Latest from the OFR

Analysis

Financial Markets Monitor

May 21, 2015

The Sell-off in Long-term Bonds

The Sell-off in Long-term Bonds

Over the last month, long-term euro area bonds experienced a sharp sell-off, leading to outsized moves in other major global bonds, including U.S. Treasuries. The sell-off reflects a partial unwinding of the euro area “QE trade,” in which investors established sizable positions in euro area bonds, equities, and the euro in response to the European Central Bank’s expanded asset-purchase program.

Analysis

Working Papers

May 13, 2015

The Influence of Systemic Importance Indicators on Banks’ Credit Default Swap Spreads

The Influence of Systemic Importance Indicators on Banks’ Credit Default Swap Spreads

By Jill Cetina and Bert Loudis

This paper examines credit default swap (CDS) spreads in a sample of international banks for evidence of a benefit related to possible measures of systemic importance. The authors find a consistent, statistically significant negative relationship between five-year CDS spreads of banks and nine different systemic importance indicators. The paper shows that the benefit is most pronounced for banks within a certain asset range. Such evidence is weaker for banks identified by regulators as global systemically important banks.

Analysis

Working Papers

May 13, 2015

Are the Borrowing Costs of Large Financial Firms Unusual?

Are the Borrowing Costs of Large Financial Firms Unusual?

By Javed Ahmed, Christopher Anderson, and Rebecca Zarutskie

This paper examines evidence of a too-big-to-fail subsidy for large financial firms by comparing borrowing costs of large and small firms across industries. The paper finds that larger firms borrow more cheaply in many industries, and this size effect is often largest in nonfinancial industries. These results challenge the notion that expected government bailouts are behind borrowing cost advantages enjoyed by the largest financial firms.

News & Events

From the Management Team

May 07, 2015

OFR Working Papers Take New Approaches to Evaluating Central Counterparty Risks

OFR Working Papers Take New Approaches to Evaluating Central Counterparty Risks

By Greg Feldberg

The OFR released two working papers today that focus on the potential risks of central clearing of over-the-counter derivative transactions.

Analysis

Working Papers

May 07, 2015

Systemic Risk: The Dynamics under Central Clearing

Systemic Risk: The Dynamics under Central Clearing

By Agostino Capponi, W. Allen Cheng, and Sriram Rajan

This paper develops a model for concentration risks that clearing members pose to central counterparties. Over time, larger clearing members crowd out smaller clearing members. Systemic risk is created because high clearing member concentration results in relatively lower lending, higher cost of capital, and increasingly costly hedging. To address this risk, the paper proposes a self-funding systemic risk charge.

Analysis

Working Papers

May 07, 2015

Hidden Illiquidity with Multiple Central Counterparties

Hidden Illiquidity with Multiple Central Counterparties

By Paul Glasserman, Ciamac C. Moallemi, and Kai Yuan

This paper focuses on the systemic risks in markets cleared by multiple central counterparties (CCPs). Each CCP charges margins based on the potential impact from the default of a clearing member and subsequent liquidation of a large position. Swaps dealers can split their positions among multiple CCPs, effectively “hiding” potential liquidation costs. A lack of coordination among CCPs can lead to a “race to the bottom” because CCPs with lower perceived liquidation costs can drive competitors out of the market.

Analysis

Working Papers

May 07, 2015

The Effect of Negative Equity on Mortgage Default: Evidence from HAMP PRA

The Effect of Negative Equity on Mortgage Default: Evidence from HAMP PRA

By Therese C. Scharlemann and Stephen H. Shore

This paper uses data from the Home Affordable Modification Program to examine the impact of principal forgiveness on mortgage default. On average 3.1 percent of loans become delinquent and exit the program each quarter. The authors estimate that the rate would have been 3.8 percent absent principal forgiveness, which averaged 28 percent of the initial mortgage balance.

News & Events

From the Management Team

May 05, 2015

Paper Funded by OFR Grant Examines High-Frequency Trading and Large Datasets

By Greg Feldberg

A recent paper funded by the OFR through its joint grant program with the National Science Foundation offers insights into the impact on the financial system of high-frequency trading, contributes to developing technologies for working with large datasets, and fosters understanding of market liquidity.

Analysis

Financial Markets Monitor

April 27, 2015

The Puzzle of Low U.S. Treasury Yields

The Puzzle of Low U.S. Treasury Yields

Yields on long-term bonds in advanced economies are at historically low levels. Several factors appear to be at work. While financial stability risks currently appear moderate, a persistence of low long-term Treasury yields could lead to a buildup of such risks if it encourages excessive borrowing or investor risk-taking.