Brookings Papers on Economic Activity:
Strengthening and Streamlining Bank Capital Regulation
(Greenwood, Hanson, Stein & Sunderam)
This paper presents three core principles that should inform bank capital regulation. First, consolidating constraints on minimum levels of equity capital can make the binding constraint the same across banks performing the same activity. Second, in the wake of a negative shock, regulation should emphasize resilience and focus on banks raising equity capital as opposed to maintaining capital ratios. Third, to avoid gaming, regulators need to build flexibility into the capital rules.
National Bureau of Economic Research:
Bank Health Post-Crisis
(Chousakos & Gorton)
This paper shows that post-crisis regulatory changes aimed at restoring bank health have contributed to persistently low Tobin’s Q (a measure of viability of banks’ business models). The low Q-ratios can’t be explained by macroeconomic conditions, indicating that bank regulatory changes have been repressive to banks’ health.
NBER working Paper:
The Housing Boom and Bust: Model Meets Evidence
(Kaplan, Mitman & Violante)
The authors assess the housing boom and bust around the Great Recession through a model incorporating aggregate shocks from income, housing finance conditions, and beliefs. They demonstrate that changes in beliefs about future housing demand contributed most to the movement in housing prices and rents. The findings suggest that fluctuations in credit condition do not affect housing prices but influence the dynamics of homeownership leverage and foreclosures. Housing rental markets and long-term mortgages played a role in loosening credit constraints. Lastly, the model suggests that the boom-bust in house prices only explains half of the volatility witnessed in nondurable expenditures transmitted through household balance sheets. They conclude that a large-scale debt forgiveness program would not have tempered the collapse of house prices and expenditures but would have reduced foreclosures and induced a small, but persistent, increase in consumption through the recovery.
FEDERAL RESERVE BOARD (Finance and Economics Discussion Series):
How Have Banks Been Managing the Composition of High-Quality Liquid Assets?
(Ihrig, Kim, Kumbhat, Vojtech & Weinbach)
Using optimal portfolio theory, the authors find that there is an optimal range of HQLA portfolios based on banks’ risk tolerance. A highly risk-averse bank would prefer a larger share of reserves, while a risk-inclined bank’s portfolio would contain more mortgage-backed securities ceteris paribus. However, the LCR influences banks to demand reserves to meet their requirement. In addition, demand for reserves is also sensitive to the opportunity cost of holding such balances, the desire to minimize interest rate risk, the ability to manage capital considerations, and the bank’s business model. The longer-run monetary policy implication of the effect of the LCR on how banks manage their liquidity is that increased demand for reserves can influence the size of the Federal Reserve’s balance sheet in the future.
Journal of Financial Economic Policy:
Establishing Credible Rules for Fed Emergency Lending
(Calomiris, Holtz-Eakin, Hubbard, Meltzer & Scott)
The authors argue that the current framework governing emergency lending is flawed and propose reforms that would establish a new framework of emergency lending rules. The authors propose five rules: (i) require the Federal Reserve to outline in detail its crisis management procedures; (ii) establish specific, observable criteria that will be used to determine whether emergency lending by the Fed becomes fiscal policy that should involve the Treasury; (iii) establish a clearly defined protocol for proceeding in the case that intervention is deemed fiscal by the Federal Reserve; (iv) require non-banks that receive funding from the Fed to submit to Federal Reserve examination and capital requirements going forward for the duration of the period they receive assistance; and (v) require that Treasury have access to supervisory information to make fiscal decisions.
Bank For International Settlements:
What Are the Effects of Macroprudential Policies on Macroeconomic Performance?
(Boar, Gambacorta, Lombardo & Pereira da Silva)
The authors use panel data from 64 advanced and emerging economies to investigate the effect of macroprudential policy on long-run economic performance. They find that countries that use more macroprudential policy measures have higher and less volatile per capita GDP growth. These beneficial effects of macroprudential policies are reserved for open and financial developed countries. They also find that a measure of nonsystematic macroprudential policy tends to be negatively correlated with GDP growth relative to its volatility.
European Central Bank Working Paper:
Do Negative Interest Rates Make Banks Less Safe?
(Lucas, Nucera, Schaumburg & Schwaab)
The authors study the effect of negative central bank policy rates on banks’ likelihood of becoming undercapitalized in a crisis (SRisk). SRisk increases during a sovereign debt crisis, but the impact varies depending on banks’ business models. Banks with diverse income streams are perceived to be less risky, while banks that depend mainly on deposit funding are perceived to be riskier. Furthermore, SRisk responds differently to policy rate cuts to negative rates relative to more conventional cuts to non-negative rates.
Bank Regulation, Innovation & Other
Journal of Accounting and Economics:
Is the SEC Captured? Evidence from Comment-Letter Reviews
(Heese, Khan & Ramanna)
The SEC oversees publicly listed firms through comment letters and pursuing enforcement actions against violators. The authors present evidence (contrary to the literature) that firm political connections positively predict comment letter reviews and the contents of those reviews such as number of issues evaluated and the seniority of the SEC staff involved. These findings counter SEC capture and indicate a more nuanced relationship between firm political connections and SEC oversight.
BoE Staff Working Paper:
Competition and Prudential Regulation
(Fisher & Grout)
This paper discusses the interaction of prudential regulation, competition, and stability of the financial system and discusses some remedies when conflicts between financial stability (primary objective) and competition (secondary objective) arise.
CFPB Office of Research Study:
CFPB Data Point: Student Loan Repayment
This paper presents analysis of student loan payments over recent history and highlights trends in outstanding balances. The authors find that student loan repayment patterns today are consistent with those beginning up to 15 years ago. Additionally, the percentage of borrowers with loans totaling over $20,000 has doubled to 40% and repayment periods have increased, especially for these large-dollar borrowers. Overall, most borrowers haven’t changed their repayment patterns, though growing student loan balances means borrowers will carry this debt much longer than in previous cohorts.