We develop a model in which capital moves quickly within an asset class, but slowly between asset classes. While most investors specialize in a single asset class, a handful of generalists can gradually reallocate capital across markets. Upon the arrival of a large supply shock, prices of risk in the directly impacted asset class become disconnected from those in others. Over the long run, capital ‡ows between markets and prices of risk become more closely aligned. While prices in the directly impacted market initially overreact to the supply shock, we show that prices in related asset classes underreact under plausible conditions. We use the model to assess event-study evidence on the impact of recent large-scale asset purchases by central banks.

This paper examines the joint determination of deviations in long-term covered interest rate parity and dierences in the credit spread of bonds of similar risk but dierent currency denomination. These two pricing anomalies are highly aligned in both the time series and the cross-section of currencies. The sum of these two pricing deviationsthe corporate basisrepresents the currency-hedged borrowing cost difference between currency regions and explains up to a third of the variation in the aggregate corporate debt issuance ow. I show that arbitrage aimed at exploiting one type of security anomaly can give rise to the other.

We characterize how U.S. global systemically important banks (GSIBs) supply shortterm dollar liquidity in repo and foreign exchange swap markets in the post-Global Financial Crisis regulatory environment and serve as the "lenders-of-second-to-lastresort". Using daily supervisory bank balance sheet information, we find that U.S. GSIBs modestly increase their dollar liquidity provision in response to dollar funding shortages, particularly at period-ends, when the U.S. Treasury General Account balance increases, and during the balance sheet taper of the Federal Reserve. The increase in the dollar liquidity provision is mainly financed by reducing excess reserve balances at the Federal Reserve. Intra-firm transfers between depository institutions and broker-dealer subsidiaries within the same bank holding company are crucial to this type of "reserve-draining" intermediation. Finally, we discuss factors that contributed to the repo spike in September 2019 and the subsequent response of U.S. GSIBs to recent policy interventions by the Federal Reserve.

We characterize how U.S. global systemically important banks (GSIBs) supply short-term dollar liquidity in repo and foreign exchange swap markets in the post-Global Financial Crisis regulatory environment and serve as the "lenders-of-second-to-last-resort". Using daily supervisory bank balance sheet information, we find that U.S. GSIBs modestly increase their dollar liquidity provision in response to dollar funding shortages, particularly at period-ends, when the U.S. Treasury General Account balance increases, and during the balance sheet taper of the Federal Reserve. The increase in the dollar liquidity provision is mainly financed by reducing excess reserve balances at the Federal Reserve. Intra-firm transfers between depository institutions and broker-dealer subsidiaries within the same bank holding company are crucial to this type of "reserve-draining" intermediation. Finally, we discuss factors that contributed to the repo spike in September 2019 and the subsequent response of U.S. GSIBs to recent policy interventions by the Federal Reserve.

and participants in the macroeconomics seminar at Harvard University. This research project involves no outside funding or conflicts of interest. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research. NBER working papers are circulated for discussion and comment purposes. They have not been peerreviewed or been subject to the review by the NBER Board of Directors that accompanies official NBER publications.

No abstract

Operational risk capital requirements represent a relative backwater of the Basel capital framework for banks. We examine both the existing Basel II framework and the latest Basel Committee proposals for reform and conclude that neither are effective in creating appropriate incentives and loss absorbency to minimize negative externalities from operational risk events. We evaluate an alternative approach that would appear to be much more effective in achieving the regulatory objectives. We do not offer a view on the amount of capital required, focusing instead on the methodology and structure of the capital requirement.

We document the exchange rate hedging channel that connects country-level measures of net external financial imbalances with exchange rates. In times of market distress, countries with large positive external imbalances (e.g. Japan) experience domestic currency appreciation, and crucially, forward exchange rates appreciate relatively more than the spot after adjusting for interest rate differentials. Countries with large negative foreign asset positions experience the opposite currency movements. We present a model demonstrating that exchange rate hedging coupled with intermediary constraints can explain these observed relationships between net external imbalances and spot and forward exchange rates. We find empirical support for this currency hedging channel of exchange rate determination in both the conditional and unconditional moments of exchange rates, option prices, large institutional investors' disclosure of hedging activities, and central bank swap line usage during the COVID-19 market turmoil.