This Week in Financial Regulation, July 23rd

This Week in Financial Regulation, July 23rd

News and Commentary

In an op-ed for The Hill, Laurence Kotlikoff of Boston University makes the comprehensive case for narrow banking. Much like a mutual fund, it is simply impossible (unless there is outright fraud) for a narrow bank to fail. Additionally, while the interest rate on deposits is quite low (around 0.1%), banks with excess reserves at the Fed are paid over 2%. Narrow banking could pass these benefits on to ordinary depositors.

Norbert Michel has two suggestions for how the Trump administration can reform the federal government’s role in housing finance. The first would be to solve the bizarre patchwork of rules that are applied on “qualifying mortgages,” rules which banks are often able to work around. The second would strike at the hearts of Fannie and Freddie: increase the capital the two GSEs must hold, and begin to unwind their portfolios.

The Hill has a profile of Richard Hunt, lobbyist for the Consumer Bankers Association (CBA) and former congressional staffer. It’s an interesting history of the banking industry’s relationship with Capitol Hill. Before 2008, lobbyists for the CBA and other financial-sector interest groups, “could almost do nothing wrong. Within reason, within the law, we could go to Congress and get almost anything we wanted passed,” said Hunt. After 2008, the banking industry has worked hard to restore its reputation. Vae victis.


New Research

A new paper from NBER analyzes how the value short-term debt, which in general is thought to be information insensitive, can change during a financial crisis. Because short-term debt is often used as a medium of exchange, there is generally a strong incentive to avoid gathering or disseminating information that would destabilize the market for such instruments. However, in times of crisis, the paper finds that when information about the soundness of these securities comes to light, it can have a destabilizing effect on the whole market. Through this view, it makes short-term debt unique among financial instruments.

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By |2019-07-23T14:09:01-07:00July 23rd, 2019|Blog, Financial Regulation|