News and Commentary
Charles Goodhart and Dirk Schoenmaker argue based on new research that while countercyclical capital buffers (CCyBs) and other anti-cyclical capital requirements are important tools of macroprudential policy, they are discretionary and can thus have a limited effect on a financial system that is ultimately pro-cyclical. They agree with previous proposals to implement CCyB once credit to GDP passes a certain threshold, and they also propose expanding the capital conservation buffer (which sits on top of a traditional capital requirement and determines what dividend payments and executive bonuses can be given out) from 2.5% to 5% and including it in the overall leverage ratio.
The Wall Street Journal interviewed Donald Layton, former chief executive of Freddie Mac, has some thoughts on how to reduce the GSE’s role in the housing market through privatization. While his thoughts on how to make Fannie and Freddie independent are broad-strokes proposals until something more concrete from the Treasury emerges, he plans to spend much of his time writing about rent-seeking, and he identified Fannie and Freddie as two of the biggest rent-seekers in the housing market, including their ability to hamper a 2005 reform pushed by the Bush administration to limit the size of their subsidized portfolios.
Diego Zuluaga has a new Cato Policy Analysis on the Community Reinvestment Act in the context of financial innovations (“Fintech”) and increased bank competition. The implications of increasing technology and non-bank lenders in the financial sector pose interesting problems to the implementation of the CRA, but Zuluaga’s research also highlights some interesting problems with the CRA’s lending requirement–including gamesmanship of the system by either increasing “risky” lending right before CRA evaluations or by “skimming off the top” by lending to high-income residents of low-income neighborhoods to, on paper, meet their lending requirements.