Financial Instability and the Fed’s Crisis Response

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Information about Financial Instability and the Fed’s Crisis Response
Economy & Finance

Published on October 15, 2014

Author: pkconference

Source: slideshare.net

Description

Financial Crises and Regulation session at 12th International Conference

1. Financial Instability and the Fed’s Crisis Response James Andrew Felkerson Bard College

2. Fed Balance Sheet 2008- 0 500 1000 1500 2000 2500 3000 3500 4000 4500 5000 2008-01-02 2008-03-12 2008-05-21 2008-07-30 2008-10-08 2008-12-17 2009-02-25 2009-05-06 2009-07-15 2009-09-23 2009-12-02 2010-02-10 2010-04-21 2010-06-30 2010-09-08 2010-11-17 2011-01-26 2011-04-06 2011-06-15 2011-08-24 2011-11-02 2012-01-11 2012-03-21 2012-05-30 2012-08-08 2012-10-17 2012-12-26 2013-03-06 2013-05-15 2013-07-24 2013-10-02 2013-12-11 2014-02-19 2014-04-30 2014-07-09 2014-09-17 Total Assets Loans Federal Ageny Debt Securities Agency MBS Treasuries Repo Other Credit

3. Introduction • Two tools: – Interest Rates – Large Scale Asset Purchases (LSAPs) • So-called “QE” • My interest is with the effects of LSAPs on systematic risk. • Interest rates come into the picture and may be important for other reasons, but will not be emphasized here.

4. Interest Rates Since the Crisis 0.00 1.00 2.00 3.00 4.00 5.00 6.00 7.00 2008-01-01 2008-04-01 2008-07-01 2008-10-01 2009-01-01 2009-04-01 2009-07-01 2009-10-01 2010-01-01 2010-04-01 2010-07-01 2010-10-01 2011-01-01 2011-04-01 2011-07-01 2011-10-01 2012-01-01 2012-04-01 2012-07-01 2012-10-01 2013-01-01 2013-04-01 2013-07-01 2013-10-01 2014-01-01 2014-04-01 2014-07-01 30yr Conventional Mortgage Effective Fed Funds Rate 10yr Treasury Constant Maturity Target FF (Upper band)

5. LSAPs Since the Crisis • Contention between the distinction between “pure QE” and LSAPs (credit easing) • From Bernanke, “The Crisis and the Policy Response: – “…in a pure QE regime the focus of policy is the quantity of bank reserves; the composition of loans and securities on the asset side of the central bank’s balance sheet is incidental.” – “In contrast, the Federal Reserve’s credit easing approach focuses on the mix of loans and securities it holds and on how this composition of assets affects credit conditions for households and businesses.”

6. Fed LSAP Programs • “QE 1”- – Announced: November 25, 2008 – Purchase approx. $1.75T in Treasuries, agency MBS, and agency debt. • “QE 2”- – Begins November 2010 – Purchase approximately $600 billion in Treasuries • “QE 2.5”- – Maturity extension program (“Operation Twist”) – Fed to purchase $400B in longer maturity Treasuries, selling • “QE 3”- – September 13, 2012: announced purchases of $40B; agency MBS – December 12, 2012: QE 3 extended, $40B month in long-term Treasuries

7. Global LSAP Programs Central Bank Peak size (billion USD) Share of economy (%) Federal Reserve $3,152 22.1 BOE $596 26.3 ECB $432 3.5 BOJ $2,193 37.3 Source: Fawley and Neely, 2013, “Four Stories of Quantitative Easing” ***Numbers as of end of 2012***

8. MBS Issuance 1996- 4000.0 3500.0 3000.0 2500.0 2000.0 1500.0 1000.0 500.0 0.0 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Total mortgage-related issuance Agency MBS Agency CMO Nonagency MBS

9. 85 90 95 100 105 110 1/3/11 2/3/11 3/3/11 4/3/11 5/3/11 6/3/11 7/3/11 8/3/11 9/3/11 10/3/11 11/3/11 12/3/11 1/3/12 2/3/12 3/3/12 4/3/12 5/3/12 6/3/12 7/3/12 8/3/12 9/3/12 10/3/12 11/3/12 12/3/12 1/3/13 2/3/13 3/3/13 4/3/13 5/3/13 6/3/13 7/3/13 8/3/13 9/3/13 10/3/13 11/3/13 12/3/13 1/3/14 FHLMC 30yr Pass Throughs, Last and Fed Purchase Prices 2.5 last 3.0 last 3.5 last 4.0 last 4.5 last 2.5 purchase 3.0 purchase 3.5 purchase 4.0 purchase 4.5 purchase

10. 85 90 95 100 105 110 1/3/11 2/3/11 3/3/11 4/3/11 5/3/11 6/3/11 7/3/11 8/3/11 9/3/11 10/3/11 11/3/11 12/3/11 1/3/12 2/3/12 3/3/12 4/3/12 5/3/12 6/3/12 7/3/12 8/3/12 9/3/12 10/3/12 11/3/12 12/3/12 1/3/13 2/3/13 3/3/13 4/3/13 5/3/13 6/3/13 7/3/13 8/3/13 9/3/13 10/3/13 11/3/13 12/3/13 1/3/14 FNMA 30yr Pass Throughs, Last and Fed Purchase Prices 2.5 last 3.0 last 3.5 last 4.0 last 4.5 last 2.5 purchase price 3.0 purchase price 3.5 purchase price 4.0 purchase price 4.5 purchase price

11. 90 95 100 105 110 115 1/3/11 2/3/11 3/3/11 4/3/11 5/3/11 6/3/11 7/3/11 8/3/11 9/3/11 10/3/11 11/3/11 12/3/11 1/3/12 2/3/12 3/3/12 4/3/12 5/3/12 6/3/12 7/3/12 8/3/12 9/3/12 10/3/12 11/3/12 12/3/12 1/3/13 2/3/13 3/3/13 4/3/13 5/3/13 6/3/13 7/3/13 8/3/13 9/3/13 10/3/13 11/3/13 12/3/13 1/3/14 GNMA I 30yr Pass Throughs, Last and Fed Purchase Prices 3.0 close 3.5 close 4.0 close 3.0 purchase price 3.5 purchase price 4.0 purchase price

12. 90.0% 80.0% 70.0% 60.0% 50.0% 40.0% 30.0% 20.0% 10.0% 0.0% Percentage Market Share, 2008 - 2013 U.S. Bank Citigroup Bank of America JPMorgan Chase Wells Fargo

13. 1000.0 900.0 800.0 700.0 600.0 500.0 400.0 300.0 200.0 100.0 0.0 Total Quarterly Mortage Orginations, in billions Total originations U.S. Bank Citigroup Bank of America JPMorgan Chase Wells Fargo

14. 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% All others Federal Reserve U.S. Bank Citigroup Bank of America JPMorgan Chase Wells Fargo

15. 50.0% 45.0% 40.0% 35.0% 30.0% 25.0% 20.0% 15.0% 10.0% 5.0% 0.0% Percentage of Total U.S. Depository Institution Agency MBS Holdings by Five Largest Mortgage Originators C USB JPM WFC BAC

16. 2.000 1.800 1.600 1.400 1.200 1.000 0.800 0.600 0.400 0.200 0.000 Ratio of Agency MBS UPB to Total Equity (Regulatory) Capital Wells Fargo JP Morgan Bank of America Citigroup US Bank

17. 1,600.00 1,400.00 1,200.00 1,000.00 800.00 600.00 400.00 200.00 - Quarterly Fed Agency MBS Holdings, in billions All other agency and GSE MBS 30yr 4.5 30yr 4.0 30yr 3.5 30yr 3.0 30yr 2.5

18. Allocation of Fed's Agency and GSE Portfolio, 2/15/2014 30yr 2.5 0.62% 30yr 3.0 29.84% 30yr 3.5 22.15% 30yr 4.0 16.30% 30yr 4.5 11.64% All others 19.45% 30yr 2.5 30yr 3.0 30yr 3.5 30yr 4.0 30yr 4.5 All others

19. FHLMC 30yr 6.0 FNMA 30yr 6.0 FHLMC 30yr 6.5 FNMA 30yr 5.5 FHLMC 30yr 5.5 FNMA 30yr 6.5 FNMA 30yr 5.0 FHLMC 30yr 5.0 GNMA 30yr 5.5 GNMA 30yr 5.0 GNMA 30yr 6.5 FHLMC 30yr 4.5 GNMA 30yr 6.0 FNMA 30yr 4.5 GNMA 30yr 4.5 FHLMC 30yr 4.0 FNMA 30yr 4.0 GNMA 30yr 4.0 FNMA 30yr 3.5 FHLMC 30yr 3.5 GNMA 30yr 3.5 GNMA 30yr 2.5 GNMA 30yr 3.0 FHLMC 30yr 3.0 FNMA 30yr 3.0 FHLMC 30yr 2.5 FNMA 30yr 2.5 % Gain/ Loss GSE and Agency Pass Throughs -12.00% -10.00% -8.00% -6.00% -4.00% -2.00% 0.00% 2.00% % Change from 1/1/2013 % Change from 1/1/2012

20. Final Considerations • Must consider Treasury/Congress actions: most importantly the significant increase in conforming loan limits during crisis; allowed banks to move mortgages off balance sheet. • But, the Fed encouraged the production of mortgages, which benefits banks: – By providing a residual buyer – By protecting banks initially from contraction (prepayment) risk and, now, from extension (contraction risk) • But, in the end, are we done with Fed intervention in mortgage markets?

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