Posts filed under “Bailouts”

Tracking Recent Levels of Financial Stress

Tracking Recent Levels of Financial Stress
Amanda Janosko
Federal Reserve Bank of Cleveland 01.17.14

 

 

The Cleveland Financial Stress Index (CFSI) has trended down throughout the fourth quarter of 2013 and early this year, indicating a reduction in the level of stress in the US financial system. During the federal government shutdown in October 2013, the CFSI was in Grade 2 or a “normal stress” period, but as the year progressed the index moved into Grade 1, indicating a “low stress” period. As of January 14, the index stood at −1.833, substantially below the CFSI’s historic high reading of 3.094 on December 29, 2008 and slightly above the CFSI’s historic low of −2.023 on January 9, 2014.

 

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In addition to measuring the overall level of stress in the financial system, the CFSI can also tell us about the relative contributions of six different financial markets to overall systemic stress. Again, looking over the fourth quarter of 2013 and into the first quarter of 2014, we can see that all of the markets—credit, equity, funding, foreign exchange, securitization, and real estate—contributed to the reduction in stress. The equity and securitization markets experienced the most significant reductions in their contributions to stress, while the foreign exchange, credit, real estate, and funding markets experienced more moderate reductions.

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The joint reduction in stress in all six financial markets led to a new historical low for the index on January 9, 2014. Previously, the lowest index reading had occurred in February 1997.

 

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We can dive another level down into the factors contributing to stress by looking at the components that we track in each of these six financial markets. Stock market crashes, the only component in the equity market, reduced its contribution to stress by 85.2 percent during the fourth quarter of 2013. In the securitization market, the reduction in the residential-mortgage-backed-security spread drove the market’s overall reduced contribution to stress. Other notable components that helped drive the reduction in system stress include weighted dollar crashes, the commercial real estate spread, and the residential real estate spread. Note that the components responsible for the decline in overall stress share two characteristics; they contributed a large share to stress in the last quarter and their contribution has fallen significantly since. Some components, like the ABS spread, by contrast, show large percent change over the previous quarter but their contribution was very small to begin with.

Factors Contributing to Financial Market Stress

 

Market Component Contribution to stress, 10/1/13 Contribution to stress, 12/31/13 Percent change
Equity Stock market crashes 10.613 1.567 −85.2
Securitization Commercial MBS spread 0.545 0.551 1.1
Residential MBS spread 7.795 2.490 −68.1
ABS spread 0.593 0.051 91.4
Real estate Commercial real estate spread 1.637 0.838 −48.8
Residential rela estate spread 2.641 1.971 −25.4
Foreign exchange Weighted dollar crashes 6.914 5.208 −24.7
Funding Financial beta 0.602 0.352 −41.6
Bank bond spread 1.527 1.475 −3.4
Interbank liquidity spread 0.497 0.164 −67.1
Interbank cost of borrowing 0.139 0.125 −9.8
Credit Covered interest spread 0.525 0.272 −48.2
Corporate bond spread 2.950 2.152 −27.0
Liquidity spread 3.536 3.183 −10.0
Commercial paper T-bill spread 0.424 0.130 −69.4
Treasury yield curve spread 1.001 0.987 −1.4

Note: “Contributions to stress” refers to levels of stress, where a value of 0 indicates the least possible stress and a value of 100 indicates the most possible stress. The sum of these contributions is the level of the CFSI, but this differs from the actual CFSI, which is computed as the standardized distance from the mean, or the z-score.

The Cleveland Financial Stress Index and all of its accompanying data are posted to the Federal Reserve Bank of Cleveland’s website at 3 p.m. daily. For a brief overview of how the index is constructed see this page.

Category: Bailouts, Credit, Federal Reserve, Think Tank

The Best Gummint Housing Program You’ve Never Heard Of

Of all of the various government housing programs run by various federal agencies — Federal Housing Administration, Federal Housing Finance Agency, Housing and Urban Development and, of course, Fannie Mae — HARP is the most effective and efficient one out there. Odds are you have never even heard of the Home Affordable Refinance Program. And…Read More

Category: Bailouts, Credit, Real Estate

Happy 100th Birthday, Mother Merrill. We Miss You

click for bigger graphic Source: Bank America     Merrill Lynch Pierce Fenner & Smith turns 100 today. At least, she would have been, if she was a standalone entity, and not a government rescued TBTF entity, forced into a shot-gun wedding with Bank of America. I have a warm place in my heart for…Read More

Category: Bailouts, Corporate Management, Digital Media, Investing, M&A

The Federal Reserve: Looking Back, Looking Forward

The Federal Reserve: Looking Back, Looking Forward Chairman Ben S. Bernanke At the Annual Meeting of the American Economic Association, Philadelphia, Pennsylvania January 3, 2014       In less than a month my term as Fed Chairman will end. Needless to say, my tenure has been eventful–for the Federal Reserve, for the country, and…Read More

Category: Bailouts, Federal Reserve, Think Tank

When Might the Federal Funds Rate Lift Off?

When Might the Federal Funds Rate Lift Off? Computing the Probabilities of Crossing Unemployment and Inflation Thresholds (and Floors) Edward S. Knotek II and Saeed Zaman       The Federal Open Market Committee has been providing guidance to help markets anticipate when it will begin raising the federal funds rate target. The most recent…Read More

Category: Bailouts, Federal Reserve

Has the Fed Stabilized the Price Level?

Has the Fed Stabilized the Price Level? Marc P. Giannoni and Hannah Herman Liberty Street Economics, November 27, 2013     The Federal Reserve Reform Act of 1977 established the monetary policy objectives of maximum employment, stable prices, and moderate long-term interest rates. The goal of “stable prices” has long been understood to mean a…Read More

Category: Bailouts, Federal Reserve, Think Tank

Bullard on the Taper: “Everything is on the Table”

Federal Reserve Bank of St. Louis President James Bullard talks about the potential for a reduction in the Fed’s bond buying, asset prices and the U.S. economy. Bullard speaks with Erik Schatzker on Bloomberg Television’s “Market Makers.”


Source: Bloomberg Nov. 20 2013

Category: Bailouts, Federal Reserve, Video

JPMorgan and Uncle Sam Now Partners in Pillaging of America


Source: Yahoo Finance

Category: Bailouts, Media, Video

Too-Big-to-Fail: The Role of Metrics

Too-Big-to-Fail: The Role of Metrics Narayana Kocherlakota – President Federal Reserve Bank of Minneapolis, November 18, 2013     Thanks for the introduction, Ron. It’s a great pleasure to address all of you tonight. First off, let me say welcome to the Minneapolis Fed. I see this workshop as being one more step on an…Read More

Category: Bailouts, Federal Reserve, Think Tank

A Limited Central Bank

A Limited Central Bank Charles I. Plosser Federal Reserve Bank of Philadelphia, November 14, 2013     PDF version (159 KB, 13 pages) Highlights President Charles Plosser discusses what he believes is the Federal Reserve’s essential role and proposes how this institution might be improved to better fulfill that role. President Plosser proposes four limits…Read More

Category: Bailouts, Federal Reserve