This Week in Financial Regulation, June 19

This Week in Financial Regulation, June 19


Basel III Liquidity Requirements and Systemically Important Bank Surcharges. A new proposal from The Clearing House finds that liquidity coverage ratio (LCR) requirements introduced with the Basel III accords would reduce the need for extra capital that global systemically important banks (GSIBs) would have to hold (also called a GSIB surcharge) by 25%. The ability to reduce this additional buffer would come from the reduced risk of a “fire sale” for banks that hold more liquid assets in the event of an economic downturn.


The value of government guarantees to American banks. The ratio of market-to-book value (total market capitalization divided by accounting value) for American banks over the past 30 years went from approximately 1 in 1990 to almost 2 in 2007, and then back to 1 again in the years following the financial crisis. The authors of a new paper find that a large portion of the increase in this ratio was driven by government guarantees, rather than just changes in bank profitability or value.

Research on the wealth effects of housing. The wealth effect of housing describes the change in consumption that comes from increased consumer wealth, in this case from home value. A new paper finds that large wealth effects of housing have been present since the 1980s, and were in fact greatest before 2000, indicating that increased spending due to increased property values was not unique to the housing bubble. The wealth effect is insensitive to changes in the loan-to-value (LTV) ratio (the value of a mortgage to the value of the home) for two reasons. First, homeowners with lower LTVs have a high propensity to consume extra household wealth, but their low LTV means they are not constrained by mortgage debt.  Second, an increase in the loan-to-value ratio increases the number of “underwater” buyers, whose consumption is insensitive to home prices.


Proposal to give all Americans bank accounts at the Fed. A recently released report from the Great Democracy Initiative proposes giving every American accounts at the Federal Reserve like U.S. banks. The proposal is similar to “postal banking,” and the “FedAccounts” would pay higher interest than current commercial banks, in addition to transferring consumer savings away from traditional banks. The authors maintain that the FedAccounts plan would also eliminate the need for FDIC insurance on private bank deposits and reduce transaction costs associated with transferring funds from one bank to another.



Swiss “narrow banking” reform fails. The Vollgeld or “sovereign money” Initiative would have prohibited commercial banks from creating money through lending. Instead, banks would only be allowed to lend out as much money as they have in deposits. Supporters of the plan argued that the ability of private actors (i.e. banks) to influence the money supply took the power away from the Swiss National Bank (SNB), though the SNB opposed the initiative. This would have ended “fractional reserve” banking, where banks lend out more than they have in deposits, and instead created a full reserve or  “narrow banking” system, where banks can only lend up to their deposits. A similar idea was proposed by Irving Fisher in the 1930s, called the “Chicago Plan.”


France to create “countercyclical” capital buffer for banks. The regulation, issued by the High Council for Financial Stability, would require both foreign and domestic banks to hold 0.25% of risk-weighted French assets in capital. The measure was designed to reduce the risk of economic downturns leading to a sudden contraction in lending, exacerbating an economic bust.


Federal Housing Finance Agency seeks comment on rules requiring Fannie and Freddie capital requirements. The proposed rule would require the two government-sponsored enterprises (GSEs) to hold a risk-based capital buffer if they exit conservatorship. Two alternatives to the currently proposed rule are a flat 2.5% capital requirement on total assets, or a “bifurcated alternative” with a 1.5% requirement on trust assets and 4% on non-trust assets. The two proposals would make the total required capital equal to $139 billion and $104 billion, respectively. Under current rules of conservatorship, Fannie and Freddie can keep up to $3 billion in capital to cover small operating losses.


You can read more about capital requirements in our reference library.


Wells Fargo isn’t the only bank to open fraudulent accounts, finds OCC. In the wake of the Wells Fargo fake-accounts scandal, for which the bank was fined $1 billion, the Office of the Comptroller of the Currency found that other banks have engaged in similar practices. A report of the suspected banks has not been released, but the OCC issued 252 “Matters Requiring Attention” notices to banks.


Banking deregulation helps mostly small banks, and bigger banks want in on the action. The recently-enacted Economic Growth, Regulatory Relief, and Consumer Protection Act provided regulatory relief to smaller banks, mostly by raising the threshold required for enhanced monitoring (even though many of the banks covered have been bailed out in the past). Larger banks, both foreign and domestic, though helped somewhat by the proposed changes to the Volcker Rule, are subject to new stress-testing rules that would require increased capital requirements for these large institutions.


Anat Admati on our fragile financial system. Writing in City A.M., Stanford Professor Anat Admati writes that 10 years after the financial crisis, our financial system is still built around excessive leverage. Recent changes haven’t challenged the fundamental assumption that our financial system must be built on debt, a system that that encourages risk at the expense of a more stable financial system.

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By |2018-06-19T07:20:22-07:00June 19th, 2018|Blog, Financial Regulation|