This Week in Financial Regulation, July 8th

This Week in Financial Regulation, July 8th

News and Commentary

The Federal Reserve recently announced the results of its annual stress tests of U.S. banks which found that banks are healthy enough to withstand the economic crisis caused by COVID-19. However, the Fed implemented some restrictions on financial institutions’ activities including by capping dividends and freezing stock buybacks.

Yalman Onaran reports for Bloomberg News that the results of the Fed’s annual stress tests for Goldman Sachs found that the bank would need a higher-than-anticipated stress capital buffer. This higher buffer likely necessitates that the bank trim its balance sheet in order to avoid a cut in the company’s dividend for shareholders.

An article on The Motley Fool discusses how new capital requirements imposed by the Fed’s recent stress tests are affecting JPMorgan Chase. The article explains how the bank’s increased capital requirement will complicate the firm’s effort to maintain its dividend down the road.

Citibank announced in a press release that the results of its Fed stress tests will allow the bank to continue with its planned dividends.

A column by Manuel A. Muñoz published in VoxEU discusses how Eurozone banks are particularly reluctant to limit dividends during recessions, notably exacerbating the impact of negative supply shocks on lending and output. Muñoz argues that limiting distribution of dividends could potentially improve the effectiveness of countercyclical capital buffers.

A blog post by Bill Nelson and Adam Freedman for the Bank Policy Institute discusses how liquidity in the financial sector and the Fed’s decisive actions to preserve the strength of financial institutions has allowed the economic crisis caused by the COVID-19 pandemic to not spiral into a financial crisis as well. The post asserts that while during the Great Recession, banks were weakly capitalized and largely illiquid, those same problems were largely avoided during this economic downturn to preparedness for another crisis.

Anna Tergesen writes in The Wall Street Journal that the Department of Labor is proposing a new rule for retirement accounts that allow financial advisors to provide financial advice and still receive commissions in some cases. Opponents say that the proposed rule would weaken protections on retirement accounts that protect consumers from conflicts of interest and other abuse.

A VoxEU column discusses new research that reveals evidence that banks’ liquidity creation is associated with increased economic growth across both industries and countries. It also finds that in the new knowledge economy, banks will serve a less important role than other financial institutions.

The European Systemic Risk Board released wide-ranging recommendations to financial institutions in the wake of the COVID-19 economic crisis, says a VoxEU column. The recommendations are non-binding yet they seem to reflect the uncertainty that the COVID-19 pandemic has on the European and global economies. The authors discuss arguments in favor and against these recommendations and examine evidence of the effectiveness of these recommendations and other restrictions on EU financial institutions.

An article published in The Daily Dish, an American Action Forum blog, discusses a finalized regulation from the Federal Housing Finance Agency that sets capital requirements for Fannie Mae and Freddie Mac, the nation’s two government-sponsored enterprises that operate in the secondary mortgage market. The author argues that the capital requirements are insufficient for these two institutions which have a, “track record of accounting fraud, excessive risk-taking and abuse of their charters, and economic damage inflicted on the American public”.


New Research

A new International Monetary Fund working paper finds that macroprudential regulation can considerably help dampen the impact of global financial shocks on developing markets. The paper also finds that stricter capital controls do not achieve a similar effect.

A new working paper from the National Bureau of Economic Research (NBER) finds that American global systemically important banks are major suppliers of short-term U.S. dollar liquidity in the repo and foreign exchange swap markets since the Great Recession. This has resulted in these financial institutions becoming “lenders-of-second-to-last-resort”.

Martin Goetz, Luc Laeven, and Ross Levine write in a NBER working paper about the role of insider ownership in shaping banks’ issuances of equity. The paper finds that greater insider ownership leads to less equity issuances.

A NBER working paper that uses historical data on financial crises around the world suggests that financial crisis are substantially predictable. The paper finds that the, “combination of rapid credit and asset price growth over the prior three years, whether in the nonfinancial business or the household sector, is associated with about a 40% probability of entering a financial crisis within the next three years”.

Itzhak Ben-David, Justin Birru, and Andrea Rossi write in a new NBER working paper about the long-run outcomes that are associated with hedge funds’ compensation structure.

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By |2020-07-09T08:59:54-07:00July 9th, 2020|Blog, Financial Regulation|