Financial Stability Retrospective

Transcription

1 Financial Stability Retrospective PRE- SET TEMPLATES & USAGE TIPS Darrell Duffie Graduate School of Business, Stanford University Financial Advisory Roundtable Meeting Federal Reserve Bank of New York, November 13, 215

2 Some remaining systemic vulnerabili3es Improving but s3ll fragile design of tri- party repo leaves the poten3al for repo fire sales. Lending of last resort is overly limited by Dodd- Frank. SIFI failure resolu3on plans are incomplete (e.g. QFC termina3ons, no CCP plan). Poten3al for pro- cyclical margins, pending new FSB standards (more research needed). The global risk network is s3ll too opaque.

3 U.S. tri- party repo collateral and liquidity Type (9th percen3le haircut) CMO Treasuries (2.%) Agency MBS (3.%) Agencies (3.%) Agency CMO Agencies Agency MBS Treasuries Money market (5.%) Agency CMO (11%) IG Corporate (9.%) Equi3es (15.%) HY Corporate (15%) CMO (Private) (2%) Other Data source: FRBNY, November, 215 h\p://newyorkfed.org/data- and- sta3s3cs/data- visualiza3on/tri- party- repo/#interac3ve/volume

4 US GSIFI FHC Zone of stays on failure terminaon of swaps, repos, sec- lending U.K. Broker Dealer U.S. Broker Dealer U.S. Bank Counterparty

5 Stability- liquidity tradeoffs Bank capital and ac3vity rules have improved bank stability and reduced commitments of balance sheet to financial market intermedia3on by banks and their affiliates. This raises incen3ves for agency intermedia3on, CCPs, all- to- all trade, shadow- bank intermedia3on, and a shic by banks away from low- risk standardized (low- margin) products. The net impacts on market efficiency are s3ll playing out. By most measures, bond- market liquidity looks fine, but turnover and average trade sizes are down. Some markets (e.g. single- name CDS, matched- book repo) are withering. The 1- year treasury yield crash of October 15, 214 is a symptom of change in the mix of intermediaries.

6 Treasuries bid- ask spreads are stable 9 2- year 5- year 1- year ths /1/25 1/1/27 1/1/29 1/1/211 1/1/213 1/1/215 Source: Adrian, Fleming, Stackman, and Vogt (215) (BrokerTec data)

7 Treasury note trade price impacts 2- year 5- year 1- year ths per $1 million /1/25 1/1/27 1/1/29 1/1/211 1/1/213 1/1/215 Source: Adrian, Fleming, Stackman, and Vogt (215) (from BrokerTec data)

8 Treasury market turnover Daily volume/outstanding Underlying source: SIFMA

9 $ millions 2 Year 5 Year 1 Year Note: 21-day moving average; 8:2-15: ET Source: Staff calculations, based on data from CME Group.

10 Decline in GCF net lending volume $ billions Daily Net Cash Positions by Dealer Group Monthly Average Mar 11 Sep 11 Mar 12 Sep 12 Mar 13 Sep 13 Mar 14 Sep 14 Mar 15 Sep 15 month Non-BHC Dealers Small BHC dealers Large BHC Dealers 21

11 Corporate bond average bid-ask spreads $1.4 $1.2 Investment Grade High Yield $1. $ per unit par $.8 $.6 $.4 $.2 $ Copyright 214 FINRA

12 Corporate and municipal bond turnover Daily volume/outstanding (percent) Municipal bonds Corporate bonds Data source: SIFMA

13 Corporate bond average trade size , Most Active Bonds Less Active Bonds $ million Copyright 214 FINRA

14 Number of CDS trades per quarter 4, 35, Single- Name Index 3, 25, 2, 15, 1, 5, Data source: DTCC

15 Who handles U.S. bonds? 4 35 Bond Fund+ETF Dealer Bonds Financed Assets (billion USD) Data sources. ICI: AUM, bond mutual funds + ETFs. FRBNY: primary dealer daily financing (securi3es out) of UST + agencies + MBS + corporate bonds.

16 Asset management stability issues Comments on the risk of a crisis arising from sudden bond fund redemp3ons seem exaggerated. A rush for the exits would impact prices, but bids will likely arrive before a crisis is triggered. Who exactly would fail? Large hedge funds present a poten3al for unwind risk, given their reliance on leverage and expert poroolio managers. Large agency- based managers seem more benign, and have not been designated as SIFIs. Regulators also focus on insurance firms that are ac3ve in financial markets. Some have been designated. Money- market funds are migra3ng to government securi3es

17 Net monthly cash inflows to bond funds 4 2 Billions of dollars - 2 1/1/13 3/1/13 5/1/13 7/1/13 9/1/13 11/1/13 1/1/14 3/1/14 5/1/14 7/1/14 9/1/14 11/1/14 1/1/15 3/1/15 5/1/15 7/1/15 9/1/ Data source: Investment Company Ins3tute

18 $ billions Note: Total net monthly flows; Some funds own agency debt securities and MBS in addition to Treasury securities Source: Staff calculations, based on data from Morningstar.