Author: Russell H. RollowPublisher:
ISBN:
Category : Banks and banking
Languages : en
Pages : 0
Book Description
In my first chapter, I study how the dollar funding fragility of non-US banks amplifies cyclical patterns in their appetite for credit risk. Global banks outside of the United States finance a significant portion of their dollar-denominated lending with uninsured wholesale dollar funding, the price of which rises with the perceived riskiness of the bank. Using data from the syndicated lending market, I examine the risk appetite of non-US global banks when a broad appreciation of the US dollar expands portfolio tail risk and activates value-at-risk constraints. By orthogonalizing errors in professional forecasts of the broad dollar index to other macroeconomic indicators, I show that following such a dollar appreciation, global banks with a heavy dependence on wholesale dollar funding contract cross-border dollar lending to firms with high credit risk, as measured with loan-specific spreads and borrower-specific characteristics. Based on this evidence, I argue that instability in non-US bank funding structures amplifies cyclical patterns in their appetite for credit risk.In my second chapter, I explore how traditional modeling techniques can be applied to produce density forecasts of interest rates. As spikes in economic uncertainty have grown in prevalence, the projection of financial data has become a more arduous task, which has sharpened the focus of investors and policymakers on forecast risk. By integrating a dynamic factor model into a Bayesian framework, I develop a density forecasting model that projects the predictive density of interest rates. Unlike point forecasts, density forecasts produce probability estimates for the full distribution of potential future outcomes of interest rates, as opposed to solely their central tendency. To assess the viability of my forecasting model, I conduct a robust out-of-sample evaluation of the model's performance, finding the model significantly outperforms a competing benchmark autoregressive model, especially when economic uncertainty is high. By examining density forecasts of Treasury yields during the COVID-19 pandemic and the term spread prior to the financial crisis of 2008, I demonstrate the value of the dynamic factor model in expanding the information set available to forward-looking investors and policymakers.In my third chapter, I analyze the impact of the Federal Reserve's adoption of a floor system of monetary policy implementation on the transmission mechanism of changes in the policy rate to US bank balance sheets. Since 2008, in part due to easy monetary policy, United States interest rates have remained at historically low levels. Using US commercial bank call report data, I examine the response of bank profitability and investment to a rise in the rate of interest on reserve balances (IORB). Specifically analyzing the 2015-18 Federal Reserve monetary tightening cycle, I show that, following a rise in the IORB, holding more reserves buffers bank NII growth and asset growth against the adverse effects of a rise in the IORB. Taken together, these results imply that a rise in the policy rate raise profitability for banks with substantial reserve holdings and, when capital constraints bind, expand investment capacity.