPs are included. A subsequent survey on MLPs in response to the COVID-19 crisis is forthcoming. MLPs focus on markets that a central bank believes are critical to financial stability. Stress in these markets could be interfering with monetary policy transmission or disrupting the smooth flow of credit to the real economy. MLPs depart from traditional central bank responses to a systemwide liquidity crisis. MLPs have used a variety of techniques that central bankers would typically consider nonstandard for the purpose of promoting liquidity in wholesale funding markets. These include (1) targeted lender-of-last resort activities, (2) lending securities for securities, (3) lending cash for securities, (4) large-scale asset purchases, (5) targeted asset purchases, and (6) indirect asset purchases

Account Guarantee Survey

This paper surveys 27 account guarantee (AG) programs across 14 Key Design Decisions. The main themes that emerge are: (a) the importance of considering the effects of AG programs on other parts of the financial system or other jurisdictions, (b) the ability to address moral hazard through heightened supervision, which removes a potential obstacle to adopting AG programs in response to the acute phase of crises, (c) the necessity of developing guarantees that are credible and timely, and (d) the need to design standing AG programs with an eye toward how they will function during crises

YPFS Lessons Learned Oral History Project: An Interview with Greg Feldberg

Suggested Citation Form: Feldberg, Greg, 2018. “Lessons Learned Interview. Interview by Sandra Ward. Yale Program on Financial Stability Lessons Learned Oral History Project. 13 December 18, 2018. Transcript. https://ypfs.som.yale.edu/library/ypfs-lesson-learned-oral-history-project-interview-greg-feldber

Reserve Requirements Survey

Banks have a private motive to hold some level of cash and liquid reserves, but the negative externalities of bank runs create a public interest in setting a regulatory level higher than the privately optimal level. We can think of such reserve requirements (RRs) as the original form of liquidity regulation. In this paper, we focus on 14 cases in which central banks adjusted RRs after crises hit, typically to deal with liquidity shortages in the banking system. We observe that RR adjustments have several advantages in a crisis: (1) such changes require little process, and the change for banks can be quick; (2) stigma concerns may be much lower than with emergency lending operations; (3) RRs can be used to fine-tune incentives for holding various types and maturities of assets; and (4) RR easing can complement a central bank’s other liquidity support programs

Central Bank Foreign Currency Swaps and Repo Facilities Survey

Central bank swap arrangements gained new importance during the Global Financial Crisis of 2007–09 (GFC) when wholesale funding markets contracted, causing severe liquidity strains. Led by the Federal Reserve, central banks, in their roles as lenders of last resort, redeployed this tool to provide liquidity in their currencies across borders to great effect. Since the GFC, swap arrangements have become key central bank policy tools and have been repeatedly used to address liquidity constraints. In this paper, we survey 67 swap and swap-like repurchase arrangements and frameworks from the 20th and 21st centuries. In addition, we analyze key design decisions of interest to policymakers seeking to design a central bank swap arrangement. We also review structural developments regarding this policy tool, such as the increasing use of repurchase (repo) arrangements in addition to swaps and multilateral regional swap facilities. We conclude that swap arrangements and related repo arrangements have proved an efficient response to liquidity strains, have become a standing tool to enhance the global financial stability safety net, and are likely to see continued use

Bank Debt Guarantee Programs

One of the hallmarks of the global financial crisis of 2007-09 was the rapid evaporation of the non-deposit, wholesale funding many financial institutions had become increasingly reliant upon in the years leading up to the crisis. In the aftermath of the Lehman Brothers bankruptcy, governments became increasingly concerned about even fundamentally sound institutions’ ability to access necessary funding. In response, beginning in October 2008, authorities across the globe began introducing guarantee programs enabling institutions to issue debt that would be backed by a guarantee from the government in exchange for a guarantee fee. While the specific details of these programs varied (sometimes widely in ways that allow for interesting comparisons), some version of this basic idea was implemented by over twenty countries. The programs saw significant use in the aggregate but were not uniformly utilized. They are generally seen as having achieved their objectives but may also in certain circumstances have had unintended consequences such as market distortions based on flawed fee structures and the crowding out of non-guaranteed debt