As we approach Leap Day, we hope you enjoy these readings from the financial regulatory world.
What we’re reading on financial regulation
“Lessons from the Crisis: Ending Too Big to Fail,” Remarks at the Brookings Institution
By Neel Kashkari, President, Federal Reserve Bank of Minneapolis
“Given the enormous costs that would be associated with another financial crisis and the lack of certainty about whether these new tools would be effective in dealing with one, I believe we must seriously consider bolder, transformational options: Breaking up large banks into smaller, less connected, less important entities; Turning large banks into public utilities by forcing them to hold so much capital that they virtually can’t fail (with regulation akin to that of a nuclear power plant);Taxing leverage throughout the financial system to reduce systemic risks wherever they lie. … Building on this important work, and the work done since the crisis, the Federal Reserve Bank of Minneapolis is launching a major initiative to consider transformational options and develop an actionable plan to end TBTF.” Read the speech.
“The Last Crisis, the Next Crisis and the Future of Large Banks,” Viewpoints, Milken Institute
By Phillip Swagel, Co-chair, Financial Regulatory Reform Initiative, Bipartisan Policy Center, and Professor, School of Public Policy, University of Maryland
“The post-crisis regulatory response involves measures not only to avoid a crisis, but also to deal with one if it arises. The response to the next severe financial crisis inevitably will involve two main tools: 1) the provision of liquidity from the Fed to mitigate a crisis, and 2) the invocation of Title II, with its broad authority to deal with a severe crisis that threatens the stability of the financial system. Making Title II work is the key challenge of the post-regulatory response. Success would be for the FDIC both to work out implementation details with its single point of entry approach, and to convince market participants and the broader political system that the mechanism is viable.” Read the publication.
Prepared Remarks at the Credit Union National Association
By Richard Cordray, Director, Consumer Financial Protection Bureau
“One idea would require lenders making small-dollar loans to assess a prospective borrower’s ability to repay instead of simply issuing a loan that ultimately saddles the consumer with unaffordable payments. This would echo the CARD Act’s rules for credit card issues, and the Federal Reserve rule that lenders issuing subprime mortgages assess the borrower’s ability to repay. We are also looking at alternatives that would allow lenders to extend certain loans without taking all of these steps as long as the loans meet certain screening requirements and include protections to prevent consumers from getting mired in loans they cannot afford.” Read the speech.
“A Two-Step Plan for Puerto Rico,” Research Paper No. 16-3, Institute for Law and Economics, A Joint Research Center of the Law School, the Wharton School, and the Department of Economics at the University of Pennsylvania
By Clayton P. Gillette, Max E. Greenberg Professor of Contract Law, New York University School of Law and David A. Skeel Jr., Professor of Law, University of Pennsylvania Law School
“The first step is to create an independent financial control board that has authority over Puerto Rico’s budgets and related issues. … The second step is giving Puerto Rico a mechanism for adjusting its debts. Puerto Rico currently does not have access to any restructuring option. To fix this problem, Congress could either give Puerto Rico and its municipalities access to existing bankruptcy law (Chapter 9), or it could craft an alternative restructuring framework for America’s territories. We will advocate for the latter approach, although either could be used.” Read the paper.
“Are Asset Managers Vulnerable to Fire Sales?” Liberty Street Economics, Federal Reserve Bank of New York
By Nicola Cetorelli, Fernando Duarte, and Thomas Eisenbach, Research and Statistics Group
“Investors seem to have become more skittish since the crisis and are quicker to redeem shares, and in larger amounts, for a given degree of underperformance. The third factor, “illiquidity concentration,” captures how concentrated illiquid assets are in large funds with high flow sensitivity. The higher this concentration, the higher the “contagion” from funds selling illiquid assets to other funds. This third factor is also significantly higher today than before the financial crisis. In sum, our macroprudential stress test reveals that mutual funds can, in fact, be subject to a “run”—despite the fact that they have no significant leverage and a floating NAV. In addition, the test shows that such a run can produce significant negative spillovers in asset markets through forced liquidations.” Read the blog post.
What we’re reading on nominations
“Democrats on the U.S. Senate Committee on Banking, Housing, and Urban Affairs today urged Chairman Richard Shelby to stop obstructing President Obama’s nominees for critical Administration positions related to financial oversight, national security, export financing, and public transportation safety. In a letter to Chairman Shelby (R-AL), all 10 of the panel’s Democrats expressed concern that the Banking Committee has not yet voted on any of the President’s nominees in this Congress.” Read the letter and press release.
What we’re reading on student debt
Starting from Scratch: A New Federal and State Partnership in Higher Education
By the Education Policy Program, New America Foundation
“Worse still, a different federal program offers unlimited loans to the parents of college students, with minimal underwriting standards. This program is particularly troubling since institutions can leave low-income parents with loans they may never be able to pay back, starting a cycle of intergenerational debt for precisely the students who need the most financial resources to get through school.” Read the report.
“The Graying of American Debt,” Liberty Street Economics
By Meta Brown, Donghoon Lee, Joelle Scally, Katherine Strair, and Wilbert van der Klaauw, Federal Reserve Bank of New York
“A comparison of the 2003 and 2015 charts shows, primarily, two things. First, at each age the average student loan balance per borrower more than doubles. Second, the age distribution of each debt type shifts decisively to the right. Younger borrowers hold lower per capita balances in every debt category save student loans, and older borrowers hold higher per capita balances in every debt category save credit card debt. Setting aside the influence of an aging population, it remains the case that in 2015, on average, younger borrowers held less nonstudent debt and older borrowers held substantially more debt of nearly all types, than comparably aged borrowers held in 2003.” Read the post.
What we’re reading on monetary policy
“The Lender of Last Resort: An International Perspective,” Remarks at the Committee on Capital Markets Regulation Conference, Washington, D.C.
By Stanley Fischer, Vice Chairman, Board of Governors of the Federal Reserve System
“There are nonetheless three major sources of concern about potential weaknesses in the new framework for financial crisis management that has been introduced since the Great Financial Crisis. The first is its failure to resolve the problem of stigma–that is, the stigma of borrowing from the central bank at a time when the financial markets are on guard, looking for signs of weakness in individual financial institutions at a time of overall financial stress. … The second is a concern that arises from the nature of financial and other crises. … These plans need to ensure that the authorities retain the capacity to deal with unanticipated events, for unanticipated events are inevitable. … Third, this concern is heightened by a related problem: The new system has not undergone its own stress test.” Read the speech.
“What Happened in Money Markets after the Fed’s December Rate Increase?” FEDS Notes
By Alyssa Anderson, Jane Ihrig, Ellen Meade, and Gretchen Weinbach, Federal Reserve Board of Governors, Federal Reserve System
“Taken together, the data that we have reviewed here regarding the behavior of money markets around the time of the December rate increase indicate that the Fed’s new framework for implementing monetary policy has been successful so far in achieving the new target range set by the FOMC. The FOMC has said that it will continue to assess its approach to policy implementation and will adjust the settings of its policy tools (and possibly use other tools as necessary) for appropriate monetary control, based on policymakers’ assessments of the efficacy and costs of their tools.” Read the blog post.
“Once Upon a Time, There Came a Negative Rate…”, Comic, Bloomberg Business
By Peter Coy, Economic Writer, and Dorothy Gambrell, Contributing Graphics Editor, Bloomberg Businessweek
“Federal Reserve and Interest Rates,” Washington Journal, C-SPAN
Interview with Aaron Klein, Director, Financial Regulatory Reform Initiative, Bipartisan Policy Center
“Aaron Klein talked about the idea of negative interest rates and other monetary moves the Federal Reserve could make in the coming weeks. A Senate Banking Committee hearing clip from the previous week was shown in which Federal Reserve Chair Janet Yellen’s testimony before the Senate Banking Committee addressed negative interest rates.” Watch the show.
As always, the views expressed in these articles do not necessarily represent the views of the initiative, its co-chairs, task force members or the BPC.