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Home > Research > Research Publications Research Update New Titles in the Staff Reports Series Number 2, 2008 Return to index page   Staff Reports home page   Banking and Finance   No. 328, May 2008 Liquidity and Leverage Tobias Adrian and Hyun Song Shin In a financial system in which balance sheets are continuously marked to market, asset price changes appear immediately as changes in net worth, eliciting responses from financial intermediaries who adjust the size of their balance sheets. Adrian and Shin document evidence that marked-to-market leverage is strongly procyclical. Such behavior has aggregate consequences. Changes in dealer repos—the primary margin of adjustment for the aggregate balance sheets of intermediaries—forecast changes in financial market risk as measured by the innovations in the Chicago Board Options Exchange Volatility Index. Aggregate liquidity can be seen as the rate of change of the aggregate balance sheet of the financial intermediaries. No. 330, June 2008 Corporate Performance, Board Structure, and Their Determinants in the Banking Industry Renée B. Adams and Hamid Mehran Using a sample of banking firm data spanning forty years, Adams and Mehran examine the relationship between board structure (size and composition) and bank performance as well as determinants of board structure. The authors document that merger-and-acquisition activity influences bank board composition and provide new evidence that organizational structure is significantly associated with bank board size. They argue that these factors may explain why banking firms with larger boards do not underperform their peers in terms of Tobin’s Q. The study’s findings suggest caution in applying regulations to banking firms motivated by research on the governance of nonfinancial firms. Since organizational structure is not specific to banks, it may be an important determinant for the boards of nonfinancial firms with complex organizational structures, such as business groups. No. 331, June 2008 The Welfare Effects of a Liquidity-Saving Mechanism Enghin Atalay, Antoine Martin, and James McAndrews This paper considers the welfare effects of introducing a liquidity-saving mechanism (LSM) in a real-time gross settlement payments system. The authors study the planner’s problem to get a better understanding of the economic role of an LSM and find that an LSM can achieve the planner’s allocation for some parameter values. The planner’s allocation cannot occur without an LSM, as long as some payments can be delayed without cost. They show that, in equilibrium with an LSM, there can be either too few or too many payments settled early compared with the planner’s allocation, depending on the parameter values. Using Fedwire data to calibrate their model, the authors describe the equilibrium that would arise with an LSM and compare welfare with and without the mechanism. Their results suggest that introducing an LSM could have significant benefits.