This Week in Financial Regulation, March 24th

This Week in Financial Regulation, March 24th

News and Commentary

A new article at CEPR’s Vox details the role of shadow banking in the European economy. The author notes that as shadow banking grows, it will slowly undermine the effectiveness of capital-based and borrower-based policies.

Another CEPR Vox column looks at liquidity in financial institutions with the Covid-19 crisis, determining that regulators should continue to plan for even more severe stress with capital preservation to be available so requirements could be cut for liquidity problems in the future. This should be noted along a new column cosigned by 13 economists urging the EU to extend a Covid Credit Line via the European Stability Mechanism, which would better enable member states to handle the pandemic and economic crisis.

Several economists at the World Bank review global debt in a recent CEPR Vox column and point out the new wave of debt in developing countries. Previous debt crises among emerging and developing countries each began with a period of low real interest rates followed by an external shock to capital. The authors conclude that the fourth and most recent wave of debt accumulation should be carefully noted by policymakers in international institutions.

Corporate debt restructuring should be considered in light of the Covid-19 crisis and economic recovery afterwards, argues a column by several economists in CEPR’s Vox. They point to the looming debt strains and emphasize designing bailout packages that enable recovery while strengthening the state’s role in negotiations. Senator Warren (D-MA) recently sent a letter to Treasury Secretary Mnuchin on leveraged loans airing a concern on the same question of risky corporate debt.

Ramin Toloui writes in Politico that direct cash payments to Americans in response to the coronavirus crisis are just a start; the government should also defer various forms of debt with the support of financial institutions. Of course, there are other policies to consider. Over at the Wall Street Journal, Kevin Warsh argues the Federal Reserve could oversee an emergency lending program to limit the liquidity crisis.

FDIC issued a FAQ document for Covid-19 and financial institutions with various recommendations for how lenders should respond to the crisis.

John Cochrane takes a skeptical look at the airline bailouts, pointing to the obvious moral hazard entailed in rewarding an industry taking on so much debt. He draws an analogy to the 2008 banking crisis and argues that capital regulation must follow this bailout or else the lack of consequences will encourage more debt-financing across businesses. The analogy becomes even more relevant when one considers this crisis is the first real test of our post-2008 financial system.

The Cato Institute has released a new white paper on the government conservatorship of Fannie and Freddie since the housing crisis, reviewing the risks and challenges ahead.

Economist Nellie Liang at Brookings writes on what the Fed should clarify about the role of banks in maintaining liquidity. She suggests deploying regulatory buffers alongside clear guidance on how banks can safely operate. Without this guidance, banks could face uncertainty of how much to help households and businesses in the Covid-19 downturn without running the dangers of insolvency.


New Research

A new CEPR paper examines risk-taking in banks through executive behavior in selling shares prior to the 2006 peak in real estate prices. It finds evidence to suggest insiders understood the risks being taken by banks prior to the crisis and should inform theory and policy about these financial institutions. The authors have written up a CEPR Vox column here.

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By |2020-03-29T17:59:17-07:00March 29th, 2020|Blog, Financial Regulation|