Investor Confidence in the Financial System

This issue of FTG Insights covers research on investor confidence---both its causes and its consequences, and including applications to currency, banking, and securitization markets. “Dynamic Interventions and Informational Linkages” argues that in a financial crisis bailing out smaller banks could be a better way to instill confidence in the resiliency of the banking sector. “U.S. Government Bonds: Still a Safe Haven?” argues that the status of US treasuries as the world’s safe asset stems not only from strong fundamentals, but also because the sheer size of the U.S outstanding debt affords a liquid vehicle for international savers to coordinate on. “Securitization, Ratings, and Credit Supply” shows that in the presence of securitization reliance on credit ratings to rate the quality of banks’ loan portfolios can actually reduce banks’ lending standards. “Financial Markets, the Real Economy, and Self-Fulfilling Uncertainties” highlights that information production in financial markets and the real economy is both affected by, and affects, the level of aggregate economic activity, amplifying and accelerating macroeconomic business cycle fluctuations.