Financial Regulatory Authorities Research Articles

Opening Doors: How to Cut Discrimination by Supporting Neighborhood Integration

The last few years have witnessed a quantum leap in the enforcement of fair housing and fair lending legislation. The 1988 Fair Housing Amendments Act gave newe enforcement powers to the U.S. Department of Housing and Urban Development (HUD) and the Department of Justice. For example, HUD can how initiate complaints against housing agents who discriminate. Moreover, several events, including release of the Home Mortgage Disclosure Act data, which show wide disparities in loan acceptance rates between whites on the one hand and blacks and Hispanics on the other, have led financial regulatory agencies such as the Federal Reserve Board and the Office of the Comptroller of the Currency to increase their anti-discrimination enforcement. These commendable enforcement efforts may fall short of the mark, however, because they are likely to have little impact on one of the principal sources of discrimination by real estate brokers and landlords, namely residential segregation. This policy brief argues that: (1) residential segregation, the physical separation of racial or ethnic groups, is a principal cause of continuing discrimination in housing; (2) enforcement efforts directed toward people who commit discriminatory acts are unlikely to have much effect on segregation; and (3) the federal government needs programs to attack segregation directly, that is, to support integration, as part of its anti-discriminational arsenal. The brief concludes by proposing the Stable Neighborhood Initiatives Program (SNIP), a nondiscriminatory federal program to support community integration efforts, which is designed to fill the current policy void.

Accountability in Prudential Regulation of Financial Markets: A Response to HM Treasury’s 2011 Consultation Paper, ‘A New Approach to Financial Regulation’

This response to the consultation on a response to the HM Treasury’s 2011 consultation paper, ‘A New Approach to Financial Regulation’ comes from Nicholas Dorn, an academic (see annex). The focus of the response is on accountability to Parliament of all aspects of prudential (systemic) regulation. Consideration should be given to direct reporting to Parliament in respect of all aspects of prudential regulation, including regulation of market infrastructure. Routing this relationship through a government department might be as unsatisfactory for the future as it proved in the recent past. There are implications in relation to the Prudential Regulation Authority, for the Financial Conduct Authority and for their relationships with the Bank and the Treasury. The PRA and the FCA should report directly to Parliament, both routinely and in cases of any ‘significant regulatory failure’. The fewer stages in, siftings of and renegotiations involved in regulatory accountability, the better, from the point of view of Parliament’s ability to satisfy itself on arrangements for financial stability. Such accountability should extent to UK activities in relation to EU financial market regulatory authorities and also international bodies.

Do Credit Market Barriers Exist for Minority and Woman Entrepreneurs?

This paper examines whether methodological deficiencies in the literature on discrimination in small business credit markets have a significant impact on the estimation of discrimination and provides a preliminary investigation into the causes of discrimination in these markets. We find substantial, statistically significant evidence of discrimination in loan approval against black-owned and Hispanic-owned businesses in 1998 with additional control variables, with a variety of different specifications, and with a simultaneous model of the application and loan-denial decisions. We also find that discrimination in small business lending may take the form of statistical discrimination, driven by lenders’ stereotypes about the ability of black- and Hispanic-owned businesses to succeed under some circumstances. In addition, we find that neither adding additional control variables nor accounting for possible endogeneity alters the conclusion that there is no discrimination in interest rates on approved loans. We also find, however, that black-owned businesses do face discrimination in interest rates when they deal with some types of lenders, particularly finance companies. Because finance companies specialize in higher-risk borrowers, this finding might indicate that they are willing to consider group-membership as a risk predictor despite the illegality of this practice. These findings suggest that federal financial regulatory agencies should re-double their efforts to uncover and prosecute lenders who discriminate against black- and Hispanic-owned businesses.

The financial crisis and the haphazard pursuit of financial crime

PurposeThe financial crisis has been something of a turning point in the regulatory response to financial crime around the world. The failure of light‐handed regulation and risk assessment by both industry and regulators made the operation of financial regulatory agencies almost untenable, often leading to calls for their replacement by more effective agencies. The purpose of this paper is to assess the nature of this regulatory challenge.Design/methodology/approachThe paper discusses some of the case studies that have emerged from the dark side of regulatory and enforcement policies in recent times.FindingsA culture of minimal regulation of financial markets meant that many undesirable practices (such as insider trading, foreign corrupt practices, tax avoidance, money laundering and other frauds) were able to avoid detection until public outrage led to regulatory and prosecutorial agencies being prompted into action following the collapse of financial markets.Research limitations/implicationsMore detailed studies of particular institutions will be necessary; this will become possible as the current financial crisis subsides.Originality/valueThis paper explores some of the factors behind this state of affairs and makes policy recommendation in regard to the need for more effective internal controls and monitoring measures within the modern financial corporation.

Towards Effective Macroprudential Policy Frameworks: An Assessment of Stylized Institutional Models

A number of countries are reviewing their institutional arrangements for financial stability to support the development of a macroprudential policy function. In some cases, this involves a rethink of the appropriate institutional boundaries between central banks and financial regulatory agencies, or the setting up of dedicated policymaking committees. In others, efforts are underway to enhance cooperation within the existing institutional structure. Against this background, this paper provides basic guidance for the design of effective arrangements, in a manner that can provide a framework for country-specific advice. After reviewing briefly the main institutional elements of existing and emerging macroprudential policy frameworks across countries, the paper identifies stylized institutional models based on key features that distinguish institutional arrangements. It develops criteria to assess the effectiveness of models, examines the strengths and weaknesses of models against these criteria, and explores ways to improve existing setups. The paper finally distills lessons and sets out desired principles for effective macroprudential policy arrangements.

Towards Effective Macroprudential Policy Frameworks: An Assessment of Stylized Institutional Models

A number of countries are reviewing their institutional arrangements for financial stability to support the development of a macroprudential policy function. In some cases, this involves a rethink of the appropriate institutional boundaries between central banks and financial regulatory agencies, or the setting up of dedicated policymaking committees. In others, efforts are underway to enhance cooperation within the existing institutional structure. Against this background, this paper provides basic guidance for the design of effective arrangements, in a manner that can provide a framework for country-specific advice. After reviewing briefly the main institutional elements of existing and emerging macroprudential policy frameworks across countries, the paper identifies stylized institutional models based on key features that distinguish institutional arrangements. It develops criteria to assess the effectiveness of models, examines the strengths and weaknesses of models against these criteria, and explores ways to improve existing setups. The paper finally distills lessons and sets out desired principles for effective macroprudential policy arrangements.

Capital Investment and Earnings: International Evidence

ABSTRACTManuscript Type: EmpiricalResearch Question/Issue: We examine the nature of the dynamic linkage (causality) between earnings and capital investment using firm‐level data from around the world to see whether the legal environment, including corporate governance and monitoring mechanisms, and financial development are important in the profitability of capital investment.Research Findings/Insights: Using firms in 40 countries over the period 1988–2004, we find that the causality from earnings to capital investment is positive and strong in almost all countries, irrespective of the type of legal system and the degree of financial development. However, the causality from capital investment to earnings is generally negative for firms in civil law and financially undeveloped countries, while the causality is generally positive in common law and financially developed countries. Therefore, our international cross‐country study enables us to find that the legal system and financial development are factors in the determination of the profitability of capital investment.Theoretical/Academic Implications: Our findings imply that internal financing is a significant constraint for capital investment, which provides support for the pecking order theory even for financially developed markets and for the free cash flow theory. Common law and financially developed countries tend to provide better shareholder protection with more efficient corporate governance and better investment decisions.Practitioner/Policy Implications: To encourage managers to make capital investments in value‐increasing projects, it is important to further improve a legal environment that includes corporate governance, monitoring, and incentive mechanisms. Financial development that includes effective financial regulatory agencies should be sought.

Governance Practices at Financial Regulatory and Supervisory Agencies

This paper summarizes the results of a survey of financial supervisory agencies in IMF member countries conducted in 2007. Responses were received from 140 financial sector supervisors in 103 countries. A majority of these are separate stand-alone agencies, though, a majority of bank supervisors are part of a central bank. The survey asked respondents about their governance structure and practices, as well as practices and policies related to public transparency and accountability. Most agencies reported having operational independence. Bank supervisors were unique in viewing financial stability as part of their mandate.

Governance Practices At Financial Regulatory and Supervisory Agencies

This paper summarizes the results of a survey of financial supervisory agencies in IMF member countries conducted in 2007. Responses were received from 140 financial sector supervisors in 103 countries. A majority of these are separate stand-alone agencies, though, a majority of bank supervisors are part of a central bank. The survey asked respondents about their governance structure and practices, as well as practices and policies related to public transparency and accountability. Most agencies reported having operational independence. Bank supervisors were unique in viewing financial stability as part of their mandate.

How to Avoid the Next Taxpayer Bailout of the Financial System: The Narrow Banking Proposal

As recovery from the present economic crisis begins, policymakers must address what reforms will be made in financial system in order to prevent the reoccurrence of a similar crisis in the future. What will Congress do in response? In terms of long-term financial reform, what is to be expected from Congress is passage of legislation that increases oversight and regulation by the federal financial regulatory agencies. The purpose of this policy brief is to explain and evaluate one proposal for reform of the financial system that would help mitigate the policy conundrum that often results from conflicting short-run and long-run policies. This proposal, known as 'narrow banking,' would separately regulate and supervise the role of banks in providing a safe and stable means of payment from the system of credit creation by financial institutions. The heart of the proposal is to make checkable deposits as safe a means of payment as currency presently issued by the Federal Reserve System, but without the need for the elaborate supervisory and regulatory structure required.

European Regulators in the Network Sectors: Revolution or Evolution?

The coming into force of the electronic communications directives, the energy directives and Regulation 1/2003 has given the European Commission a new set of instruments to safeguard the uniform application of European law by the 27 independent national regulatory authorities founded by the member states in implementation of European legislation. On the one hand, the Commission has itself acquired wide-ranging powers to monitor and regulate the national authorities both directly and ex ante. It has the power to formulate ex ante rules, including binding comitology guidelines and European policy rules which, on the grounds of Article 10 EC and specific co-operation obligations laid down in European legislation, national authorities must take into account when exercising their powers. The Commission also has the power, in the interests of uniform application of European law, to intervene ex ante in national procedures by making comments, vetoing decisions and/or removing a national authority from a case. On the other hand, the Commission has increasingly used 'hybrid' forms of regulation through the founding of independent European networks of national regulators. Within these networks, the national regulatory authorities in the various member states must co-operate with each other and with the Commission to guarantee uniform application of European law. These networks include the European Energy Regulators Group (ERGEG), the European Regulators Group for Communications Networks and Services (ERG) and the European Competition Network (ECN). A network of financial regulatory authorities had already been set up earlier in the financial sector, in the form of the Committee of European Securities Regulators (CESR). The European networks of national regulators are hybrid in nature. Their lack of legal personality means they do not have the status of 'EU independent agencies' which, established on the basis of European regulations, do have legal personality and are able to carry out their daily tasks at one remove from the European institutions. Neither are the European networks national agencies. The independent European networks of national regulators are increasingly manifesting themselves as autonomous entities. Through hybrid forms of regulation (such as Common Positions or European policy rules) created as a consequence of the interaction between informal European and national actions, they are able to influence the decisions of both the Commission and the national authorities. As part of the reform of European legislation in the network sectors, the Commission is currently looking at the possibilities for uniform application of European law in the member states and looking at ways of improving the co-ordination between the different national regulatory authorities (see section 6). The Commission wishes to increase its own ex ante powers and is examining whether the role of the European networks of national regulators could be further strengthened by the creation of 'European networks plus'. It recently published a proposal for a Regulation founding a European Agency for the Co-operation between Energy Regulators. As this paper will show, owing to the hybrid nature of the European networks and their actions, there are a number of 'accountability gaps' both in the present situation and in the proposals for the 'European networks plus'. This article analyses the problems which arise with regard to the political and legal accountability of the independent national regulatory authorities which work together with each other and with the Commission in the European networks of national regulators or the 'European networks plus'. It devotes attention to the political monitoring by and accountability to the European Parliament and/or the national parliaments at the European and national level, respectively, and to the potential role of judicial oversight by the European Court of Justice and the national courts. A distinction is consistently drawn between the present situation of more informal co-operation between the national regulatory authorities in the European networks and the strengthened co-operation within the 'European networks plus'. This article also makes a number of proposals for improving the accountability of the 'European networks plus'.

Developing financial intelligence: an assessment of the FIUs in Australia and India

PurposeThe purpose of this paper is to present a comparative position of the extent of commonality or diversity in the rationale, objectives, processes used and outcomes achieved by financial intelligence agencies in India and Australia. An effective financial‐intelligence unit (FIU) can make a significant contribution to combating serious financial crimes nationally and internationally.Design/methodology/approachThe agencies in these two countries are compared using the framework for assessment of financial regulatory agencies – suitably modified to capture the specialist role of such agencies. Information available at the web site of the two agencies has been used.FindingsThe study shows several commonalities and differences in the financial intelligence agencies in the two countries and points to operational and policy changes required in making the units more effective.Originality/valueIt is hoped that the study would encourage similar studies in respect of other FIUs and help in contributing to making the global financial‐intelligence regime more robust.

A Preliminary Look at Regulatory Structures for Financial Services

Within the past thirty-five years approximately fifty nations have consolidated their financial regulatory agencies into either a single integrated agency or into two semi-integrated agencies. The United States has resisted this trend, due in part to a concern that the costs of such significant consolidation would exceed its benefits. The existing studies that compare the costs of the consolidated regulators around the world with the United States regime have often been discounted because they have been unable to control for differences in culture and regulatory intensity between those other countries and the United States. This article attempts to address this problem by examining the costs of six different regulatory structures used by the states within the United States, which range from separate agencies for each financial services industry to a single agency that regulates all financial services. As a result, this study provides a better picture of whether consolidation within the United States might result in any cost savings.

Do lenders discriminate against minority and woman entrepreneurs?

This paper draws on a conceptual analysis of discrimination to improve the methodology for estimating discrimination in small-business credit markets and to provide some evidence about the possible causes of discrimination in these markets. Using a variety of statistical enhancements to existing studies, we find statistically significant evidence of substantial discrimination in loan approval against black-owned and Hispanic-owned businesses in 1998. We also find some hints that this discrimination takes the form of statistical discrimination, driven by lenders' stereotypes about the ability of black- and Hispanic-owned businesses to succeed under some circumstances. Although we find no discrimination, on average, in interest rates on approved loans, we also find that black-owned businesses do face discrimination in interest rates when they borrow from finance companies and businesses, such as mutual fund companies and leasing companies, with a primary mission other than lending. These findings suggest that federal financial regulatory agencies should re-double their efforts to uncover and prosecute lenders who discriminate against black- and Hispanic-owned businesses and that new tools may be needed to find discrimination by firms not well covered by the existing fair-lending enforcement system.

An American Perspective on the U.K. Financial Services Authority: Politics, Goals & Regulatory Intensity

Although similarities between the British and American systems of financial regulation are often remarked upon in academic commentary, the organizational structure of financial supervision in the two countries has diverged substantially in the past decade, as the United Kingdom has now largely consolidated its financial regulatory agencies in the Financial Services Authority whereas the United States has maintained the world’s most decentralized and fragmented collection of financial supervisory agencies. In this essay, Professor Howell Jackson explores various reasons why financial regulation in these two countries differs so dramatica lly in organizational structure. Focusing first on the differences in political economy that surrounded the enactment of the Financial Services and Markets Act of 2000 in the United Kingdom and the Gramm-Leach-Bliley Act of 1999 in the United States, Professor Jackson discusses deeper differences in the regulatory philosophies of the two countries and also presents data on the relative intensity of financial regulation in both jurisdiction. He speculates that the comparatively more ambitious regulatory agenda of the U.S. system pushes the country towards a more elaborate system of financial oversight that is inherently more difficult to consolidate. In the United Kingdom, in contrast, the goals of the financial regulators are more modest and, to the extent that cost efficiency is one of the country’s regulatory objectives in the field of financial regulation, that policy tends to foster a less cumbersome system of financial regulation that more easily accommodates consolidation of regulatory functions. The paper concludes with some broader comparative data suggesting that while British financial regulation may be less intensive than financial regulation in the United States, it is substantially more intensive than financial regulation in many other jurisdictions, particularly civil law jurisdictions on the Continent.

Beneficiaries of federal housing programs: A data reconnaissance

Abstract This article reports on a reconnaissance of information systems containing data on the beneficiaries of direct and indirect federal housing expenditures. It covers data in the U.S. Departments of Agriculture, Housing and Urban Development, Veterans Affairs, and the Treasury; the Resolution Trust Corporation; financial regulatory agencies; and secondary mortgage market actors. Data varied widely across agencies in availability, accessibility, and quality. Data are more systematically collected for low‐income beneficiaries of housing programs than for the more affluent beneficiaries of indirect housing expenditures. The systems need improvements in data quality and coverage and database format, though they have improved recently. Many research topics can be explored with new and underused data systems: the characteristics of beneficiaries of rural housing programs, urban rental housing programs, low‐income homeownership programs, and mortgage guarantee and insurance programs. But the lack of information on the systems themselves makes data difficult to locate and access.