Research Exchange: January 2026

Selected Outside Research

Private Credit and Financial Stability

This paper examines financial stability risks associated with private credit funds by conducting a stress test using data for business development companies (BDCs), which represent roughly 40 percent of direct lending to middle-market firms. The analysis focuses on BDC defaults on bank loans and bond issues and the resulting contraction in the supply of BDC credit. The authors find that under severely adverse macroeconomic conditions, no BDCs would default on their debt obligations, although BDCs would reduce credit provision by about 10 percent owing to deleveraging. BDCs with higher initial leverage and riskier portfolios experience more severe deleveraging. Additionally, the analysis highlights the role of dividend reinvestment plans as a mechanism that helps private credit funds manage stress. The paper concludes that BDC creditors-banks and bondholders-are well-protected by equity cushions and BDC deleveraging mechanisms.

Private Credit and Financial Stability

The Macroeconomic Consequences of Capital Constraints

In response to the pandemic, the Federal Reserve temporarily relaxed the supplementary leverage ratio (SLR) by excluding U.S. Treasury securities and central bank reserves from the calculation in an effort to grant banks capital relief. Using this episode, this paper examines how bank capital requirements affect consumer lending and economic stability. First, the paper quantifies the effects of the reduced capital requirements on credit card lending and borrowing as reflected in higher credit limits, increased balances and lower average interest rates on revolving balances. Next, the paper develops a macroeconomic model calibrated to match these empirical findings and derives two key findings: (1) Without the SLR relaxation, U.S. consumption would have fallen an additional 1 percent on impact and 2.7 percent cumulatively over three years, making the recession significantly worse; and (2) implementing capital rules that loosen requirements during recessions and tighten during booms could reduce consumption volatility by up to 12 percent over the business cycle.

The Macroeconomic Consequences of Capital Constraints

Stablecoins as Private Money: A Policy Agenda

This paper develops a comprehensive policy framework for regulating stablecoins and offers 13 policy recommendations. These include a set of baseline requirements relating to legal clarity on redemption rights, conservative reserve management and transparent disclosures. Additional policy considerations come into play when stablecoins reach systemic scale: central bank reserve access, public liquidity backstops, interoperability standards and limits on currency substitution. Other policy issues identified relate to platform market power, monetary sovereignty, financial integrity risks and interest payment regulations. The paper also discusses recent legal developments (EU's MiCA in 2024, U.S. GENIUS Act in 2025) in relation to this framework.

Stablecoins as Private Money: A Policy Agenda

A Framework for Understanding the Vulnerabilities of New Money-Like Products

By applying a framework of comparison to money market funds (MMFs), this paper assesses the financial stability vulnerabilities in novel money-like products. The discussion highlight five key vulnerability features based on past MMF research: (1) liquidity transformation-converting illiquid assets into liquid liabilities; (2) threshold effects-sharp discontinuities in investor payoffs during stress; (3) moneyness-perception as safe and liquid, functioning as private money; (4) contagion risk-problems in one product triggering runs on similar products; and (5) reactive investor base-investors prone to running during stress. Against these features, three new types of money-like instruments are assessed: money market ETFs; tokenized MMFs and stablecoins. The research emphasizes the need to monitor specific developments in each of these products as well as assess other emerging products as they evolve.

A Framework for Understanding the Vulnerabilities of New Money-Like Products

From Par to Pressure: Liquidity Redemptions and Fire Sales with a Systemic Stablecoin

There is broad recognition that adoption of fiat-backed stablecoins at systemic scale can pose financial stability risks. This paper analyzes these risks and the regulatory policy design choices that may effectively mitigate them. The analysis is based on a conceptual discussion grounded in financial economics and on the application of a structural model simulating stablecoin balance sheets and bond market interactions. Key potential sources of systemic risk are identified, including credit risk from counterparties; market risk from bond price fluctuations; liquidity risk from maturity mismatches and from continuous redemptions versus markets that close; and endogenous feedback loops. The paper concludes that capital requirements for stablecoin issuers are the most potent regulatory tool for mitigating systemic risks, with complementary roles for cash reserves and redemption gates.

From Par to Pressure: Liquidity Redemptions and Fire Sales with a Systemic Stablecoin

Lending Relationships Within Supply Chains

This paper examines how banks' informational advantages from lending simultaneously to a firm and its suppliers or customers shape credit supply. Using unique data that identifies firms' supply-chain linkages and bank borrowing relationships, the study finds that firms receive roughly twice as much credit when they share common lenders with their business partners. The increase reflects both larger loans conditional on lending and, more importantly, a higher likelihood that a lending relationship forms in the first place. The paper also documents economically meaningful differences in loan interest rates, maturities and default risk. To probe for the underlying mechanisms, the authors use plausibly exogenous firm shocks from wildfires and show that banks with greater exposure to affected production networks maintain more stable credit supply and thus mitigate adverse effects on real and financial outcomes. Overall, the findings are consistent with banks internalizing supply-chain spillovers to limit shock propagation and adverse feedback effects.

Lending Relationships Within Supply Chains

The Dynamics of Retail Deposit Balances

Using account-level data covering 12 million accounts across 154 U.S. credit unions, this paper examines the distribution and flow of household deposit balances. One key takeaway is that the retail deposit distribution is highly skewed-10 percent of depositors hold 70 percent of total deposits-hence, large-balance accounts disproportionately drive aggregate retail deposit flows. The paper also shows that high-balance accounts typically become large following substantial one-time inflows, and they are more likely to experience large idiosyncratic drawdowns. Additionally, the analysis finds that high-balance retail depositors tend to be less sensitive to interest-rate shocks and that observed "deposit stickiness" is driven primarily by these depositors.

The Dynamics of Retail Deposit Balances

Targeting Higher Credit Card Payments

This paper describes a field experiment, embedded in a credit card payment app, that tested two interventions intended to increase payments: (1) shrouding the minimum payment amount, and (2) adding an option to pay 50 percent of the statement balance. Results from the experiment, conducted over six billing periods, demonstrate that neither intervention increased credit card payments. One key takeaway is that prior research findings of higher hypothetical payments when minimum payments are hidden do not hold up in a field setting. The findings also run contrary to the view that minimum payments operate as anchors that depress repayment amounts.

Targeting Higher Credit Card Payments

Transformed Intermediation: Credit Risk to NBFIs, Liquidity Risk to Banks

This paper proposes a "transformation of risks" view of why nonbank financial intermediaries (NBFIs) have grown rapidly relative to banks, emphasizing increased interconnectedness between the two sectors. According to this view, growth of NBFIs is consistent with avoiding tighter post-Global Financial Crisis bank regulation while continuing to draw on banks' funding and liquidity advantages associated with deposit franchises and access to government safety nets. The paper describes how banks provide funding to NBFIs through senior loans and credit lines, and how NBFIs use this support for acquiring junior credit claims, warehouse financing and liquidity management. Empirically, the study presents evidence, based on stock market data and supervisory data on bank lending to NBFIs, that shocks experienced by NBFIs spill over to the banks that extend them credit lines. The paper also develops policy implications of the transformations view and suggests directions for future research.

Transformed Intermediation: Credit Risk to NBFIs, Liquidity Risk to Banks

Why is Private Lending So Popular?

By presenting a detailed look at business development companies (BDCs), this paper offers insights into the rapid expansion of private credit. The paper argues that BDC growth is closely tied to the growth of private equity, as many BDCs are directly connected to large private equity firms. Beyond providing debt financing for private-equity-sponsored deals, the paper documents that BDCs also take positions that resemble private equity exposures, including instruments involving deferred interest, preferred equity and exposure to underlying assets. In addition, it highlights how the linkages to private equity relate to the expanding participation of retail investors in the segment and discusses regulatory implications.

Why is Private Lending So Popular?

Featured BPI Research

What Determines Banks' Demand for Reserve Balances?

Reserve balances-deposits of insured banking institutions at the Federal Reserve-are a central determinant of the size of the Fed's balance sheet under the current operating framework. This note summarizes results from a BPI survey of bank treasurers on why banks hold reserve balances and what developments could reduce their demand. Responses from 26 of BPI's 40 member banks indicate that reserves demand is driven primarily by internal risk-management practices, the need to pass required internal liquidity stress tests (ILSTs), aversion to discount window borrowing and the interest on reserve balances (IORB) relative to rates on similar assets. Among banks that reduced reserves holdings over the past two years, respondents place the most weight on the decline in IORB rate relative to alternative rates as the reason for doing so. Treasurers report that the most effective changes for lowering reserve demand would be permitting banks to factor anticipated discount window or Federal Home Loan Bank borrowing into ILSTs; counting discount window capacity toward the liquidity coverage ratio (LCR); and reducing discount window stigma.

What Determines Banks' Demand for Reserve Balances?

Even Crypto-Funded Research Affirms That Yield-Bearing Stablecoins Reduce Bank Deposits and Lending

This post describes how yield-bearing stablecoins could affect bank deposits and lending by summarizing and assessing the implications of two recent research papers, one from the Federal Reserve and one out of Cornell School of Management that builds on the former. The post highlights the mechanisms by which issuance and adoption of stablecoins reduce deposits and loans as adoption rises and explains how yield-bearing stablecoins would cause even greater contraction in deposits and loans. The post also describes how the crypto investment firm Paradigm mischaracterized the implications of this research in a recently published article.

Even Crypto-Funded Research Affirms That Yield-Bearing Stablecoins Reduce Bank Deposits and Lending

Outside Blog Posts and Research Notes of Interest

Building Bank Resilience by Additional Tier 1 Debt Reform

When Broadband Comes to Banks: Credit Supply, Market Structure, and Information Acquisition

The Liquidity Coverage Ratio a Decade on: a Stock Take of the Literature

Conferences & Symposiums

2/19/2026
Joint Conference on Financial Crises
Federal Reserve Bank of Chicago
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2/20/2026
Columbia/BPI Annual Bank Regulation Research Conference: Announcement and Call for Papers
Columbia University, New York City
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2/24/2026
Conference on Technology Enabled Disruption
Federal Reserve Bank of Boston
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3/23/2026 - 3/26/2026
2026 Federal Reserve National Community Investment Conference
Phoenix, AZ
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3/26/2026 - 3/27/2026
2026 Georgia Tech-Atlanta Fed Household Finance Conference: Announcement and Call for Papers
Atlanta, GA
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4/3/2026
Fintech and Financial Institutions Research Conference: Announcement and Call for Papers
Federal Reserve Bank of Philadelphia and University of Delaware
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5/7/2026 - 5/8/2026
13th Annual Conference on Financial Market Regulation: Announcement and Call for Papers
The Securities and Exchange Division of Economic and Risk Analysis
Washington, D.C.
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5/14/2026 - 5/15/2026
Mortgage Market Research Conference
Federal Reserve Bank of Philadelphia
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5/18/2026
2026 Research Conference on Banking Regulation
European University Institute and Bank Policy Institute
Florence, Italy
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5/27/2026 - 5/29/2026
Boulder Summer Conference on Consumer Financial Decision Making
University of Colorado, Boulder
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6/22/2026 - 6/23/2026
Fifth Conference on the International Roles of the U.S. Dollar: Announcement and Call for Papers
Federal Reserve Board, Washington, D.C.
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6/25/2026 - 6/26/2026
2026 New York Fed Innovation Conference
Federal Reserve Bank of New York
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9/2/2026 - 9/3/2026
Edinburgh Financial Technology Conference: Announcement and Call for Papers
University of Edinburgh Business School, Edinburgh, Scotland
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