www.newyorkfed.org/research ReseResearcharchUUPDATEPDATE federalFederal reserve reserve bank bank of of new new york York ■ ■ Number Number 2, 3, 2012 2009 Research and Statistics Group www.newyorkfed.org/researchwww.newyorkfed.org/research

Two Research Series Examine Recent Changes in Banking n July, the Research Group published a special The five articles that follow explore the idea of volume of the Economic Policy Review (EPR) bank adaptation in more depth, presenting arguments and a companion series of Liberty Street and findings associated with the volume’s emphasis on Economics blog posts on the evolution of intermediation roles and changes in bank structure. Ibanking since the advent of asset securitization. In “The Rise of the Originate-to-Distribute The project came out of discussions within the Model and the Role of Banks in Financial Intermedia- Group about “shadow banks” and their role in the tion,” Vitaly Bord and João Santos show that banks 2007-09 financial crisis. The consensus was that it is indeed play a much more important part in lending no longer obvious what banks really do and to what than what the balance sheet suggests. Moreover, bank extent they are still central to the process of financial actions have actually spurred the growth of shadow intermediation. Getting a better under- banks involved in the subsequent steps of the credit The main finding standing of these issues is important from intermediation chain. of the studies an academic perspective, but the insights Benjamin Mandel, Donald Morgan, and is that financial gained from the exercise could also prove Chenyang Wei next analyze the importance of banks intermediation is in useful in a practical sense for policymakers. in providing credit enhancements. Their study, “The The main finding of the studies is Role of Bank Credit Enhancements in Securitization,” fact less “shadowy” that financial intermediation is in fact less asks why credit enhancement is provided and what than originally “shadowy” than originally thought. Finan- functions it performs. The study suggests that the thought. cial intermediation has changed and grown act of buffering investors to reduce their credit risk more complex, making it more difficult to monitor and regulate. Yet when looked at closely, Also in this issue… regulated banks and bank holding companies (BHCs) have been able to adapt and continue to provide New report recommends ways to strengthen Puerto Rico’s competitiveness ����������������������������3 essential intermediation services. Study proposes a novel capital framework After an introduction outlining the issues, the for banks ����������������������������������������������������������������4 EPR volume offers a survey of the regulatory and Spotlighting our work on the web ���������������������������5 policy decisions that have affected the institutions Top blog posts of Q2 �������������������������������������������������6 and instruments of credit intermediation and helped transform the role of banks in the process. Most downloaded publications �������������������������������7 “Regulation’s Role in Bank Changes,” by Peter Olson, Papers recently published by Research Group economists �����������������������������������������������7 suggests that government action—sometimes unintentionally—has spurred the evolution of Papers presented at conferences ������������������������������8 financial intermediation. Staff Reports: New titles ������������������������������������������10 Publications and blog posts ������������������������������������12 Research UPDATE n Number 2, 2012 exposure is the main motivation behind the provision sources, the study shows that while the number of of credit enhancement in asset securitization. The nonbank subsidiaries has increased significantly since ­authors corroborate the underlying view that banks the 1990s, most of the structural expansion beyond have played a fundamental role in supporting the the traditional boundaries of commercial banking modern intermediation process. has been limited to the largest organizations. This Nicola Cetorelli and Stavros Peristiani, in “The development signifies the presence of important Role of Banks in Asset Securitization,” examine four economies of scale associated with key roles in the credit intermediation chain: issuer, this form of adaptation. When looked at closely, underwriter, trustee, and servicer. They then take a Adam Copeland concludes the regulated banks and “bean-counting” approach to establish the extent to volume with his analysis of “Evolu- bank holding companies which financial intermediation is now occurring “in tion and Heterogeneity among Larger have been able to adapt the shadow”—that is, outside the realm of banks and Bank Holding Companies: 1994 to the scrutiny of regulators. Their evidence suggests 2010.” Copeland tracks the changing and continue to provide that very little securitization-based intermediation is activities of bank holding companies essential intermediation actually in the shadow—much of it remains within by analyzing data on BHC income services. the scope of regulated bank entities. streams. He shows that fee-based The last two articles focus on the idea of bank income has grown in importance across the largest adaptation by looking at the organizational transfor- BHCs, and that nonbank subsidiaries have become mation of banks and the expanding role of BHCs. In a more prominent source of income for the larger “A Structural View of U.S. Bank Holding Companies,” organization. Dafna Avraham, Patricia Selvaggi, and James Vickery You can find the articles at www.newyorkfed.org/ describe the organizational structure and history of research/epr/2012.html; the blog posts are available U.S. bank holding companies. Using a detailed data at libertystreetecono mics.newyorkfed.org/2012/07/ set compiled from relatively obscure regulatory index.html.

federal reserve bank of new york 2 www.newyorkfed.org/research New Report Recommends Ways to Strengthen Puerto Rico’s Competitiveness hile Puerto Rico—part of the The report was prepared at the request of busi- Federal Reserve’s Second Dis- ness and community leaders in Puerto Rico to inves- trict—has shown signs of eco- tigate impediments to economic growth and evaluate nomic expansion, growth is not ways to promote competitiveness The report was prepared Woccurring broadly enough. Many families, commu- and productivity. It identifies nities, and businesses there continue to face difficult important challenges facing Puerto at the request of business conditions. As part of its commitment to promote Rico, such as how to improve labor and community leaders in community development in its District, the New market opportunities, develop Puerto Rico to investigate York Fed is working to help put the Island on a path human capital, and reduce the impediments to economic of robust, sustainable, and inclusive growth. A re- costs of doing business. The report cent publication, “Report on the Competitiveness of also makes policy recommenda- growth and evaluate ways Puerto Rico’s Economy,” reflects that commitment. tions on ways to capitalize on the to promote competitiveness Island’s considerable strengths to and productivity. restore growth—for example, by reducing barriers to job creation and labor force par- ticipation as well as fostering partnerships between industry and higher education. The report is available at www.newyorkfed.org/ regional/puertorico/index.html.

RESEARCH AND STATISTICS GROUP 3 Research UPDATE n Number 2, 2012

Study Proposes a Novel Capital Framework for Banks egulators could strengthen bank capital the financial sector hurt by the failing institution, or structures by implementing a two-part even to support affected parts of the household and capital requirement designed to counter real sectors. Regulators could also save the capital as a banks’ incentives to take on excessive risk buffer against a future crisis. Rand leverage, according to a recent article in Current The framework would discourage risk taking in Issues in Economics and Finance (volume 18, no. 4, two ways. First, it would require banks to increase the “Robust Capital Regulation”). equity in their capital structure. Second, it would mo- As authors Viral Acharya, Hamid Mehran, Til tivate creditors to monitor bank management more Schuermann, and closely, since they would be uninsured against losses Anjan Thakor explain, in the event of a bank collapse. the new capital Te authors suggest The new capital framework framework would that their proposal would consist of a core yield a number of benefits. would consist of a core capital requirement It could bring more capital capital requirement . . . (much like existing into banking and thus and a special capital requirements) and a contribute to the safety and special capital account soundness of the financial account that banks would that banks would sector without requiring create from earnings create from earnings Author Hamid Mehran of the banks to issue new equity. Federal Reserve Bank of New York’s retained by limiting retained by limiting Research and Statistics Group It could also boost bank dividend payouts to dividend payouts to incentives to reduce the shareholders. The earnings, invested in Treasury probability of a crisis and shareholders. securities or their equivalents, would belong to the creditors’ incentives to impose discipline on banks. bank’s shareholders as long as the bank was solvent, Finally, the proposal relies on well-known instru- but would pass to regulators—rather than the bank’s ments, such as equity and retained earnings, rather creditors—if the bank failed. In the latter event, regu- than new instruments whose pricing characteristics lators could use the securities to assist components of and market impact might be hard to gauge. n

federal reserve bank of new york 4 www.newyorkfed.org/research Spotlighting Our Work on the Web n June, we introduced a web series, Research Investor Share of Nonprime Topics in Focus, to brief readers on work of Mortgage Borrowing Our research indicates that the share of speculative buyers active in the academic and public-policy interest. The first run-up in housing prices is much larger than previously understood. article pulled together publications by our Percent economists on “The Dynamics of Housing Prices,” I 50 including staff reports and Liberty Street Economics United States 40 Measured using blog posts by Andrew Haughwout, Donghoon Lee, new CCP data 30 Joseph Tracy, Wilbert van der Klaauw, Marco Measured using Cipriani, Andrea Ferrero, and Richard Peach. 20 self-reported data The Research Topics series grew out of an 10

interview with Haughwout, in which he reviewed 0 the scope of New York Fed research on housing and 50 “Bubble” States 40 Measured using asset-price bubbles and highlighted insights that were new CCP data made possible with a relatively new data source, the 30 Measured using FRBNY Consumer Credit Panel (CCP). The interview 20 self-reported data

featured a key graphic from a recent study in our Staff 10

Reports series, “Real Estate Investors, the Leverage 0 Cycle, and the Housing Market Crisis,” revealing that 2000 2001 2002 2003 2004 2005 2006 2007

estimates of the share of speculative investors active Source: FRBNY Consumer Credit Panel, 1 percent sample. in the housing bubble made using CCP data were The Research Topics series will continue to sharply higher than the recognized share (see chart). ­offer insights into topics of interest to academics and Haughwout commented on the significance of this policy professionals. Visit www.newyorkfed.org/ finding as well as on ways to advance the research. research/research_topics_archive.html.

Publications and Other Media

n The Economic Policy Review—a policy-oriented journal focusing on economic and financial market issues.

n EPR Executive Summaries—online versions of selected Economic Policy Review articles, in abridged form.

n Current Issues in Economics and Finance—concise studies of topical economic and financial issues.

n Second District Highlights—a regional supplement to Current Issues.

n Staff Reports—technical papers intended for publication in leading economic and finance journals, available only online.

n Publications and Other Research—an annual catalogue of our research output.

n Liberty Street Economics—a blog that enables our economists to engage with the public on important economic issues quickly and frequently.

RESEARCH AND STATISTICS GROUP 5 Research UPDATE n Number 2, 2012

Top Blog Posts of Q2

ur Liberty Street Economics blog n “How Low Will the Unemployment Rate Go?” by publishes on economic topics twice a Jonathan McCarthy, Simon Potter, and Ayşegül week—more frequently when there is a Şahin, April 2 – 2,644 downloads post on a newly released report or on a In the concluding post of the blog’s labor Opressing topic. market series, the authors run simulations based on the movements in the outflow and inflow rates of Listed below are the top five posts in the second the previous three economic expansions to deter- quarter. mine the effect on the unemployment rate if the n “Grading Student Loans,” by Meta Brown, Andrew current expansion lasts as long as any of the previous ones. Haughwout, Donghoon Lee, Maricar Mabutas, and Wilbert van der Klaauw, March 5 – n “What’s Driving Up Money Growth?” by Jamie 11,211 downloads McAndrews, Donald Morgan, and James Vickery, The authors examine the overall student loan May 23 – 2,618 downloads debt market as of third-quarter 2011, giving The authors show that they can attribute most, particular attention to changes from the second to but not all, of the recent high money growth rate of the third quarter and highlighting new findings by monetary aggregate M1 to low current interest rates age group. as well as the growth in bank reserves that has resulted from the Fed’s asset purchase programs. n “Historical Echoes: We Are the 99 Percent, 1765 Edition,” by Kara Masciangelo and Jamie n “The Great Moderation, Forecast Uncertainty, and McAndrews, April 13 – 6,705 downloads the Great Recession,” by Ging Cee Ng and Andrea Masciangelo and McAndrews look back to the Tambalotti, May 14 – 2,533 downloads 1760s, when an economic downturn caused a great Ng and Tambalotti attempt to quantify the role deal of hardship for most of the residents of New the Great Moderation played in making the Great York, and conspicuous shows of extreme wealth by Recession appear nearly impossible in the eyes the few were met with disapproval. of macroeconomists. The blog posts are available at: http://libertystreeteconomics.newyorkfed.org/.

Follow Us on Twitter!

The Research Group has a Twitter feed, designed to offer the first word on news going on in the Group, such as:

n new publications and blog posts,

n updates on economists’ work and speaking engagements,

n postings of key indexes and data,

n media coverage of the Group’s work. Follow us at @NYFedResearch.

federal reserve bank of new york 6 www.newyorkfed.org/research

Most Downloaded Publications isted below are the most sought-after SSRN website, second-quarter 2012: Research Group articles and papers from the n “Determinants and Impact of Sovereign Credit New York Fed’s website and from the Ratings,” by Richard Cantor and Frank Packer Bank’s page on the Social Science Research (Economic Policy Review, vol. 2, no. 2, Network site (www.ssrn.com/link/FRB-New-York.html). L October 1996) – 292 downloads New York Fed website, second-quarter 2012: n “The Corporate Governance of Banks,” by n “Shadow Banking,” by Zoltan Pozsar, Tobias Adrian, Jonathan R. Macey and Maureen O’Hara Adam Ashcraft, and Hayley Boesky (Staff Reports, (Economic Policy Review, vol. 9, no. 1, no. 458, July 2010) – 7,293 downloads April 2003) – 242 downloads

n “Understanding the Securitization of Subprime n “Corporate Governance and Banks: What Have Mortgage Credit,” by Adam Ashcraft and We Learned from the Financial Crisis?” by Hamid Til Schuermann (Staff Reports, no. 318, Mehran, Alan Morrison, and Joel Shapiro (Staff March 2008) – 4,178 downloads Reports, no. 502, June 2011) – 194 downloads

n “Shadow Banking Regulation,” by Tobias Adrian For lists of the top-ten downloads, visit and Adam Ashcraft (Staff Reports, no. 559, www.newyorkfed.org/research/top_downloaded/ April 2012) – 3,731 downloads topdownloads.html.

Recently Published Jaison Abel. 2012. “Knowledge in Cities,” with Todd Emanuel Moench. 2012. “Term Structure Surprises: Gabe, Adrienne Ross, and Kevin Stolarick. Urban The Predictive Content of Curvature, Level, and Studies 49, no. 6 (May): 1179-200. Slope.” Journal of Applied Econometrics 27, no. 4 (June/July): 574-602. Jaison Abel and Richard Deitz. 2012. “Do Colleges and Universities Increase Their Region’s Human Paolo Pesenti. 2012. Comment on “Firm Hetero- Capital?” Journal of Economic Geography 12, no. 2 geneity, Endogenous Entry, and the Business Cycle,” (May): 667-91. by Gianmarco Ottaviano. In Jeffrey Frankel and Christopher Pissarides, eds., NBER International Meta Brown. 2012. “A New Test of Borrowing Con- Seminar on Macroeconomics 2011. Chicago: straints for Education,” with John Karl Scholz and University of Chicago Press. Ananth Seshadri. Review of Economic Studies 79, no. 2 (April): 511-38. Tanju Yorulmazer. 2012. “Imperfect Competition in the Interbank Market for Liquidity as a Rationale Nicola Cetorelli and Linda Goldberg. 2012. “Follow for Central Banking,” with Viral Acharya and the Money: Quantifying Domestic Effects of For- Denis Gromb. American Economic Journal: eign Bank Shocks in the Great Recession.” American Macroeconomics 4, no. 2 (April): 184-217. Economic Review: Papers and Proceedings 102, no. 3 (May): 213-8. Basit Zafar. 2012. “Double Majors: One for Me, One for Mom and Dad?” Economic Inquiry 50, no. 2 (April): 287-308. n

RESEARCH AND STATISTICS GROUP 7 Research UPDATE n Number 2, 2012

Papers Presented “The Gender Unemployment Gap,” Stefania Albanesi. Nobuhiro Kiyotaki. Also presented at the Paris School Ninth New York–Philadelphia Workshop on Quanti- of Economics, Paris, France, April 12, and the Four- tative Macroeconomics, New York City, May 4. With teenth Annual Inflation Targeting seminar, Central Ayşegül Şahin. Bank of Brazil, Rio de Janeiro, Brazil, May 11. “Maternal Health and Fertility: An International “Rare Shocks, Great Recessions,” Marco Del Negro. Perspective,” Stefania Albanesi. NBER Cohort Studies Bank of France conference, Paris, France, April 10. Meeting, Cambridge, Massachusetts, April 13. Also With Vasco Cúrdia and Daniel Greenwald. presented at the City University of New York Institute “Anxiety in the Face of Risk,” Thomas Eisenbach. for Demographic Research seminar, New York City, Conference on “People and Money 2012: The Human April 20. Factor in Financial Decision Making,” DePaul Univer- “Optimal Taxation of Entrepreneurial Capital with sity, Chicago, Illinois, June 1. With Martin Schmalz. Private Information,” Stefania Albanesi. NBER Trans- “House Price Booms, Current Account Deficits, and Atlantic Public Economics Seminar on Business Taxation, Low Interest Rates,” Andrea Ferrero. Georgetown University of Oxford, Oxford, England, June 21. Also University seminar, Washington, D.C., April 27. presented at the Society for Economic Dynamics Annual Meeting, Limassol, Cyprus, June 24. “Liquidity Management of U.S. Global Banks,” Linda Goldberg. Graduate Center of the City University “Have Financial Markets Become More Informative?” of New York seminar, New York City, May 1. With Jennie Bai. Society for Economic Dynamics Annual Nicola Cetorelli. Also presented at the Workshop on Meeting, Limassol, Cyprus, June 24. With Alexi Savov Financial Globalization, Financial Crises, and the and Thomas Philippon. (Re-) Regulation of Banking, University of Zurich, “Student Loan Balance and Repayment Trends in the Zurich, Switzerland, May 15. FRBNY Consumer Credit Panel,” Meta Brown and “Perspectives on Financial Interconnectedness and Donghoon Lee. Financing Human Capital, Credit Cooperation,” Linda Goldberg. Remarks delivered Constraints, and Market Frictions Workshop, spon- at the Swiss National Bank–International Monetary sored by the University of Chicago’s Becker Friedman Fund Conference, Zurich, Switzerland, May 9. Institute for Research in Economics, Chicago, Illinois, June 6. “The Record of Cross-Border Banking in Emerging Markets,” Linda Goldberg. Conference on “The End “Vouchers, Responses, and the Test-Taking Popu- of Cross-Border Banking in Emerging Markets?” lation: Regression Discontinuity Evidence from cosponsored by the European Bank for Reconstruc- Florida,” Rajashri Chakrabarti. Columbia University tion and Development, the Group of Twenty, and the seminar, New York City, April 19. Reinventing Bretton Woods Committee, London, “DSGE Model-Based Forecasting,” Marco Del Negro. England, May 17. European Center for Advanced Research in Econom- “Bailouts and Financial Fragility,” Todd Keister. ics and Statistics seminar, Brussels, Belgium, April 5. 2012 Shanghai Macroeconomics Workshop, With Frank Schorfheide. Shanghai University of Finance and Economics, “The Great Escape? A Quantitative Evaluation of the Shanghai, China, June 10. Fed’s Non-Standard Policies,” Marco Del Negro. Bank of Belgium conference, Brussels, Belgium, April 6. With Gauti Eggertsson, Andrea Ferrero, and

federal reserve bank of new york 8 www.newyorkfed.org/research

“Fundamentals: Does the Cause of Banking Panics Korea, June 20. With Giancarlo Corsetti and Matter for Prudential Policy?” Todd Keister. Philippe Martin. 2012 Midwest Macroeconomics Meetings, University “The Measurement and Behavior of Uncertainty: of Notre Dame, South Bend, Indiana, May 12. With Evidence from the ECB Survey of Professional Fore- Vijay Narasiman. casters,” Robert Rich. 2012 Midwest Macroeconomics “Financial Intermediation, Asset Prices, and Macro- Meetings, University of Notre Dame, South Bend, economic Dynamics,” Emanuel Moench. Organisa- Indiana, May 11. With Joseph Song and Joseph Tracy. tion for Economic Co-operation and Development “Inflation Expectations and Behavior: Do Survey seminar, Paris, France, May 21. With Tobias Adrian Respondents Act on Their Beliefs?” Wilbert van der and Hyun Song Shin. Klaauw. University College London seminar, London, “The Pre-FOMC Announcement Drift,” Emanuel England, May 23. With Olivier Armantier, Wandi Moench. Deutsche Bundesbank seminar, Frankfurt, Bruine de Bruin, Giorgio Topa, and Basit Zafar. Also Germany, May 18. With David Lucca. Also presented presented at a Bank of England seminar, London, at the Bank of France, Paris, France, May 22, a Uni- England, May 25, and the Society for Economic Dy- versity of Bonn seminar, Bonn, Germany, May 24, and namics Annual Meeting, Limassol, Cyprus, June 24. a Swiss National Bank seminar, Zurich, Switzerland, “How Does Risk Management Influence Production June 1. Decisions? Evidence from a Field Experiment,” James “Theoretical Notes on Commodity Prices and Mone- Vickery. NBER Universities Research Conference on tary Policy,” Paolo Pesenti. Bank for International “Insurance Markets and Catastrophe Risk,” Cambridge, Settlements research workshop on “Globalization Massachusetts, May 11. With Shawn Cole and and Inflation Dynamics in Asia and the Pacific,” Xavier Giné. Hong Kong, China, June 18. “Determinants of College Major Choice: Identifica- “Varieties and the Transfer Problem,” Paolo Pesenti. tion Using an Information Experiment,” Basit Zafar. Fifteenth Korean Eco omic Association International Ohio State University Department of Economics Conference on “Prospects for the Future: Shaping seminar, Columbus, Ohio, May 24. n New Approaches and Issues in Economics,” Seoul,

RESEARCH AND STATISTICS GROUP 9 Research UPDATE n Number 2, 2012

New Titles in the Staff Reports Series Macroeconomics and Growth in their sample at the baseline. The authors find that revised attitudes are, on average, significantly different No. 560, May 2012 How “Unconventional” Are Large-Scale Asset from baseline attitudes, indicating that providing in- Purchases? The Impact of Monetary Policy formation had a meaningful effect on U.S. favorability. on Asset Prices Observed revisions are a consequence of both the sa- Carlo Rosa lience of already known information and information This paper examines the impact of large-scale asset acquisition that leads to a convergence in attitudes purchases (LSAPs) on U.S. asset prices using an event across respondents with different priors. This analy- study with intraday data. Estimation results show that sis provides evidence that 1) public opinions are not the LSAP news has economically large and highly purely a cultural phenomenon and are malleable, and significant effects on asset prices, even after control- 2) the tendency of respondents to ignore information ling for the surprise component of the Fed’s conven- not aligned with their priors can be overcome. These tional target rate decision and communication about findings make the case for dissemination of accurate its future path of policy. The study documents that the information about various aspects of the Pakistan- cumulative financial market impact of the Fed’s LSAP U.S. relationship in order to improve opinion about program is equivalent to an unanticipated cut in the the United States. federal funds target rate that ranges between zero (for No. 562, June 2012 three-month yields) and 197 basis points (for ten-year Payment Changes and Default Risk: The Impact of yields), with the response of stock prices and foreign Refinancing on Expected Credit Losses exchanges lying within this interval. These point Joseph Tracy and Joshua Wright estimates are, however, surrounded by considerable This paper analyzes the relationship between changes uncertainty. By looking at the cross-asset reactions, in borrowers’ monthly mortgage payments and future Rosa concludes that, for most U.S. asset prices, the credit performance. This relationship is important effects of asset purchases are not statistically different for the design of an internal refinance program such from an unanticipated cut in the fed funds target rate. as the Home Affordable Refinance Program (HARP). Tracy and Wright use a competing risk model to es- Microeconomics timate the sensitivity of default risk to downward ad- No. 558, April 2012 justments of borrowers’ monthly mortgage payments How Deeply Held Are Anti-American Attitudes for a large sample of prime adjustable-rate mortgages. among Pakistani Youth? Evidence Using Applying a 26 percent average monthly payment Experimental Variation in Information Adeline Delavande and Basit Zafar reduction that they estimate would result from refi- nancing under HARP, the authors find that the This paper investigates how attitudes toward the cumulative five-year default rate on prime conforming United States are affected by the provision of informa- adjustable-rate mortgages with loan-to-value ratios tion. Delavande and Zafar use an experimentally gen- above 80 percent declines by 3.8 percentage points. erated panel of attitudes, obtained by providing urban If they assume an average loss given a default of Pakistanis with fact-based statements describing the 35.2 percent, this lower default risk implies reduced United States in either a positive or negative light. credit losses of 134 basis points per dollar of balance Anti-American sentiment is high and heterogeneous for mortgages that refinance under HARP.

federal reserve bank of new york 10 www.newyorkfed.org/research

Banking and Finance No. 561, May 2012 Estimating a Structural Model of Herd Behavior in No. 559, April 2012 Financial Markets Shadow Banking Regulation Marco Cipriani and Antonio Guarino Tobias Adrian and Adam B. Ashcraft Cipriani and Guarino develop a new methodology Shadow banks conduct credit intermediation without for estimating the importance of herd behavior in direct, explicit access to public sources of liquidity financial markets. Specifically, they build a structural and credit guarantees. The banks contributed to the model of informational herding that can be estimated credit boom in the early 2000s and collapsed during with financial transaction data. In the model, rational the financial crisis of 2007-09. Adrian and Ashcraft herding arises because of information-event uncer- review the rapidly growing literature on shadow tainty. The authors estimate the model using 1995 banking and provide a conceptual framework for its stock market data for Ashland Inc., a company listed regulation. Since the financial crisis, regulatory re- on the New York Stock Exchange. Herding occurs form efforts have aimed at strengthening the stability often and is particularly pervasive on certain days. On of the shadow banking system. They review the im- an information-event day, on average, 2 percent plications of these reform efforts for shadow funding (4 percent) of informed traders herd-buy (-sell). On sources, including asset-backed commercial paper, 7 percent (11 percent) of information-event days, the tri-party repurchase agreements, money market proportion of informed traders who herd-buy (-sell) mutual funds, and securitization. Despite significant is greater than 10 percent. Herding causes important efforts by lawmakers, regulators, and accountants, the informational inefficiencies, amounting, on average, authors find that progress in achieving a more stable to 4 percent of an asset’s expected value. n shadow banking system has been uneven.

RESEARCH AND STATISTICS GROUP 11 Research UPDATE n Number 2, 2012 Research and Statistics Group Publications and Blog Posts Publications are available at www.newyorkfed.org/ Liberty Street Economics research/publication_annuals/index.html. Blog Economic Policy Review, The blog posts are available at FORTHCOMING http://libertystreeteconomics.newyorkfed.org/. The Federal Reserve’s Term Asset-Backed Securities April 2 Loan Facility How Low Will the Unemployment Rate Go? Adam Ashcraft, Allan Malz, and Zoltan Pozsar Jonathan McCarthy, Simon Potter, and Ayşegül Şahin

Current Issues in Economics April 4 and Finance, Vol. 18 Corridors and Floors in Monetary Policy Todd Keister No. 3 The Evolution of Treasury Cash Management April 6 during the Financial Crisis Historical Echoes: Fed Chairman or Rock Star? Paul J. Santoro When Arthur Burns Made Rolling Stone Amy Farber No. 4 Robust Capital Regulation April 9 Viral Acharya, Hamid Mehran, Til Schuermann, and Innovations in Treasury Debt Instruments Anjan Thakor Kenneth Garbade Staff Reports April 11 The European Growth Outlook and Its Risks No. 558, April 2012 Joshua Abel, Robert Rich, and Joseph Tracy How Deeply Held Are Anti-American Attitudes among Pakistani Youth? Evidence Using April 13 Experimental Variation in Information Historical Echoes: We Are the 99 Percent, Adeline Delavande and Basit Zafar 1765 Edition Kara Masciangelo and Jamie McAndrews No. 559, April 2012 Shadow Banking Regulation April 16 Tobias Adrian and Adam B. Ashcraft The Federal Reserve in the 21st Century 2012 Symposium No. 560, May 2012 Eric Tucker How “Unconventional” Are Large-Scale Asset Purchases? The Impact of Monetary Policy Forecasting the Great Recession: on Asset Prices DSGE vs. Blue Chip Carlo Rosa Marco Del Negro, Daniel Herbst, and Frank Schorfheide No. 561, May 2012 Estimating a Structural Model of Herd Behavior in April 30 Financial Markets The Impact of Trade Reporting on the Interest Rate Marco Cipriani and Antonio Guarino Derivatives Market Michael Fleming, John Jackson, Ada Li, Asani Sarkar, No. 562, June 2012 and Patricia Zobel Payment Changes and Default Risk: The Impact of Refinancing on Expected Credit Losses May 2 Joseph Tracy and Joshua Wright Euro Area Spending Imbalances and the Sovereign Debt Crisis Matthew Higgins and Thomas Klitgaard federal reserve bank of new york 12 www.newyorkfed.org/research

May 4 May 30 Historical Echoes: Pneumatic Tubes and Banking Are CDS Derivatives Associated with Higher Amy Farber Corporate Defaults? Stavros Peristiani May 7 The Flash Crash, Two Years On Just Released: Regional Economic Press Briefing on Adam Biesenbach and Marco Cipriani Job Polarization and Rising Inequality Jaison R. Abel and Richard Deitz May 9 A Boost in Your Paycheck: How Are U.S. Workers June 1 Using the Payroll Tax Cut? Historical Echoes: The Symbolism of the Bull and Basit Zafar, Grant Graziani, and the Bear Wilbert van der Klaauw Amy Farber

May 11 June 4 Just Released: The New York Fed Staff Forecast— Is the 2005 Bankruptcy Reform Working? May 2012 Donald Morgan Jonathan McCarthy, Richard Peach, and Simon Potter June 6 May 14 Is Wall Street the Only Street in New York City? The Great Moderation, Forecast Uncertainty, and Jason Bram, Jonathan Hastings, and James Orr the Great Recession Just Released: New York’s Latest Beige Book Report Ging Cee Ng and Andrea Tambalotti Signals Steady Growth May 16 Jaison Abel and Jason Bram The Private Premium in Public Bonds? June 8 Anna Kovner and Chenyang Wei Historical Echoes: When Fed Officials Wax Poetic May 18 Amy Farber Historical Echoes: Our Checking Accounts, Ourselves—Or, Say Good Night, Gracie’s June 11 Checking Account Money Market Funds and Systemic Risk Amy Farber Marco Cipriani, Michael Holscher, Antoine Martin, and Patrick McCabe May 21 Just Released: The Euro-Zone Growth Outlook— June 25 Calm before the Storm? Mapping and Sizing the U.S. Repo Market Joshua Abel, Robert Rich, and Joseph Tracy Adam Copeland, Isaac Davis, Eric LeSueur, and Antoine Martin What Falling Export Share Says about U.S. Export Competitiveness June 27 Benjamin R. Mandel Fiscal Drag from the State and Local Sector? Nora Fitzpatrick, Andrew Haughwout, and May 23 Elizabeth Setren What’s Driving Up Money Growth? Jamie McAndrews, Donald Morgan, and June 29 James Vickery Historical Echoes: A Water Machine that Simulates the Economy May 25 Amy Farber Historical Echoes: From the Bonfires to the Frozen Assets Mary Tao

RESEARCH AND STATISTICS GROUP 13