This Week in Financial Regulation, July 30th

This Week in Financial Regulation, July 30th

Rent Check

I have a blog post examining how the Community Reinvestment Act is inadvertently accelerating gentrification. While it was a needed amelioration for the legacies of redlining, flaws in the structure and targeting of the program redirect loans to the well-to-do residents of otherwise poor neighborhoods.


News and Commentary

Axios has a brief summary of Elizabeth Warren’s record concerning financial regulation.  Based on her personal history and the post-2008 salience, these issues have become central to her political identity.

Two interesting announcements courtesy of the Federal Reserve’s Board of Governors.  First, they have proposed a rule change to encourage more residential development.   There are complicated to rules determining a bank’s risk-weighted capital requirement.  This change would score the development of land for family housing as less risky than it was previously considered.  Second, they clarified which foreign entities will be excluded from a proposed change to the Volcker Rule.


New Research

NBER has some new research on the incentives of hedge fund managers.  Certain managers invest their personal money in the fund, and this stake is meant to align the interests of managers and owners.  While funds with this policy tend to outperform peer institutions, the authors find that these increased returns are mostly driven by managers excluding additional capital to pursue non-scalable, highly-lucrative investment strategies.  Thus, managers can generate a good return for themselves and a few other owners, but the fund ceases to pursue other less profitable opportunities.  Thus, rather than aligning interests, manager’s having “skin in the game” seems to actually distort their decisions.

The Center for American Progress has some interesting recommendations for strengthening the regulation of shadow banking.  While you may be imagining tellers lurking in dark alleys, shadow banks are in fact respectable institutions, such as money market mutual funds and hedge funds.  However, when these companies hold short-term liabilities and long-term assets (the surest means of generating profit), they can be subject to the same instability of traditional banking.  After Dodd-Frank, the Financial Stability Oversight Council is charged with recognizing systemically important Shadow Banks and regulating them.  The “populists” in the Trump administration have let this oversight languish.

Brookings just conducted an interesting analysis of capital requirements in the context of the Fed’s annual stress tests.  Here is their underlying paper.  The authors highlighted that a proposed rule change may significantly weaken the countercyclicality of our current capital requirements regime.  Right now, banks are required to pre-fund all payments to ownership (dividends or buybacks).  This mandate promotes countercyclicality because in good times banks will generate profits.  Then, prefunding the payment of these profits increases the bank’s capital ratio.  Therefore, the Fed’s proposal to end the pre-funding requirement raises serious questions, and it may necessitate increasing the countercyclical capital buffer (CCyB) or the global systemically important bank (GSIB) surcharge.


I didn't find this helpful.This was helpful. Please let us know if you found this article helpful.
By |2019-07-30T13:58:00-07:00July 30th, 2019|Blog, Financial Regulation|