News and Commentary
In the second part of their posts on Liberty Street Economics’ new model for contagion in the financial sector,
An analysis from the Bank Policy Institute finds that recent changes to capital requirements that reduced them for non-advanced approach (AA) banks, but kept them the same for AA banks. They find that this has distorted the market, leading to more mortgage service assets (MSAs) held by non-AA banks. While BPI sees this as a rationale for lowering capital requirements for MSAs across the board, in light of the literature that indicates capital requirements are currently too low, the opposite should be argued.
It’s stress test season! The Fed’s annual Comprehensive Capital Analysis and Review has come out, and it’s generally good news. The only downside is for Credit Suisse, whose capital plan was only conditionally approved. This positive assessment, among other things, gives the green light for banks to make dividend payouts to shareholders, excepting Credit Suisse, who has its payments capped.
A new paper from the Center for Economic Policy Research finds that after financial crises, there is an increase in financial regulation that undoes previous liberalization. However, these reforms tend to be short-lived, and markets soon return to pre-crisis levels of liberalization.