News and Commentary
In this interview transcript, three Brookings Institution scholars discuss the stress tests implemented after the financial crisis. Up through 2018, these tests resulted in banks being required to steadily raise more capital until that trend reversed in 2019. While the scholars are optimistic, they note that we can only be sure of the tests’ accuracy by seeing how banks perform in the next crisis.
Ending the tax preference for debt financing relative to equity financing is perhaps a potential area of convergence between Republicans and Democrats. The Republican tax bill made some minor progress on this issue already, and such a reform would fit with Democrats’ rhetoric about ending favors to Wall Street.
In 2008, when Fannie Mae and Freddie Mac were on the verge of bankruptcy, the Federal government took the companies into conservatorship ensuring their financial stability. With the crisis over, the government should consider unwinding its relationship with these companies but not before ensuring the companies are adequately capitalized to withstand the next crisis and getting some more compensation for the taxpayers who bailed them out.
In a recent episode of Macro Musings, David Beckworth sat down with Thomas Hoening to discuss his career as a Fed governor. Hoening discusses some of his lingering doubts concerning Quantitative Easing, and they debate moving from our floor system back to a corridor system. Hoening is also a supporter of higher capital requirements.
New Research
Two new studies out of the NBER measure the effects of competition on banks. The first study explores how the introduction of credit unions places pressure on banks’ old business models. The surviving banks tend to specialize in relationship business lending and tend to see higher profits. Meanwhile, non-bank consumer credit agencies (for example auto loan companies) became more willing to lend to risky borrowers. The second study shows that banks operating in concentrated deposit markets issue more high maturity loans. Facing less competition in attracting depositors, they are more willing to lend for longer periods of time.
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