This Week in Financial Regulation, September 10th

This Week in Financial Regulation, September 10th

News and Commentary

Hannah Lang at American Banker reports that the Fed published capital requirements incorporating a stress capital buffer: the projected change in capital ratio under severe stress.

In a VoxEU column, Acharya et al. explain how economies with undercapitalized financial sectors are less able to recover from economic recession than those better capitalized or well recapitalized by a central bank.

Bill Nelson and Pat Parkinson from the Bank Policy Institute write that despite early concerns and money-market warning signs, decreased liquidity from post-recession banking regulations have not been widely understood until COVID related shocks. Normally highly liquid markets such as US Treasuries have evaporated, and the authors suggest that future market growth must be accompanies by regulatory changes.

JDP documents the UK Prudential Regulation Authority’s suspension of fixed rate lending limits.

Matthew Larvick and Daniel Sherlock detail the potential implications of IRS “carried interest” regulations stemming from section 1061 of the 2017 Tax Cuts and Jobs Act, noting exceptions to the three year recharacterization requirement.

Motley Fool author Bram Berkowitz covers new capital requirements from the Fed, showing post stress test results for numerous large firms.

Ryan Smith, in Mortgage Professional America Magazine, quotes Senate Democrats asking for more time to consider proposed Federal Housing Finance Agency Fannie May and Freddie Mac capital framework that could increase capital requirements.

John Ryan of American Banker thinks that The Office of the Comptroller of the Currency continues to overstep Congressional authority by defining what is and is not a bank.

Todd Baker and Corey Stone write at Harvard Business Review that financial regulation could tether bank profits to the financial health of its customers. After making public a “Financial Health Rating,” regulators incur a tax on low performing firms.

Investigating why financial markets can be disconnected from the actual economic state, John Balder claims the financialization process has caused artificially high asset pricing and income inequality in a piece at Seeking Alpha.

JPSupra publishes on the Final Volcker Rule, presenting its implications for venture capital. The regulation modifies the types of venture capital funds in which banks can invest.


New Research

Kristen Forbes publishes a paper on the ability of macroprudential tools to improve the stability of a country’s financial system. She finds that while strategies containing leverage of financial institutions effectively slow credit growth (including mortgages), their efficacy may be limited in countries with less regulation by increased lending to non-banks and foreign banks causing exposure to foreign volatility.

Campbell, Clara, and Cocco model an adjustable rate mortgage that allows maturity extension and interest-only payment during recessions. This mortgage flexibility steadies consumption while lowering premiums and defaults.
Joao Santos and Vish Viswanathan use Shared National Credit program data to demonstrate the viability of lines of credit to provide liquidity to relevant borrowers during recessions in spite of credit line cuts. They also create a model predicting increases in lead-bank’s loan share during crisis, consistent with empirical evidence.

Stephen Miller of the Mercatus Center studies the Basel III capital regulation effects, finding that targeted banks responded with higher reserves. His modelling of higher risk-based capital requirements predicts that banks would move to lower risk assets.

Erol Akcay and David Hirshleifer theorize that the evolution of financial behavior traits shape market outcomes, which further entrench those traits.

Julien Acalin and Alessandro Rebucci document that financial shocks in South Korea and China explain 20 and 50 percent of equity return variability, respectively. China’s tight capital account and rigid exchange rate regime limits diversification and substantially increases shock vulnerability.

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By |2020-09-10T15:16:46-07:00September 10th, 2020|Blog, Financial Regulation|