News and Commentary
Zachary Warmbrodt writes in Politico about the ongoing debate about whether the Federal Reserve should be required to factor in the costs of climate change risk into annual bank stress tests.
Dmitry Kuvshinov and Kaspar Zimmermann write in VoxEU about how stock market size should co-evolve with real output in the long run and find that that was true until the 1980s when a profit shift towards listed firms and historically low discount rates caused an unprecedented divergence between output and stock market size.
In an article for the Bank Policy Institute, Francisco Covas discusses the severity of the Fed’s recent stress tests of American banks and concludes that, “Fed’s sensitivity analysis was extremely severe” and that, “an extremely severe stress test conducted in the middle of an economic downturn makes the capital framework procyclical and unduly restricts credit availability”.
A VoxEU column discusses how changes in financial regulation can affect children’s educational outcomes by connecting changes in banking regulation with parents’ financial conditions.
If there is a large credit expansion with an asset price boom then a financial crisis is likely to follow, concludes a VoxEU column which examines the predictability of financial crises.
An article on Seeking Alpha examines the financialization of the U.S. economy and finds that investors ought to be aware of its effects on corporations. The article suggests that many companies have excessive debt burdens that are being buoyed by liquidity injections from the Fed and federal government spending.
A new working paper from the National Bureau of Economic Research examines the long-run effects of government interventions in the Eurozone banking sector finding that fiscally-constrained European governments “kicked the can down the road” which has resulted in lessened credit supply, elevated risk, and greater reliance on liquidity support from the European Central Bank.
An NBER working paper by Ricardo Correa and Linda S. Goldberg examines how complexity of bank holding companies can cause increased risk. The paper also finds how regulatory changes focused on complexity can affect banks’ risk.