News and Commentary
An article in IPPMedia provides an excellent outline of the relationship between financialization and broader economic growth. The financial sector is essential, and in previous decades it was mostly focused on banks lending to productive industries in the “real” economy, but after a certain point it becomes a net drag on growth, as we see today.
The Bank for International Settlements has published an updated review of the literature on the benefits of capital requirements. It finds that, in general, the benefits of capital requirements have been undersold and that there are benefits across “a wide range of capital levels.” It also finds in its review of the literature that the net marginal benefit of increasing capital requirements (based on discounted GDP growth), is generally positive even at levels higher than 15%, but the marginal benefits diminish significantly around 10%.
Macroprudential policy, which has to do with the stability of the financial sector broadly, and monetary policy, while separate topics, can have complementary effects, a new study finds. A new paper’s findings based on a sample of 37 developing and industrialized economies show that stricter macroprudential policies can restrict credit growth, and that tighter monetary policy makes the impacts of stricter macroprudential policy greater. The authors use these findings to argue that the two policies must be coordinated to achieve the best results.
A new paper from the National Bureau of Economic Research describes the development of the structure of the financial sector after the founding of the Federal Reserve System and the Great Depression. After the Fed was created, network concentration decreased as banks connected with others in cities with a Fed Bank. After the Great Depression, bank survival was positively correlated with connections to banks in Fed cities.
New research from NBER demonstrates that financial shocks propagate through the financial sector are amplified less in more connected networks. Banks that are more diversified better protect themselves from shocks, but they increase their influence on other banks. The paper finds that shocks to the system propagate more depending on the relationship between financial instruments to others rather than the size of the shock per se.