Policy

Policy Articles

Modeling Bank Stock Returns: A Factor-Based Approach (with Paige Ehresmann and Jessie Wang) link:

We introduce a factor asset pricing model to analyze risk-adjusted returns on bank stocks. Our model includes five established pricing factors in the literature. We illustrate the model's usefulness in two applications: first, for daily analysis of bank stock return drivers between policy events like FOMC meetings. Second, for detecting the propagation of banking-sector shocks, focusing on market reactions to news about NYCB in early 2024 and contrasting them with responses during the collapse of SVB in early 2023.

What Do Bank Stock Returns Say About Monetary Policy Transmission? (with Paige Ehresmann and Jessie Wang) link:

In this FEDS note, we quantify the heterogeneous effects of monetary policy (MP) in the banking sector using a factor-based asset pricing model. We find that MP shocks shift risk factors that price bank stocks and that the transmission varies with bank characteristics such as size, leverage, wholesale funding, and ratio of uninsured deposits. Notably, we show that the greater sensitivity of larger banks to MP shocks is primarily transmitted through the market risk factor.

Measuring Bank Credit Supply Shocks Using the Senior Loan Officer Survey (with Michele Cavallo, Rebecca Zarutskie, and Solveig Baylor) link:

Estimating the effects that bank credit supply has on macroeconomic activity has long been an area of active research. A key challenge in pursuing this goal is the ability to measure such shocks to banks' supply of credit separately from shocks to borrowers' demand for credit. In this note, we present a measure of credit supply shocks that exploits bank-level responses to the Federal Reserve's Senior Loan Officer Opinion Survey on Bank Lending Practices (SLOOS) applying a variation of the methodology introduced by Bassett et al. (2014), which consists of purging banks' responses regarding changes in lending standards from the influence of macroeconomic, financial, and bank-specific factors.

Unpacking the Effects of Bank Credit Supply Shocks on Economic Activity (with Michele Cavallo and Rebecca Zarutskie) link:

In this note, we examine the effects of bank credit supply shocks on real economic activity. First, we estimate how GDP and various aggregate demand sectors respond to such shocks. Second, based on the estimated responses, we compute how much those sectors contribute to the overall response of aggregate demand to bank credit supply shocks. We find that these shocks affect aggregate demand disproportionately through personal consumption expenditures on durable goods, nonresidential investment in equipment, and residential investment. We also find that measuring bank credit supply shocks through individual loan categories and estimating their effects on the corresponding aggregate demand sectors does not allow us to account for the overall estimated response of aggregate demand growth. This result suggests the presence of meaningful linkages at work across the various lending categories in the propagation of bank credit supply shocks.

The views expressed here are my own and should not be interpreted as reflecting the views of the Federal Reserve Bank of New York or of anyone else associated with the Federal Reserve System.