Research Exchange: September 2025

Selected Outside Research

Pre-Pledged Collateral and Likelihood of Discount Window Use

When banks experience sudden funding needs (like large withdrawals), they can borrow from the Federal Reserve's discount window, which requires pledging collateral. To facilitate future discount window borrowing, many institutions preposition collateral-typically less liquid assets like loans. This study examines whether banks and credit unions that pre-pledge collateral are more likely to borrow when they face liquidity shocks compared to those that do not, using data from January 2015 to June 2025 on nearly 3,000 institutions, which incorporates about 80,000 liquidity shock events. The analysis finds that borrowing occurred in only 4 percent of these events and that banks with pre-pledged collateral were significantly more likely to borrow during these events. This relationship is stronger for banks that had relatively low reserve levels at the time of pre-pledging. Thus, the analysis suggests that pre-pledging collateral makes the discount window a more practical and accessible funding source during financial stress.

Pre-Pledged Collateral and Likelihood of Discount Window Use

Banks' Regulatory Risk Tolerance

Banks tend to maintain capital above minimum regulatory requirements (management buffers) as safety cushions to avoid the penalties and costs associated with breaching the minimums. This paper assesses the buffer management strategies of large U.S. and Euro-area banks, comparing strategies before and after the 2008 financial crisis. This is accomplished by developing and applying a new metric called "regulatory risk tolerance" (RRT), which incorporates three component factors: the targeted buffer amount; speed of returning to the target following adverse shocks and volatility of buffer fluctuations, where higher RRT indicates a willingness to operate closer to regulatory minimums despite breach risks. The analysis finds that banks doubled their RRT on average post-crisis, primarily by lowering their buffer targets, which suggests that banks adapted to stricter Basel III requirements by accepting increased regulatory risk. The study also finds that US banks tend to have lower RRT than European banks and small banks have lower RRT than large banks, and that when buffers fall below targets, high-RRT banks are more likely to cut lending to restore buffers quickly.

Banks' Regulatory Risk Tolerance

Where's the Bank? Banking Access in the Era of Branch Consolidation

This paper revisits the question of whether the dramatic decline in bank branches between 2014 and 2024 has reduced households' and businesses' access to banking services. Advances over previous studies of the effects of branch consolidation include use of more granular (block level) data and accounting for the effect of population density on accessibility. The analysis finds that the average distance from households and businesses to their nearest branch has not changed appreciably (with little differences across racial groups), and the number of households and businesses with low access to bank branches has increased only slightly. It also suggests that areas with lower branch access tend to have adequate mobile banking availability as an alternative.

Where's the Bank? Banking Access in the Era of Branch Consolidation

Economic Capital: A New Measure of Bank Solvency

This study describes "Economic Capital" (EC), an alternative, forward-looking solvency metric that is based on the calculated present values of assets, liabilities and operating expenses incorporating changes in value from interest rate movements and credit spreads. The EC measure also allows for specified future scenarios around payment timing, deposit stability, and stress shocks to interest rates and defaults. After introducing this metric, the study applies it to U.S. commercial banks historically, calculating the quarterly time series of industry average EC beginning in the second quarter of 1997. The analysis demonstrates that, conditional on a stable funding scenario, banking industry EC and solvency have materially improved compared to pre-GFC levels. However, under stressed deposit funding ("run") scenarios, the analysis suggests that economic capital hasn't materially changed compared to pre-GFC levels, due to the industry's increased reliance on uninsured deposits.

Economic Capital: A New Measure of Bank Solvency

Evaluating Empirical Regularities in Variable Co-movement in Stress Test Scenarios

The annual stress tests conducted on large banks by the Federal Reserve rely on "severely adverse" 13-quarter economic scenarios. This note assesses whether co-movement relationships among five key domestic economic variables in these scenarios are empirically well-supported. The variables examined are the unemployment rate; BBB corporate bond spreads, the VIX (volatility index); commercial real estate prices; and equity prices. Two analytical approaches are used: comparison of typical stress test scenarios to the 2007-2009 financial crisis, and vector autoregression (VAR) modeling to study how these variables have responded to financial shocks historically. The analysis finds that the relationships between these variables in the stress scenarios closely match the patterns observed during the financial crisis as well as the responses predicted by econometric modeling, suggesting that the co-movement patterns in the scenarios are empirically well-founded.

Evaluating Empirical Regularities in Variable Co-movement in Stress Test Scenarios

The Financial Stability Implications of Tokenized Investment Funds

This note examines the potential effects of tokenized investment funds on broader financial stability from these funds expanding beyond the digital asset ecosystem following recent regulatory developments like cryptocurrency ETF approvals and the GENIUS Act. The discussion describes three economic mechanisms through which fund participants' investment strategies and liquidity demands might affect broader financial market conditions: liquidity transformation, interconnections between the digital asset and the traditional financial system and transaction settlement. Specifically, tokenized investment funds offer potential benefits through improved liquidity and reduced redemption pressures. However, they also introduce new funding risks by tying fund demand to external factors beyond asset performance, potentially amplifying financial system vulnerabilities.

The Financial Stability Implications of Tokenized Investment Funds

Dynamic Competition for Sleepy Deposits

Stickiness, or "sleepiness", of deposits, whereby depositors have a low propensity to switch banks, has long been recognized as a characteristic of U.S. banking markets. This paper analyzes the effects of "sleepy deposits" on bank competition and profitability and banking system stability, using a dataset that combines data from multiple sources. The analysis demonstrates that 5-15 percent of depositors open new accounts annually, and that most account closures are due to life events such as relocations rather than customers seeking better rates or services, consistent with depositor inactivity or "sleepiness." The analysis also reveals that depositor inactivity contributes to much of the typical bank's deposit-related business value; enables higher profit margins, particularly in less concentrated local markets and contributes stability to the banking system. In particular, the analysis shows that without inactive depositors, two major U.S. money center banks would have faced notably higher default probabilities during the Federal Reserve's 2022-2023 interest rate increases.

Dynamic Competition for Sleepy Deposits

Interest Rate Caps and Bank Loan Supply: Locking out the Small Borrower in the Great Depression

In 1929, concerned about excessive profits from high interest rates, New Jersey lawmakers cut the interest rate ceiling for small loan companies from 3 percent to 1.5 percent per month; they then reversed course two years later, raising it to 2.5 percent per month. This paper draws on that historical experience as a natural experiment to study the effects of interest rate caps, applying a difference-in-differences approach that compares small loan brokers subject to the caps with bank providers of similar type loans not subject to the caps. The analysis finds that the loan brokers significantly reduced lending when caps were lowered and increased lending when caps were raised. Moreover, banks did not compensate by increasing their lending to affected borrowers. Brokers charging higher rates in 1929 were more likely to close by 1930, and many closed brokers never reopened. These findings highlight the trade-off whereby interest rate caps can protect consumers from predatory lending but can also restrict credit access for vulnerable populations who have limited alternatives.

Interest Rate Caps and Bank Loan Supply: Locking out the Small Borrower in the Great Depression

Where Collateral Sleeps

Borrowing from the Federal Reserve's discount window requires pre-valued collateral, which can be time-consuming to process during crises; for instance, the 2023 failure of Silicon Valley Bank was in part due to lacking quick access to collateral, which was "sleeping in the wrong place" at other institutions. By "prepositioning" collateral with the Fed, banks can ensure readier access to the discount window, in contrast to the case of SVB. This paper explores banks' prepositioning strategies using supervisory data and public SEC filings. It documents that the biggest banks typically preposition a substantial share (28 percent) of unencumbered assets; most banks don't voluntarily disclose their prepositioning; and those that do tend to be riskier institutions. The analysis identifies three key determinants of a bank's prepositioning strategy: expectations about future liquidity shocks (run risk), which relates in part to the share of deposits that are uninsured; the opportunity costs of prepositioned assets and the stigma (negative market reactions) often associated with discount window borrowing. Regarding disclosure, the paper describes a trade-off between the insurance signaling benefit (communicating preparedness to borrow) versus the stigma cost and argues that riskier banks are more likely to disclose because the insurance signal is more valuable to them.

Where Collateral Sleeps

Chart of the Month

The above chart shows quarterly, inflation-adjusted, aggregate dollar volume of credit card origination activity, expressed as a ratio to the January 2011 volume, by census tract income category: low (less than 50 percent of area median income); moderate (50-80 percent); middle (80-120 percent); and high (greater than 120 percent). The pace of origination activity in low- and moderate-income neighborhoods has consistently exceeded that in middle- and upper-income neighborhoods. After plummeting in 2020, origination volumes rebounded to near or at post-2011 highs in 2022; they have trended downward since then.

Featured BPI Research

The Risks from Allowing Stablecoins to Pay Interest

While the GENIUS Act prohibits issuers from paying interest on stablecoins, exchanges can still make such payments. This note applies economic modeling to estimate that paying interest would materially lift-possibly double-the demand for stablecoins. The implications of this for financial stability would depend on the investment strategies of stablecoin issuers. If issuers house stablecoin reserves mainly in Treasuries and reverse repos, expansion of demand would pull funding from bank deposits and shrink bank credit intermediation. Alternatively, if issuers hold large, predominantly uninsured balances at banks, then run risk shifts onto banks, affecting financial stability through that channel. The note concludes that permitting exchange-level interest undermines the intent of the statutory prohibition and materially amplifies scale-driven risks.

The Risks from Allowing Stablecoins to Pay Interest

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10/15/2025
2025 Stress Test Modeling Symposium
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10/16/2025
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1/2/2026
19th Annual Day Ahead Conference on Financial Markets and Institutions: Announcement and Call for Papers
Federal Reserve Bank of Philadelphia
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