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Which Poor Neighborhoods Experienced Income Growth in Recent Decades?

April 18, 2014 Comments off

Which Poor Neighborhoods Experienced Income Growth in Recent Decades?
Source: Federal Reserve Bank of Cleveland

Why has average income grown in some poor neighborhoods over the past 30 years and not in others? We explore that question and find that low-income neighborhoods that experienced large improvements in income over the past three decades tended to be located in large, densely populated metro areas that grew in income and population. Residential sorting—changes in population and demographics within neighborhoods—could help to explain this relationship.

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Competition in lending and credit ratings

April 14, 2014 Comments off

Competition in lending and credit ratings
Source: Federal Reserve Board

This article relates corporate credit rating quality to competition in lending between the public bond market and banks. In the model, the monopolistic rating agency’s choice of price and quality leads to an endogenous threshold separating low-quality bank-dependent issuers from higher-quality issuers with access to public debt. In a baseline equilibrium with expensive bank lending, this separation across debt market segments provides information, but equilibrium ratings are uninformative. A positive shock to private (bank) relative to public lending supply allows banks to compete with public lenders for high-quality issuers, which threatens rating agency profits, and informative ratings result to prevent defection of high-quality borrowers to banks. This prediction is tested by analyzing two events that increased the relative supply of private vs. public lending sharply: legislation in 1994 that reduced barriers to interstate bank lending and the temporary shutdown of the high-yield bond market in 1989. After each event, the quality of ratings (based on their impact on bond yield spreads) increased for affected issuers. The analysis suggests that strategic behavior by the rating agency in an issuer-pays setting dampens the influence of macroeconomic shocks, and explains the use of informative unsolicited credit ratings to prevent unrated bond issues, particularly during good times. Additionally, the controversial issuer-pays model of ratings leads to more efficient outcomes than investor-pays alternatives.

Payment Choice and the Future of Currency: Insights from Two Billion Retail Transactions

April 14, 2014 Comments off

Payment Choice and the Future of Currency: Insights from Two Billion Retail Transactions
Source: Federal Reserve Bank of Richmond

This paper uses transaction-level data from a large discount chain together with zip-code-level explanatory variables to learn about consumer payment choices across size of transaction, location, and time. With three years of data from thousands of stores across the country, we identify important economic and demographic effects; weekly, monthly, and seasonal cycles in payments, as well as time trends and significant state-level variation that is not accounted for by the explanatory variables. We use the estimated model to forecast how the mix of consumer payments will evolve and to forecast future demand for currency. Our estimates based on this large retailer, together with forecasts for the explanatory variables, lead to a benchmark prediction that the cash share of retail sales will decline by 2.54 percentage points per year over the next several years.

Community Bank Performance: How Important are Managers?

April 10, 2014 Comments off

Community Bank Performance: How Important are Managers?
Source: Federal Reserve Board

Community banks have long played an important role in the U.S. economy, providing loans and other financial services to households and small businesses within their local markets. In recent years, technological and legal developments, as well as changes in the business strategies of larger banks and non-bank financial service providers, have purportedly made it more difficult for community banks to attract and retain customers, and hence to survive. Indeed, the number of community banks and the shares of bank branches, deposits, banking assets, and small business loans held by community banks in the U.S. have all declined substantially over the past two decades. Nonetheless, many community banks have successfully adapted to their changing environment and have continued to thrive. This paper uses data from 1992 through 2011 to examine the relationships between community bank profitability and various characteristics of the banks and the local markets in which they operate. Bank characteristics examined include size, age, ownership structure, management quality, and portfolio composition; market characteristics include population, per capita income, unemployment rate, and banking market structure. We find that community bank profitability is strongly positively related to bank size; that local economic conditions have significant effects on bank profitability; that the quality of bank management matters a great deal to profitability, especially during times of economic stress; and that small banks that make major shifts to their lending portfolios tend to be less profitable than other small banks. Variables within managers’ control account for between 70 percent and 96 percent of the total explanatory power of equations explaining variations in performance across community banks.

FRB Atlanta — Econ South – First Quarter 2014

April 8, 2014 Comments off

Econ South – First Quarter 2014
Source: Federal Reserve Bank of Atlanta

The Economic Plight of Millennials
The millennial generation is entering the labor force with one trait in common: they watched as the Great Recession dramatically reshaped the landscape of employment, housing, and their overall expectations. How profoundly will the economic downturn and its associated effects mark this generation?

How We Pay: Results from the Federal Reserve’s Latest Payments Study
Changes in technology have affected not only how people live and work, they have also affected how individuals and businesses pay for goods and services. The Federal Reserve’s most recent triennial study of the payments system highlights a number of shifts in this dynamic arena.

Changing Channels: The Evolving Face of Media in the Southeast
New digital devices and enhanced technology have given consumers a feast of content to consume. Although consumers are the clear winners in this new media landscape, regional players in the communications field are scrambling to remain in the game.

Tips from TIPS: the informational content of Treasury Inflation-Protected Security prices

April 8, 2014 Comments off

Tips from TIPS: the informational content of Treasury Inflation-Protected Security prices
Source: Federal Reserve Board

TIPS are notes and bonds issued by the U.S. Treasury with coupons and principal payments indexed to inflation. Using no-arbitrage term structure models, we show that TIPS yields contained liquidity premiums as large as 100 basis points when TIPS were first issued, reflecting the newness of the instrument, and up to 350 basis points during the recent financial crisis, reflecting common funding constraints affecting a variety of financial markets. Applying our models to the U.K. data also reveals liquidity premiums in index-linked gilt yields that spiked to nearly 250 basis points at the height of the crisis. Ignoring TIPS liquidity premiums is shown to significantly distort the information content of TIPS yields and TIPS breakeven inflation rate, two widely-used empirical proxies for real rates and expected inflation.

The Effect of Large Investors on Asset Quality: Evidence from Subprime Mortgage Securities

April 4, 2014 Comments off

The Effect of Large Investors on Asset Quality: Evidence from Subprime Mortgage Securities
Source: Federal Reserve Bank of Atlanta

This paper examines how the government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac, the largest investors in subprime private-label mortgage-backed securities (PLS), influenced the risk characteristics and prices of the deals in which they participated. To identify the causal effect of the GSEs, we use the fact that PLS deals in which Fannie Mae and Freddie Mac purchased securities included separate mortgage pools: one specifically created for the GSEs and one or more others directed at other triple-A investors. Using within-deal variation, we find that the pools bought by Fannie Mae and Freddie Mac had similar ex-ante risk characteristics but performed much better ex-post relative to other mortgage pools in the same deals. These effects were concentrated in low-documentation loans and in issuers that were highly dependent on Fannie Mae and Freddie Mac. Our results extend the importance of disciplining effects of large claimholders beyond information-sensitive securities, such as equities and bank debt, to information-insensitive arm’s-length debt.

Growing Risk in the Insurance Sector

April 3, 2014 Comments off

Growing Risk in the Insurance Sector
Source: Federal Reserve Bank of Minneapolis

The financial crisis of 2008 exposed important vulnerabilities in the banking sector. In its aftermath, considerable academic effort has been devoted to better understanding banking risks, and policymakers around the world are developing new regulations to contain those risks.

Our recent and ongoing work shows that there are also important risks in the insurance sector. Although these risks have been growing rapidly over the past 15 years, they have received relatively little attention from academics and regulators. If unaddressed, these risks could cause severe problems. Insurance is a large share of the financial sector. For example, U.S. life insurance liabilities amounted to $4.1 trillion in 2012, compared to $7 trillion in U.S. savings deposits. Moreover, as the largest institutional investors in the corporate bond market, insurance companies serve an important role in real investment and economic activity.

We begin this note by describing the growing risks and highlight some early symptoms, based on evidence during the financial crisis. We follow with a discussion of possible economic consequences of trouble in the insurance sector. Finally, we highlight points of attention for policymakers and discuss recent developments in global insurance markets.

FRB OIG — The CFPB Can Improve the Efficiency and Effectiveness of Its Supervisory Activities

April 3, 2014 Comments off

The CFPB Can Improve the Efficiency and Effectiveness of Its Supervisory Activities (PDF)
Source: Federal Reserve Board, Office of Inspector General

Since it began operations in July 2011, the CFPB has made significant progress toward developing and implementing a comprehensive supervision program for depository and nondepository institutions. The agency has implemented this program on a nationwide basis across its four regional offices. While we recognize the considerable efforts associated with the initial development and implementation of the program, we believe that the CFPB can improve the efficiency and effectiveness of its supervisory activities.

Specifically, we found that the CFPB needs to (1) improve its reporting timeliness and reduce the number of examination reports that have not been issued, (2) adhere to its unequivocal standards concerning the use of standard compliance rating definitions in its examination reports, and (3) update its policies and procedures to reflect current practices.

We completed our fieldwork in October 2013, using data as of July 31, 2013. Following the completion of our fieldwork, senior CFPB officials indicated that management has taken various measures to address certain findings in our report, including streamlining the report review process and reducing the number of examination reports that have not been issued. As part of our future follow-up activities, we will assess whether these actions, as well as the planned actions described in management’s response, address our findings and recommendations.

Brazil — Bank Ownership, Lending, and Local Economic Performance During the 2008-2010 Financial Crisis

April 3, 2014 Comments off

Bank Ownership, Lending, and Local Economic Performance During the 2008-2010 Financial Crisis
Source: Federal Reserve Board

While the finance literature often equates government banks with political capture and capital misallocation, these banks can help mitigate financial shocks. This paper examines the role of Brazil’s government banks in preventing a recession during the 2008-2010 financial crisis. Government banks in Brazil provided more credit, which offset declines in lending by private banks. Areas in Brazil with a high share of government banks experienced increases in lending, production, and employment during the crisis compared to areas with a low share of these banks. We find no evidence that lending was politically targeted or that it caused productivity to decline in the short-run.

Atlanta Fed — Annual Report Asks: Where Are the Jobs?

March 21, 2014 Comments off

Annual Report Asks: Where Are the Jobs?
Source: Federal Reserve Bank of Atlanta

The Atlanta Fed in its 2013 Annual Report explores a timely and important economic question: where are the jobs?

“For most Americans the critical element of our ongoing economic recovery is employment,” says Atlanta Fed President Dennis Lockhart in a video introduction to the report. “Since the end of the worst recession in the post–World War II era, jobs in the nation and the Southeast have been growing more slowly than in earlier recoveries.”

Combining rich text and videos, sleek infographics, and interactive charts, the annual report guides readers through the complex issues at work in the nation’s labor market. Want more information about something you just read? Related links throughout the report lead to more research and data.

The report also highlights the Atlanta Fed’s major accomplishments in 2013 and introduces readers to the Bank’s management, boards of directors, and advisory councils.

Government Involvement in Residential Mortgage Markets

March 20, 2014 Comments off

Government Involvement in Residential Mortgage Markets
Source: Federal Reserve Bank of Atlanta

With the federal funds rate effectively at the zero lower bound, the Federal Reserve has used unconventional forms of monetary policy. Specifically, the central bank has issued forward guidance about the policy path and purchased large amounts of U.S. Treasury bonds and agency mortgage-backed securities (MBS) in an effort to lower long-term interest rates. In the case of agency MBS purchases, a goal was to stimulate the housing market by lowering mortgage rates. Two papers presented at the recent Atlanta Fed/University of North Carolina—Charlotte conference, “Government Involvement in Residential Mortgage Markets,” examine the extent to which the Federal Reserve has been successful.

Fed Survey Reports Easier Lending Policies in Late 2013

March 18, 2014 Comments off

Fed Survey Reports Easier Lending Policies in Late 2013
Source: Federal Reserve Bank of Atlanta

Banks eased their lending policies and saw stronger demands for most types of business and consumer loans in the fourth quarter of 2013, according to the Federal Reserve’s January Senior Loan Officer Opinion Survey.

The survey included responses from 75 domestic banks and 21 foreign banks with U.S. operations. Respondents answered questions about changes in the standards and terms on their loans to businesses and households and demand for such loans. The latest survey also included special questions about banks’ reaction to supervisory guidance on leveraged lending and the outlook for loan performance.

Housing Crash Continues to Overshadow Young Families’ Balance Sheets

March 14, 2014 Comments off

Housing Crash Continues to Overshadow Young Families’ Balance Sheets
Source: Federal Reserve Bank of St. Louis

The average young family—which we define as a single- or multi-person family unit headed by someone under 40—has recovered only about one-third of the wealth it lost during the financial crisis and recession. The average wealth of middle-aged families (ages 40 to 61) and older families (ages 62 or older) has recovered to about its precrisis level.

The main reason young families’ balance-sheet recovery lags is the recent housing crash and its lingering effects. The homeownership rate among younger families has plunged, reflecting both the loss of many homes through foreclosure or other distressed sales and delayed entry into homeownership among newly formed households. The house-price gains that have helped mainly older families to rebuild homeowners’ equity have been overshadowed among younger families by the ongoing retreat from homeownership.

Intergenerational Redistribution in the Great Recession

March 14, 2014 Comments off

Intergenerational Redistribution in the Great Recession
Source: Federal Reserve Bank of Atlanta

In this paper we construct a stochastic overlapping-generations general equilibrium model in which households are subject to aggregate shocks that affect both wages and asset prices. We use a calibrated version of the model to quantify how the welfare costs of severe recessions are distributed across different household age groups. The model predicts that younger cohorts fare better than older cohorts when the equilibrium decline in asset prices is large relative to the decline in wages, as observed in the data. Asset price declines hurt the old, who rely on asset sales to finance consumption, but they benefit the young, who purchase assets at depressed prices. In our preferred calibration, asset prices decline close to three times as much as wages, consistent with the experience of the U.S. economy in the Great Recession. A model recession is almost welfare-neutral for households in the 20–29 age group, but translates into a large welfare loss of around 10 percent of lifetime consumption for households aged 70 and over.

The Rising Cost of College: Tuition, Financial Aid, and Price Discrimination

March 7, 2014 Comments off

The Rising Cost of College: Tuition, Financial Aid, and Price Discrimination (PDF)
Source: Federal Reserve Bank of St. Louis

The cost of college tuition has been in the headlines frequently in recent years. Conventional wisdom says the cost of a college education is rising—but is it really? The “sticker price” for a college education has risen three times faster than the inflation rate since 1978. However, when we adjust for inflation, expressing the cost in terms of constant dollars, and account for financial aid (which reduces the overall cost), average tuition and fees have remained effectively unchanged. For example, the College Board reports that average tuition and fees increased from $24,070 for the 2003-04 school year to $30,090 in 2013-14, but the average net tuition and fees (after financial aid) actually decreased from $13,600 per year to an estimated $12,460—a reduction of $1,140 over 10 years (in 2013 dollars). 2 Why the difference? The textbook explanation falls under the heading “price discrimination.”

Beige Book – March 5, 2014

March 6, 2014 Comments off

Beige Book – March 5, 2014
Source: Federal Reserve Board

Reports from most of the twelve Federal Reserve Districts indicated that economic conditions continued to expand from January to early February. Eight Districts reported improved levels of activity, but in most cases the increases were characterized as modest to moderate. New York and Philadelphia experienced a slight decline in activity, which was mostly attributed to the unusually severe weather experienced in those regions. Growth slowed in Chicago, and Kansas City reported that conditions remained stable during the reporting period. The outlook among most Districts remained optimistic.

Retail sales growth weakened since the previous report for most Districts, as severe winter weather limited activity. However, Richmond, St. Louis, and Minneapolis reported modest sales growth since the beginning of the year. Weather was also cited as a contributing factor to softer auto sales in many Districts, with the exception of Cleveland, which saw strong gains. Tourism increased in a number of Districts but declined in Philadelphia and was reported to have been mixed in New York and Minneapolis.

Using Data on Seller Behavior to Forecast Short-run House Price Changes

March 3, 2014 Comments off

Using Data on Seller Behavior to Forecast Short-run House Price Changes
Source: Federal Reserve Board

We construct a new “list-price index” that accurately reveals trends in house prices several months before existing sales price indices like Case-Shiller. Our index is based on the repeat-sales approach but for recent months uses listings data, which are available essentially in real time, instead of transactions data, which become available with signiffcant lags. Our index methodology is motivated by a simple model of the home-selling problem that shows how listings variables such as the list price and marketing time help predict the final sales price. In a sample of three large MSAs over the years 2008-2012, our index (i) accurately forecasts the Case-Shiller index several months in advance, (ii) outperforms forecasting models that do not use listings data, and (iii) outperforms the market’s expectation as inferred from prices on Case-Shiller future contracts.

New York Fed Report Shows Households Adding Debt

February 27, 2014 Comments off

New York Fed Report Shows Households Adding Debt
Source: Federal Reserve Bank of New York

In its latest Household Debt and Credit Report, the Federal Reserve Bank of New York announced that outstanding household debt increased $241 billion from the previous quarter, the largest quarter over quarter increase since the third quarter of 2007. The increase was led primarily by a 1.9 percent increase in mortgage debt ($152 billion). In Q4 2013 total household indebtedness increased to $11.52 trillion; 2.1 percent higher than the previous quarter.  Overall household debt remains 9.1 percent below the peak of $12.68 trillion in Q3 2008. The report is based on data from the New York Fed’s Consumer Credit Panel, a nationally representative sample drawn from anonymized Equifax credit data.

The Interplay Between Student Loans and Credit Card Debt: Implications for Default in the Great Recession

February 26, 2014 Comments off

The Interplay Between Student Loans and Credit Card Debt: Implications for Default in the Great Recession
Source: Federal Reserve Board

We analyze the interactions between two different forms of unsecured credit and their implications for default behavior of young U.S. households. One type of credit mimics credit cards in the United States and the default option resembles a bankruptcy filing under Chapter 7; the other type of credit mimics student loans in the United States and the default option resembles Chapter 13. In the credit card market a financial intermediary offers a menu of interest rates based on individual default risk, which account for borrowing and repayment behavior in both markets. In the student loan market, the government sets the interest rate and chooses a wage garnishment to pay for the cost associated with default. We prove the existence of a steady-state equilibrium and characterize the circumstances under which a household defaults on each of these loans. We demonstrate that the institutional differences between the two markets make borrowers prefer to default on student loans rather than on credit card debt. We find that the increase in student loan debt together with the expansion of the credit card market fully explains the increase in the default rate for student loans in recent normal years (2004-2007). Worse labor outcomes for young borrowers during the Great Recession (2008-2009) significantly amplified student loan default, whereas credit card market contraction during this period helped reduce this effect. At the same time, the accumulation of student loan debt did not affect much the default risk in the credit card market during normal times, but significantly increased it during the Great Recession. An income contingent repayment plan for student loans completely eliminates the default risk in the credit card market and induces important redistribution effects. This policy is beneficial (in a welfare improving sense) during the Great Recession but not during normal times.

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