A proposed framework for empirically assessing a central counterparty’s capacity to cope with severe financial stress. Using public disclosure data for global central counterparties (CCPs), we show how to estimate the probability that a CCP could cover any specified fraction of payment...

We show that the fundamental legal structure of a well-written financial contract follows a state-transition logic that can be formalized mathematically as a finite-state machine (specifically, a deterministic finite automaton or DFA). The automaton defines the states that a financial...

Non-U.S. banks with relatively low capital ratios appear to temporarily remove an average of $170 billion from the U.S. market for tri-party repurchase agreements (repo) before each quarter-end in order to appear safer and less levered. This amount is more than double the $76 billion market-wide...

Financial institutions commonly face the risk that large trades will execute at unfavorable prices due to price impact effects from insufficient market liquidity. A typical method to manage these price impact effects is to split a given order into smaller pieces and to trade these pieces...

Expectations of government support for large financial firms are often based on their lower borrowing costs relative to smaller financial firms. However, large financial firms are not unique in this regard: larger firms enjoy lower borrowing costs in several industries. We show that size-related...

Contingent convertibles (CoCos) and bail-in debt for banks have been proposed as potential mechanisms to enhance financial stability. They function by converting to equity when a bank approaches insolvency. We develop a capital structure model to analyze the incentives created by these forms of...

The increasing frequency and scope of financial crises have made global financial stability one of the major concerns of economic policy and decision makers. This has led to the understanding that financial and banking supervision has to be thought of as a systemic task, focusing on the...

Reducing systemic liquidity risk related to seasonal swings in loan demand was one reason for the founding of the Federal Reserve System. Existing evidence on the post-Federal Reserve increase in the seasonal volatility of aggregate lending and the decrease in seasonal interest rate swings...

Interconnections among financial institutions create potential channels for contagion and amplification of shocks to the financial system. We estimate the extent to which interconnections increase expected losses, with minimal information about network topology, under a wide range of shock...

This paper surveys the rapidly growing literature about interconnectedness and financial stability. The paper focuses on insights in the literature on the relationship between network structure and the vulnerability of the financial system to contagion