This Week in Financial Regulation, March 31st

This Week in Financial Regulation, March 31st

News and Commentary

Washington Post columnist Megan McArdle writes about the limits of the Fed in addressing the economic crisis. Fortunately, Congress has since taken action but time will tell what Phase IV brings.

A new blog post at Pro-Market argues that bailouts for corporations simply insulate investors from the risks they accept when investing. Of course, the CARES Act as now enacted will give to individuals under a certain income threshold, but the bailouts for corporate entities were quite generous.

One of the problems that can arise with macroprudential policy is something akin to preparing to fight the last war. While requirements and regulations for banks were built after 2008 and the Eurozone crisis to account for financial troubles, the sheer scale of output collapse as services close up for quarantine measures outpaces any recent crisis concentrated in the financial sector.  A new piece at Euromoney provides this analysis and looks more deeply at the threat of Covid-19 to the banking sector.


New Research

A new NBER paper discusses banking crises and builds a dataset looking at such crises across 46 countries since 1870. The authors find banking panics are typically a result rather than a cause of these crises.

An NBER paper reviews bank stress tests and concludes that large trading banks do adopt more conservative capital plans in response to the tests, demonstrating these tests do serve the public interest rather than regulatory capture.

Another NBER paper uses Fisherian models linking credit constraints to market prices to analyze Sudden Stops, where a large current-account reversal occurs immediately. The authors build a frontier model suggesting there is a tradeoff between reducing the probability of crisis and long-run output. 

How do shadow banks operate without funding from deposits? An NBER paper assembles call report data for shadow banks and documents how these financial institutions function.

An AEA paper proposes a New Keynesian model in light of the 2008 recession to study optimal monetary policy at the zero lower bound. 

Clearly the Fed’s growth expectations downgrade alongside negative stock returns, but a new NBER paper looks more deeply into how policymakers at the Fed use stock return information to infer consumption.

A new working paper analyzes natural disasters and bank lending systems, finding that corporate credit demands are met by regional banks prioritizing lending to them over distant regions not affected by a disaster. Of course, that lending can be further expanded with reduced capital requirements for such banks during a crisis.

A new working paper at Mercatus Center looks at regulatory burdens and the concept of financial technology “sandboxes”. The authors find these sandboxes carry risks but also be modified to reduce such risks of favoritism and uncertain incentives.

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By |2020-04-02T13:46:40-07:00April 2nd, 2020|Blog, Financial Regulation|