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Financial Reform Must-Reads, January 15

As you prepare to enjoy the long weekend and celebrate Martin Luther King Jr. Day, we hope you enjoy these readings from the financial regulatory world.

Compiled by Aaron Klein, Justin Schardin, Kristofer Readling and Olivia Weiss.


What we’re reading on Dodd-Frank

Dodd-Frank Regulations: Impacts on Community Banks, Credit Unions and Systemically Important Institutions
By U.S. Government Accountability Office

“With regard to select Dodd-Frank Act rules expected to have impacts on … community banks, credit unions, and industry associations GAO interviewed cited an increase in compliance burden associated with these rules. This included increases in staff, training, and time allocation for regulatory compliance and updates to compliance systems. Some of these industry officials also reported a decline in specific business activities, such as loans that are not qualified mortgages, due to fear of litigation or not being able to sell those loans to secondary markets.” Read the report.


Federal Reserve Guidance on Supervisory Assessment of Capital Planning and Positions for Large and Noncomplex Firms
By the Board of Governors of the Federal Reserve System

“This guidance applies to U.S. bank holding companies and intermediate holding companies of foreign banking organizations that have total consolidated assets of at least $50 billion but less than $250 billion, have consolidated total on-balance sheet foreign exposure of less than $10 billion, and are not otherwise subject to the Federal Reserve’s Large Institution Supervision Coordinating Committee (LISCC) framework.” Read the guidance.


“Five Years after Dodd-Frank: Unintended Consequences and Room for Improvement,” Issue Brief: Volume 3, Number 10, Public Policy Initiative, Wharton, University of Pennsylvania
By David Skeel, J.D., Professor, University of Pennsylvania School of Law

“There are many reasons why regulators’ policing efforts remain aggressive and why the U.S. is not moving in a less regulatory direction after five years, but three causes stand out. The first is the London Whale incident of 2012, which single-handedly accounted for the severity of the Volcker Rule. … The second spur for the surprisingly aggressive Dodd-Frank rulemaking is the LIBOR scandal, a story that broke on the heels of the London Whale. … The third explanation for the current regulatory climate is Senator Elizabeth Warren (D-MA).” Read the brief.


“Understanding the New Liquidity Coverage Ratio Requirements,” Economic Briefing, Federal Reserve Bank of Richmond
By Mark House, Team Leader, Supervision, Regulation, and Credit Department; Tim Sablik, Economics Writer and John R. Walter, Senior Economist

“In 2014, U.S. financial regulators introduced new liquidity coverage ratio requirements for qualified banking institutions. This regulation, based on guidelines from the Basel III accord, requires that banks hold minimum levels of liquid assets to withstand a period of financial stress. It is a response to the financial crisis of 2007–08, during which many banks found themselves suddenly cut off from short-term funding. But the impact of liquidity requirements remains an area of ongoing debate and economic research.” Read the brief.


What we’re reading on the Federal Reserve

“Audit the Fed” is not about auditing the Fed
By Ben Bernanke, Distinguished Fellow in Residence, Economic Studies Program, Brookings Institution

“Monetary policy is complex and must be conducted under tremendous uncertainty about both the economic outlook and how the economy works. Nevertheless, I know from first-hand experience that the FOMC sets monetary policy with the best technical information available and without any consideration of politics or partisanship. I am also confident that political interventions in monetary policy decisions would not lead to better results. But increasing the likelihood of such interventions is precisely the risk presented by ‘Audit the Fed.’” Read the blog post.


“Monetary Policy, Financial Stability, and the Zero Lower Bound,” Remarks at the Annual Meeting of the American Economic Association, San Francisco, California
By Stanley Fischer, Vice Chairman, Board of Governors of the Federal Reserve System

“I believe that the real issue of whether adjustments in interest rates should be used to deal with problems of potential financial instability is macroeconomic, and that if asset prices across the economy–that is, taking all financial markets into account–are thought to be excessively high, raising the interest rate may be the appropriate step.” Read the speech.


“Banks Should Not Be Forced to Buy ‘Stock’ in the Federal Reserve,” The Daily Signal, The Heritage Foundation
By Norbert Michel, Ph.D., Research Fellow in Financial Regulation, Thomas A. Roe Institute for Economic Policy Studies

“Now, rather than receive 6 percent, these banks will receive the lower of 6 percent or the 10-year Treasury note yield. The new proposal would simply return most of the amount these banks had to contribute to the Fed. The amount would fall from 3 percent of their capital to 0.5 percent. It would be easy for opponents of this new plan to argue against reducing the Fed’s capital were it not for one major problem: The highway bill lowered the Fed’s capital surplus account from around $30 billion to $10 billion.” Read the blog post.


“The Cost of Capital of the Financial Sector,” Staff Reports, no. 755, Federal Reserve Bank of New York
By Tobias Adrian, Senior Vice President and Associate Director of Research, Federal Reserve Bank of New York; Evan Friedman, ‎Ph.D. Candidate, Columbia University; and Tyler Muir, Assistant Professor of Finance, Yale School of Management

“Standard factor pricing models do not capture well the common time-series or cross-sectional variation in average returns of financial stocks. We propose a five-factor asset pricing model that complements the standard Fama and French (1993) three-factor model with a financial sector ROE factor (FROE) and the spread between the financial sector and the market return (SPREAD). … We find that the aggregate expected return to financial sector equities correlates negatively with aggregate financial sector ROE, which is puzzling, as ROE is commonly used as a measure of the cost of capital in the financial sector.” Read the staff report.


“Effects of Monetary and Macroprudential Policies on Financial Conditions: Evidence from the United States,” Working Paper 15/288, International Monetary Fund
By Aleksandra Zdzienicka, Economist; Sally Chen, Senior Economist; Federico Diaz Kalan, Research Analyst; Stefan Laseen, Senior Economist; and Katsiaryna Svirydzenka, Economist

“This paper looks into these issues using U.S. exogenous monetary policy shocks and macroprudential policy measures. Estimates indicate that monetary policy shocks have significant and persistent effects on financial conditions and can attenuate long-term financial instability. In contrast, the impact of macroprudential policy measures is generally more immediate but shorter-lasting. Also, while an exogenous increase in U.S. monetary policy rates tends to reduce credit and house prices in other countries—with the effects varying with country-specific characteristics—an increase driven by improved U.S. economic conditions tends to have the opposite effect. Finally, we do not find evidence of cross-border spillover effects associated with U.S. macroprudential policies.” Read the paper.


“Secular drivers of the global real interest rate,” Staff Working Paper No. 571, Bank of England
By Lukasz Rachel, Senior Economist and Thomas D. Smith, Economist

“Long-term real interest rates across the world have fallen by about 450 basis points over the past 30 years. The co-movement in rates across both advanced and emerging economies suggests a common driver: the global neutral real rate may have fallen. In this paper we attempt to identify which secular trends could have driven such a fall.” Read the working paper.


What we’re reading on nominations

“The When and Why of Nominations: Determinants of Presidential Appointments,” Forthcoming, American Politics Research
By Gary E. Hollibaugh Jr. and Lawrence S. Rothenberg, Assistant Professor, University of Notre Dame, Professor, University of Rochester respectively

“Scholars interested in bargaining over political appointments typically analyze the duration between the candidate’s nomination and eventual disposition, ignoring the prior period between vacancy and nomination. Using a dataset of vacancies reported to the Government Accountability Office, we instead examine the nomination stage. We uncover both commonalities and differences between the dynamics of nomination and those of confirmation. Ideological divergence between the President and the Senate filibuster pivot tends to delay nominations, but only under divided government. Presidents move more quickly on more important positions, but are also influenced by the ideological leanings of the agencies.” Download the report.


What we’re reading on cybersecurity

“S.2410 – Cybersecurity Disclosure Act of 2015,” Committee on Banking, Housing and Urban Affairs, U.S. Senate
Introduced by Senators Jack Reed (D-RI) and Susan Collins (R-ME)

“In response to recent data breaches at various companies, which exposed the personal information of millions of customers, the Reed-Collins legislation asks each publicly traded company to include in its Securities and Exchange Commission (SEC) disclosures to investors information on whether any member of the company’s Board of Directors is a cybersecurity expert, and if not, why having this expertise on the Board of Directors is not necessary because of other cybersecurity steps taken by the publicly traded company.” Read the press release and the bill.


The views expressed in these articles do not necessarily represent the views of the initiative, its co-chairs, task force members or BPC.

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