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| Research Update |
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| New Titles in the Staff
Reports Series |
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| Number 1, 2008 |
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| Banking and Finance |
| No. 312, January 2008 |
| Run Equilibria in a Model of Financial Intermediation |
| Huberto M. Ennis and Todd Keister |
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| The authors study the Green and Lin (2003) model of financial intermediation with two new features: traders may face a cost of contacting the intermediary, and consumption needs may be correlated across traders. They show that each feature is capable of generating an equilibrium in which some (but not all) traders “run” on the intermediary by withdrawing their funds at the first opportunity regardless of their true consumption needs. Their results also provide some insight into elements of the economic environment that are necessary for a run equilibrium to exist in general models of financial intermediation. In particular, the findings highlight the importance of information frictions that cause the intermediary and traders to have different beliefs, in equilibrium, about the consumption needs of traders who have yet to contact the intermediary. |
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| No. 314, January 2008 |
| What Can We Learn from Privately Held Firms about Executive Compensation? |
| Rebel A. Cole and Hamid Mehran |
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| This study examines the determinants of CEO compensation using data from a nationally representative sample of privately held U.S. corporations. It finds that 1) pay-size elasticity is much larger for privately held firms than for the publicly traded firms on which previous research has almost exclusively focused; 2) executives at C-corporations are paid significantly more than executives at S-corporations; 3) executive pay is inversely related to CEO ownership; 4) executive pay is inversely related to leverage; and 5) executive pay is associated with a number of CEO characteristics, including age, education, and gender; it is inversely related to CEO age and positively related to educational attainment, and female executives are paid significantly less than their male counterparts. |
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| No. 318, March 2008 |
| Understanding the Securitization of Subprime Mortgage Credit |
| Adam B. Ashcraft and Til Schuermann |
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| Ashcraft and Schuermann provide an overview of the subprime mortgage securitization process and the seven key informational frictions that arise. They discuss the ways that market participants work to minimize these frictions and speculate on how this process broke down. They continue with a complete picture of the subprime borrower and the subprime loan, discussing both predatory borrowing and predatory lending. The authors present the key structural features of a typical subprime securitization, document how rating agencies assign credit ratings to mortgage-backed securities, and outline how these agencies monitor the performance of mortgage pools over time. Throughout the paper, they draw upon the example of a mortgage pool securitized by New Century Financial during 2006. |
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| No. 319, March 2008 |
| Settlement Delays in the Money Market |
| Leonardo Bartolini, Spence Hilton, and James McAndrews |
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| The authors track 38,000 money market trades from execution to delivery and return to provide a first empirical analysis of settlement delays in financial markets. In line with predictions from recent models showing that financial claims are settled strategically, they document a tendency by lenders to delay delivery of loaned funds until the afternoon hours. The authors find that banks follow a simple strategy to manage the risk of account overdrafts—delaying the settlement of large payments relative to that of small payments. They also find evidence of strategic delay in the return of borrowed funds, although they can explain a smaller fraction of the dispersion in delays in the return than in the delivery leg of money market lending. |
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