News and Commentary
Jonathan Kirshner in The Washington Post reviews the late Paul Volcker’s views and influence on financial regulation. Volcker is perhaps best known for his views on inflation, but Kirshner emphasizes the late chairman’s skepticism of many financial regulatory changes that occurred during the Reagan and Clinton administrations.
Claire Williams at The Morning Consult offers five predictions on where financial policy could go this year. With the 2020 election on the horizon and a potential change of power, the Trump administration is expected to speed up finalizing changes to Dodd-Frank rules. Williams points to likely country-wide changes in bank capital requirements, the Community Reinvestment Act, and anti-money laundering policy. Meanwhile, individual states are expected to pass various bills reworking regulation in areas ranging from retirement plans to fiduciary standards.
The Federal Reserve Board has published a rule effective January 15th following the Federal Reserve Act to annually adjust the total consolidated asset threshold for inflation according to the GDP Price Index.
The Cato Institute’s Jeffrey Miron and Erin Partin applaud the FHFA’s decision to reduce loans to risky borrowers, pointing to a lower risk of mortgage defaults to follow. They stress however that the FHFA’s mission is misguided and housing affordability should be improved through the elimination of land use regulations, not government lending.
Listen to Wharton’s Nikolia Roussanov discuss a paper he published with coauthors on mortgage refinancing occurring before recessions.
Kristian Bickle and others at Liberty Street Economics have published an annual update on four measures of vulnerability in the banking system. They note a slow growth in these measures since 2016 but still quite low compared to the period before 2008.
Betsy Vereckey at MIT gives five takeaways from a recent Q&A session on regulatory policy. Panelists discussed new possible bubbles and the rise of new technologies such as cryptocurrencies, online payment processors, and Facebook’s Libra.
Nicola Cetorelli and Douglas Leonard at Liberty Street Economics examine the transformation of banks into conglomerates since the late 80’s and find positive outcomes such as higher return on equity and lower overall risk that mostly fade out by the end of the 90’s. However, they also suggest selection bias could have easily driven this trend, and that further analysis will need to take place.
Rich Miller in the San Francisco Chronicle reports that former Fed officials are warning against current Federal Reserve policies. The ex-officials cautioned that lowering rates and easing certain regulations could worsen a recessionary period in the future.
The Cato Institute’s Jeffrey Miron comments on a recent WSJ story noting the perverse incentives of bailing out failing banks.
Listen to Sir Paul Tucker at Cato Institute discuss the central bank’s role in separation of powers.
New Research
A new paper in NBER proposes a model to explain bank capital access effects on financial recoveries. It suggests that when equity losses occur, banks tighten intermediation, making existing information asymmetries lead to even worse adverse selection. This in turn reduces bank lending, slowing recovery.
Another paper recently published in NBER analyzes a relationship between a country’s foreign reserve accumulation and riskier behavior undertaken by firms in said country.
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