Changes In Financial Regulation Research Articles

Monetary policy in a world of radical uncertainty

Monetary policy in a world of radical uncertainty

МІЖНАРОДНА КООРДИНАЦІЯ МАКРОПРУДЕНЦІЙНОЇ ПОЛІТИКИ ЯК ІНСТРУМЕНТ ФІНАНСОВОЇ ІНТЕГРАЦІЇ

The article provides a comprehensive analysis of the problem of international macroprudential regulation from the standpoint of benefits and threats produced for national economies in the process of its implementation. It has been established that the macroeconomic situation in each individual country is increasingly being influenced by forces that go beyond both traditional cycle theories and the conventional understanding of non-economic factors. As a result, long-term macroeconomic stability, the key to which is the stability of the national financial and, above all, the banking system, to external shocks, is called into question, and the main way to ensure it is to conduct a risk-weighted macroprudential policy. Capital inflows driven by changes in financial regulations in the country of origin of capital could lead to excessive credit growth and asset price pressures in capital recipient countries, which could be partly mitigated by regulatory and macroeconomic policies in those countries. Conversely, effective domestic macroprudential policies that help contain systemic risks in one country can contribute to financial stability in other countries by generating positive externalities. Reducing the likelihood of a financial crisis in one country through timely macroprudential policies can reduce the scale of negative trade and financial spillovers or spillovers at the regional or international level. Based on the assumption that, when policymaking is inconsistent, each country's regulator is free to choose policy instruments to minimize its own political losses or maximize public welfare, assuming that regulators in other countries can make similar arbitrary choices of macroprudential instruments as a given, it has been found that such policy, generally does not take full account of cross-border spillovers, that is, the real and financial externalities caused by domestic shocks, or the consequences of national policy responses to those shocks. The article determines that, theoretically, international coordination of macroprudential policies can achieve a reduction in political losses or contribute to an increase in public welfare. Both domestic macroprudential policies and prudential capital controls produce spillover effects internationally, which can lead to “capital wars” based on races to lower interest rates. Keywords: macroprudential policy, international economic policy, international capital flows, financial integration, international policy coordination, global instability, regulatory wars.

Michael Moran, 1946–2018: An Intellectual Memoir

Michael Moran's intellectual journey is a remarkable one. Starting from quite a narrow focus on industrial relations in the 1970s, he switched his main research interest to the politics of banking and to changes in financial regulation during the 1980s. In the 1990s he extended this interest in regulation to write about the emergence of the British regulatory state, which culminated in his major publication, The British Regulatory State: High Modernism and Hyper-Innovation (Moran 2003). After 2008 he turned his attention to the nature of contemporary capitalism and how it might be reformed. A subsidiary but important second theme was his broad interest in British politics, which led through various publications to a major single-authored textbook, Politics and Governance in the UK (Moran 2011), as well as the very successful co-authored text Politics UK (Jones et al. 1990) and what turned out to be his valedictory work, The End of British Politics? (Moran 2017).

Stress Testing and Calibration of Macroprudential Policy Tools

We present a semi-structural model of default risk, which is a function of loan and borrower characteristics, economic conditions, and the regulatory environment. We use this model to simulate bank credit losses for stress-testing purposes and to calibrate borrower-based macroprudential tools. The proposed approach is very flexible and is particularly useful when there is limited history of crisis episodes, when crises bring unanticipated shocks where past tail events offer little guidance and when structural shocks or changes in financial regulations have altered the loan default process. We apply the model to quantify mortgage lending risk in two distinct mortgage markets. For each application, we show a range of modeling adjustments that can be made to capture country-specific institutional features. The model uses bank portfolio data broken down by risk bucket and vintage, which enables us to take explicit account of the loan life cycle and to incorporate the housing and economic cycles. This feature facilitates a timely assessment of banks’ loss-absorbing capacity and the buildup of systemic risk conditional on policy. It also enables counterfactual analysis and the evaluation of macroprudential policy interventions.

More of the Same or Real Transformation: Does FinTech Warrant New Regulation?

This Article examines how and why regulating FinTech is different. This question relates to the ongoing debate of whether FinTech is simply “more of the same”—primarily exacerbating existing failures and challenges and hence not requiring new regulations—or a radical transformation that poses unique challenges and thus requires tailored regulatory responses. The Article argues that when looking at each FinTech application individually, FinTech arguably does not create novel challenges and failures, but mainly exacerbate existing ones. When looking at the FinTech phenomenon from a broader perspective, however, it apparently introduces fundamental changes that require corresponding changes in financial regulation. The Article demonstrates this argument from three perspectives. From a transactional perspective, it shows that financial services increasingly rely on emerging technologies (e.g., artificial intelligence and big data) and novel business models (e.g., ICO, P2P lending) to disintermediate traditional financial functions and create new financial activities. From a structural perspective, it shows that the financial industry transformed from a homogenous industry dominated by few large financial institutes into a more dispersed industry that includes increasingly diverse types of market participants (FinTech startups, TechFin companies, and financial institutes). From a more abstract perspective, it shows that FinTech innovations tend to grow exponentially, creating new challenges related to the “pacing problem”. The Article argues that these broad, fundamental changes pose new regulatory challenges, as well as exacerbating existing ones, in a way that requires regulators to both reevaluate their existing regulatory strategies and develop new regulatory tools and approaches. It concludes by proposing tailored regulatory responses.

Innovation in the American Era of Industrial Preeminence: The Interaction of Policy, Finance, and Human Capital

Abstract:It is commonly accepted that innovation and economic prosperity after World War II were really spurred by the tremendous benefits of public investments. While public funding was crucial, a missing component of the historical analysis is a synthesis of the effects of these investments with changes in financial regulations enacted during the Great Depression, specific economic and employment policies, and the infusion of intellectual capital from scientists and engineers fleeing Nazi Germany and the turmoil of the war. The purpose of this article is to synthesize and analyze the effect of these three components—public polices, changes in private financial structures, and highly skilled immigration. This analysis will allow us to explore the broader impact and interdependence of knowledge creation, human and financial capital, and innovation.

Success factors in Title III equity crowdfunding in the United States

Abstract The financial industry is seeing rapid introduction of new technologies and new business models that are challenging established practices. Recent changes in financial regulation in the United States have spurred evolution of equity crowdfunding as a potential alternative to traditional sources of venture capital. To address the relative lack of knowledge about success factors, we focus on Title III equity crowdfunding platforms in the United States that are open to non-accredited investors. We draw on traditional venture finance research and we examine the effects of market, execution and agency risks in equity crowdfunding under Title III. We collect data on 133 ventures that attracted more than $11 million in funding commitments across sixteen Title III equity crowdfunding platforms. We find that all three types of risks can affect the likelihood of successful fundraising under Title III. We discuss the implications of these findings for entrepreneurs, investors, crowdfunding platforms and policy makers.

Finance and Economic Growth in OECD and G20 Countries

This paper shows that finance has been a key ingredient of long-term economic growth in OECD and G20 countries over the past half-century, but that there can be too much finance. The evidence indicates that at current levels of household and business credit further expansion slows rather than boosts growth. Causality from more credit to slower growth is supported by a novel empirical methodology which exploits changes in financial regulation across countries and time as a source of exogenous variation in financial size. The empirical analyses point to five factors that link more credit to slower growth: i) excessive financial deregulation, ii) a more pronounced increase in credit issuance by banks than other intermediaries, iii) too-big-to-fail guarantees by the public authorities for large financial institutions, iv) a lower quality of credit and v) a disproportionate rise of household compared with business credit. By contrast, expansions in stock market funding in general boost growth. Finance et croissance economique dans les pays de l'OCDE et du G20 Ce document montre que la finance a ete une composante essentielle de la croissance economique a long terme dans les pays de l’OCDE et du G20 durant les cinquante dernieres annees, mais que parfois, il peut y avoir trop de finance. Certaines observations montrent en effet qu’au niveau actuel du credit aux menages et aux entreprises, toute nouvelle expansion freine plutot qu’elle n’accelere la croissance. Des liens de causalite entre l’accroissement de l’offre de credit et le ralentissement de la croissance sont mis en evidence par une nouvelle methode empirique, qui utilise les modifications de la reglementation financiere dans les pays et dans le temps comme une source de variation exogene de la taille de la finance. L’analyse empirique attire l’attention sur cinq facteurs qui etablissent un lien entre l’accroissement de l’offre de credit et le ralentissement de la croissance : i) une dereglementation financiere excessive, ii) une emission de credit par les banques en progression plus rapide que par les autres intermediaires, iii) les garanties des pouvoirs publics sur les etablissements d’importance systemique (TBTF), iv) une moindre qualite du credit et v) une augmentation du credit aux menages nettement plus forte que celle du credit aux entreprises. En revanche, l’accroissement du financement par actions en general stimule la croissance.

Changes in financial regulation and the Brazilian economy: comments on 'The evolution of financial regulation before and after the crisis'

Changes in financial regulation and the Brazilian economy: comments on 'The evolution of financial regulation before and after the crisis'

Difficulties of the Financial Reform in the USA

We study the reform of financial regulation initiated by the Dodd—Frank Wall Street Reform and Consumer Protection Act of 2010. Major factors impeding Obama’s financial and economic policy are explored, including institutional difficulties, party warfare, lobbyism, and systemic inconsistencies of international financial regulation. We also examine challenges that are being faced by economic and political sciences due to the changes in financial regulation and also assess the level of radicality of the financial reform.

The Home Owners’ Loan Corporation and the Development of the Residential Security Maps

The Great Depression led to dramatic changes in financial regulation and home financing. Policymakers opted for insurance programs—deposit guaranty and mutual mortgage insurance—as safe and stable ways to manage the critical financial sector. An analysis of data collected in support of the Residential Security Maps of the Home Owners’ Loan Corporation shows that the age, upkeep, and price of housing along with mortgage availability are robust predictors of mortgage risk in these maps while the presence of non-white and foreign-born residents represent more modest estimators of mortgage risk. The system of mortgage insurance established in this period sowed the seeds of center city economic deterioration.

Financial Fragility in the Current European Crisis

The paper argues that the European financial system in the years following the great financial crisis started in 2007 has become increasingly fragile. Minsky’s notion of fragility, on which it is based, is related to history, policy and institutions. In the current European environment, fragility depends on the rise of shadow banks’ assets, the expansion of derivatives and the changes in financial regulation. All these elements have jointly triggered several feedback loops. In Minsky’s opinion, policies should have the scope of thwarting self-enforcing feedback loops. Yet the policies that have been implemented so far seem to have produced the opposite effects. They have created new feedback loops that nurture fragility again. This outcome, however, is not surprising for policies may change initial conditions and have unintended consequences, as Minsky has taught us since a long time.

The financial crisis and the regulatory response: An interim assessment

Most changes in financial regulation are introduced hastily in response to a crisis. For most people, and politicians, financial regulation is not a topic of consuming interest, and hence it is ignored until it appears in the headlines of the daily news feed. At that point, ‘something’ must be done, and so something is. These were the circumstances in which post-2007 reforms were undertaken, and we can now begin to evaluate them, even as they are being put into effect. In the author's view, regulatory failure was a part, but not a principal cause, of the financial crisis. Regulatory assumptions – notably as to the effectiveness of hedging strategies in the private sector and the continuous availability of liquidity – proved faulty, and so regulators failed to provide the ‘speed bumps’ that are the most effective tool in addressing booms and reducing the impact of busts. Moreover, regulatory models that extrapolate from the past are likely to prove ineffective for at least some futures. Finally, the global regulatory bodies themselves were structurally flawed, and poorly coordinated, both internationally and within countries. Some structural reform has now been undertaken, globally, within Europe, and within the United Kingdom. Those reforms were certainly necessary, but are not likely to be sufficient. While it is too early to draw definitive conclusions, the reforms to date probably fall short of the mark.

Financial fragility in a general equilibrium model: the Brazilian case

This paper employs a general equilibrium approach to model the Brazilian financial system. We show that the model is able to replicate the main characteristics of the data and to predict short-term trends. We calibrate the model for the years of 2002–2006, which comprise a crisis period in Brazil’s financial system. Empirical results suggest that the financial system is improving in terms of financial stability over time. Furthermore, the model has been proven useful to model the Brazilian banking system and could be employed to evaluate the impact of changes in financial regulation on the banking system.

Optimale Regulierung bleibt eine Herausforderung!

The challenge of perfect regulation! Comments to the debate on reforms of the financial sector. In the light of the recent financial crisis the question was raised, if there is any chance of regulation at all to help prevent future crises. As lessons learned from the financial crisis regulators have already adopted numerous measures that aim to enhance financial regulation. Most prominent is the reform of the well-known Basel II soon to be Basel III framework. The following paper takes a closer look on the most important measures against the background of the economic aspects of financial intermediation. The overall focus of this paper is the question if the reform of Basel II can improve the regulatory environment. This includes an analysis of how the changes in financial regulation will affect financial institutions. As a result the paper will show that most of the discussed and adopted measures actually lead to greater regulatory effectiveness. Nevertheless, the key factor for more effective financial regulation is a deep knowledge with regard to financial institutions and their business models. Only a thourough understanding of each individual bank and the system as a whole puts the regulator in the position to assess risks which might lead to the next financial crisis and to react appropriately.

American Economic Association Committee on Statistics (AEAStat): Annual Report—2010

The current members of the Committee on Economic Statistics are Matthew Shapiro, University of Michigan (Chair); Mark Bils, University of Rochester; Dennis Fixler, Bureau of Economic Analysis; Barbara Fraumeni, University of Southern Maine; David Johnson, Census Bureau; Randall Kroszner, University of Chicago; Jonathan Parker, Northwestern University; Charles Schultze, Brookings Institution; and Jack Triplett. In January 2007, the Executive Committee voted to give the Committee standing authority to organize three sessions each year for inclusion on the program of the Association’s annual meeting. At its April 2008 meeting, the Executive Committee voted to allow the Committee to designate one session each year for publication in the annual Papers and Proceedings volume. For the January 2011 meeting, the Committee circulated a call for papers related to the statistical issues arising from the financial crisis and potential changes in financial regulations, markets, and institutions in addition to any topics related to economic statistics. The following three sessions are included in the program of the January 2010 meeting: “Frontiers of Productivity and Output Measurement,” “New Approaches to Measuring Household-Level Finances,” and “Measuring Financial Capacity and Risk: Lessons from the Financial Crisis.” Details of the sessions are given in the Table. The Committee has also undertaken the task of commissioning reviews of needs for data in particular subject matter areas. A group cochaired by Robert Feenstra and Robert Lipsey completed a report on data needs for research on international trade. It was discussed at this year’s National Bureau of Economic Research Summer Institute meetings. It is scheduled for discussion at a meeting of the Federal Economic American Economic Association Committee on Statistics (AEAStat)

US enacts sweeping financial reform legislation

PurposeThe purpose of this paper is to provide an overview of the major provisions of the Dodd‐Frank Wall Street Reform and Consumer Protection Act passed by the US Congress and signed into law by President Obama on July 21, 2010.Design/methodology/approachThis does not offer any empirical analysis of the new law given that it has just been adopted. The paper does provide discussion of the major provisions with some commentary on the arguments for an against each provision.FindingsThe new law represents the most sweeping changes in financial regulation and supervision in the USA since the Great Depression. The role of the Federal Government is greatly expanded in almost all aspects of the financial sector of the economy and will affect consumers, investors, and managers of financial service firms. Many feel that the effect of the law will be to adversely affect the competitive environment while others feel the additional regulation is necessary to prevent another financial crisis.Research limitations/implicationsAs the provisions of this law become more clear, much research will be needed to assess the true economic impact of the law and whether it is indeed providing the additional safeguards against a financial crisis.Originality/valueThis review of the new law offers a concise discussion of the major provisions of the recently passed law. This review is of value to those seeking an introduction to the law and its provisions and implications.

The David Gordon Memorial Lecture: Finance without Financiers: Prospects for Radical Change In Financial Governance

In response to the financial crisis of 2007—2010, governments in the United States, Europe, and elsewhere have invested billions of dollars in financial institutions to prevent them from going bankrupt and from further disrupting the global economy. Despite these massive public bail-outs, a government and “elite” consensus has emerged that these nationalized or quasi-nationalized financial institutions should be privatized as soon as possible, and that, apart from modest changes in financial regulation, our economies should return to the status quo ante financial structure. I disagree. As the crisis reveals, “financier” dominated finance has a number of devastating flaws: it creates major externalities that contribute to financial and real economic instability; it promotes short-term investment strategies; it contributes to inequality; and it undermines economic efficiency and the achievement of social goals in the real economy. I argue that a better strategy for achieving economic recovery, restructuring, and widely shared, sustainable prosperity is to use public investments in the financial sector to build on the successful post-World War II experiences of publicly oriented financial institutions to create a stronger presence of “finance without financiers.” JEL classification: E02, E44, G28

American Economic Association Committee on Statistics (AEAStat) Annual Report—2009

The current members of the Committee on Economic Statistics are Matthew Shapiro, University of Michigan (chair); Katharine Abraham, University of Maryland; Robert Feenstra, University of California–Davis; Dennis Fixler, Bureau of Economic Analysis; David Johnson, Census Bureau; Barbara Fraumeni, University of Southern Maine; Jonathan Parker, Northwestern University; Charles Schultze, Brookings Institution; Jack Triplett. The committee met by teleconference in January and September 2009. Katharine Abraham stepped down as chair of the Committee on Statistics early in 2009 in order to chair the newly established American Economic Association Committee on Government Relations. The Committee on Statistics is exceedingly grateful for her thoughtful and effective leadership during her tenure as chair. In January 2007, the Executive Committee voted to give the Committee standing authority to organize three sessions each year for inclusion on the program of the Association’s annual meeting. At its April 2008 meeting, the Executive Committee voted to allow the Committee to designate one session each year for publication in the annual Papers and Proceedings volume. For the January 2010 meeting, the Committee circulated a call for papers on the measurement of intangibles, trade in services, and other economic measurement topics. The following three sessions are included in the program of the January 2010 meeting: “Measuring Intangible Capital,” “Measuring Labor and Wage Dynamics with Administrative Data,” and “Measuring Cognition and Linking it to Economic Outcomes.” Details of the sessions are given in the Table. The call for papers for the 2011 session solicits submissions related to the statistical issues arising from the financial crisis and potential changes in financial regulations, markets, and institutions in addition to any topics related to economic statistics. American Economic Association Committee on Statistics (AEAStat)

Differences Among Banks are More Important than Their Common Risks in Explaining Banking Profits

[Regulations following the Financial Crisis threaten to throw out the baby with the bathwater. The Evidence shows that Banks are profitable largely because of their differences. Federally encouraged mergers and other regulations that discourage these differences among banks may reduce the contribution of bank individuality to the financial system. Uniformity increases system risks.We measure differences among banks using financial statement value differences from sample means. Such differences test as “priced risks,” improving forecasts of financial institution stock returns. We find “differentness” carries greater weight in explaining recent long run financial institution returns than market excess returns within a CAPM framework. This result has important implications for financial-crisis-induced changes in financial regulation. If differentness is necessary to long run profits in banking, then different capital rules for different sorts of bank are more helpful than rules that encourage uniformity of behavior. Large retail banks and complex wholesale banks should be separate to protect depositors.