News and Commentary
The Fed has proposed imposing an 8% risk-adjusted capital requirement on the insurance companies it oversees. These insurance companies are so-called “shadow banks”–major financial institutions who face all the risks of normal banking but are not subject to the same regulations. For example, an insurance company like AIG, though technically not a bank, still needed a bailout during the financial crisis. This proposal is a welcome move to take shadow banking out of the dark.
The Cato Institute’s Deigo Zuluaga explains how government subsidies contributed to the pre-crisis housing boom. A push to promote homeownership encouraged irresponsible lending, often to those who one wouldn’t expect to deserve government assistance, and left some of the policy’s supposed beneficiaries saddled with debt.
This week, Zuluaga also defended financialization against some criticism.
James Dorn argues that a rules-based monetary policy would be best positioned to remain independent. A rules-based approach would bind policymakers to follow a formula rather than their own economic intuitions.
A paper in the NBER argues that middle-income countries accumulate foreign reserves in good times as a counter-cyclical measure. Essentially, when private actors are borrowing a lot from the world, their central bank will tend to lend to the world to maintain a sustainable net foreign asset position.
After the financial crisis, there has been increasing cross border cooperation in banking supervision. However, researchers with CEPR find that though these efforts are somewhat effective, the largest banks have not been made safer. Their work is summarized here.