longform

2025

1. Bank Economic Capital

   Beverly Hirtle and Matthew C. Plosser

   Federal Reserve Bank of New York Staff Report No. 1144, Mar 2025

   Revised October 2025

   Abs DOI

   Conventional measures of bank solvency fail to account for liquidity risks posed by deposits. Using public regulatory data, we develop economic capital, a framework that jointly quantifies credit, liquidity, and market risk. Economic capital identifies banks that fail years in advance, including those in March 2023, while book capital deteriorates just before failure. Predictive power comes from valuing liabilities, which are elevated long before asset impairment. The framework informs assessments of stabilization policies, credit provision, and financial stability — for example, following the Global Financial Crisis low rates depressed economic capital even as interest rate and liquidity risks grew.

2024

1. The Cost of Bank Regulatory Capital

   Matthew C. Plosser and João A. C. Santos

   Review of Financial Studies, Mar 2024

   Abs DOI

   Basel I introduced capital requirements for undrawn commitments, but only for revolvers with an original maturity greater than one year. We use this regulatory discontinuity to estimate the impact of capital regulation on the cost and composition of credit. Following Basel I, short-term commitment fees declined relative to long-term commitments and issuance of short-term facilities increased. Our results highlight the sensitivity of credit provision to capital regulation, particularly for banks with less capital. We are able to infer that low-capital banks are willing to forego twice as much income from fees to reduce required regulatory capital by a dollar.

2023

1. Does the Community Reinvestment Act Improve Consumers’ Access to Credit?

   Jacob Conway, Jack Glaser, and Matthew C. Plosser

   Federal Reserve Bank of New York Staff Report No. 1048, Mar 2023

2022

1. Import Competition and Household Debt

   Jean-Noël Barrot, Erik Loualiche, Matthew C. Plosser, and 1 more author

   Journal of Finance, Mar 2022

   Abs DOI

   We analyze the effect of import competition on household balance sheets using individual data on consumer finances. We exploit variation in local industry exposure to foreign competition to study households’ response to the income shock triggered by China’s accession to the World Trade Organization. We show that household debt increases significantly in regions where manufacturing industries are more exposed to import competition. The effects are driven by home equity extraction and are concentrated in areas with strong house price growth. Our results highlight the role played by mortgage markets in absorbing displacement shocks triggered by globalization.

2. Bank Liquidity Provision across the Firm Size Distribution

   Gabriel Chodorow-Reich, Olivier Darmouni, Stephan Luck, and 1 more author

   Journal of Financial Economics, Mar 2022

   Abs DOI

   We use supervisory loan-level data to document that small firms (SMEs) obtain shorter maturity credit lines than large firms, post more collateral, have higher utilization rates, and pay higher spreads. We rationalize these facts as the equilibrium outcome of a trade-off between lender commitment and discretion. Using the COVID recession, we test the prediction that SMEs are subject to greater lender discretion. Consistent with this hypothesis, SMEs did not draw down whereas large firms did, even in response to similar demand shocks. PPP recipients reduced non-PPP loan balances, indicating the program bolstered their liquidity and alleviated the shortfall.

3. Does CFPB Oversight Crimp Credit?

   Andreas Fuster, Matthew C. Plosser, and James Vickery

   Federal Reserve Bank of New York Staff Report, Mar 2022

2020

1. The Impact of Supervision on Bank Performance

   Beverly Hirtle, Anna Kovner, and Matthew C. Plosser

   Journal of Finance, Mar 2020

   Abs DOI

   We explore the impact of supervision on the riskiness, profitability, and growth of U.S. banks. Using data on supervisors’ time use, we demonstrate that the top-ranked banks by size within a supervisory district receive more attention from supervisors, even after controlling for size, complexity, risk, and other characteristics. Using a matched sample approach, we find that these top-ranked banks that receive more supervisory attention hold less risky loan portfolios, are less volatile, and are less sensitive to industry downturns, but do not have lower growth or profitability. Our results underscore the distinct role of supervision in mitigating banking sector risk.

2019

1. The Role of Technology in Mortgage Lending

   Andreas Fuster, Matthew C. Plosser, Philipp Schnabl, and 1 more author

   Review of Financial Studies, Mar 2019

   Abs DOI

   Technology-based (“FinTech”) lenders increased their market share of U.S. mortgage lending from 2% to 8% from 2010 to 2016. Using loan-level data on mortgage applications and originations, we show that FinTech lenders process mortgage applications 20% faster than other lenders, controlling for observable characteristics. Faster processing does not come at the cost of higher defaults. FinTech lenders adjust supply more elastically than do other lenders in response to exogenous mortgage demand shocks. In areas with more FinTech lending, borrowers refinance more, especially when it is in their interest. We find no evidence that FinTech lenders target borrowers with low access to finance.

2018

1. Macroprudential Policy and the Revolving Door of Risk: Lessons from Leveraged Lending Guidance

   Sooji Kim, Matthew C. Plosser, and João A. C. Santos

   Journal of Financial Intermediation, Mar 2018

   Abs DOI

   We investigate the U.S. experience with macroprudential policies by studying the interagency guidance on leveraged lending. We find that the guidance primarily impacted large, closely supervised banks, but only after supervisors issued important clarifications. It also triggered a migration of leveraged lending to nonbanks. While we do not find that nonbanks use more lax lending policies than banks, we unveil important evidence that nonbanks increased bank borrowing following the guidance, possibly to finance their growing leveraged lending. The guidance was effective at reducing banks’ leveraged lending activity, but it is less clear whether it accomplished its broader goal of reducing the risk that these loans pose for the stability of the financial system. Our findings highlight the importance of supervisory monitoring for macroprudential policy goals, and the challenge that the revolving door of risk poses to the effectiveness of macroprudential regulations.

2. Banks’ Incentives and Inconsistent Risk Models

   Matthew C. Plosser and João A. C. Santos

   Review of Financial Studies, Mar 2018

   Abs DOI

   This paper investigates banks’ incentive to bias the risk estimates they report to regulators. Within loan syndicates, we find that banks with less capital report lower risk estimates. Consistent with an effort to mitigate capital requirements, the sensitivity to capital is robust to bank fixed effects and greater for large, risky, and opaque credits. Also, low-capital banks’ risk estimates have less explanatory power than those of high-capital banks with regard to loan prices, indicating that their estimates incorporate less information. Our results suggest banks underreport risk in response to capital constraints and highlight the perils of regulation premised on self-reporting.

2017

1. Buyout Activity: The Impact of Aggregate Discount Rates

   Valentin Haddad, Erik Loualiche, and Matthew C. Plosser

   Journal of Finance, Mar 2017

   Abs DOI

   Buyout booms form in response to declines in the aggregate risk premium. We document that the equity risk premium is the primary determinant of buyout activity rather than credit-specific conditions. We articulate a simple explanation for this phenomenon: a low risk premium increases the present value of performance gains and decreases the cost of holding an illiquid investment. A panel of U.S. buyouts confirms this view. The risk premium shapes changes in buyout characteristics over the cycle, including their riskiness, leverage, and performance. Our results underscore the importance of the risk premium in corporate finance decisions.

2. Supervising Large, Complex Financial Institutions: What Do Supervisors Do?

   Thomas M. Eisenbach, Andrew F. Haughwout, Beverly Hirtle, and 3 more authors

   Economic Policy Review, Mar 2017