Aggregate Uncertainty and the Supply of Credit
Source: International Monetary Fund
Recent studies show that uncertainty shocks have quantitatively important effects on the real economy. This paper examines one particular channel at work: the supply of credit. It presents a model in which a bank, even if managed by risk-neutral shareholders and subject to limited liability, can exhibit self-insurance, and thus loan supply contracts when uncertainty increases. This prediction is tested with the universe of U.S. commercial banks over the period 1984-2010. Identification of credit supply is achieved by looking at the differential response of banks according to their level of capitalization. Consistent with the theoretical predictions, increases in uncertainty reduce the supply of credit, more so for banks with lower levels of capitalization. These results are weaker for large banks, and are robust to controlling for the lending and capital channels of monetary policy, to different measures of uncertainty, and to breaking the dataset in subsamples. Quantitatively, uncertainty shocks are almost as important as monetary policy ones with regards to the effects on the supply of credit.
Navigating the market
Source: Consumer Financial Protection Bureau
To understand the wide range of information sources consumers could be exposed to in making financial decisions, we commissioned a study of the size and scope of the financial information field. The results give an overall indication of the relative amounts spent in the U.S. on financial education and on the marketing of certain types of financial products. The report found that for every dollar put towards financial education, $25 is spent on financial marketing, which can make it difficult for consumers to find objective information.
Multilateral Development Banks: Overview and Issues for Congress (PDF)
Source: Congressional Research Service (via Federation of American Scientists)
The multilateral development banks (MDBs) include the World Bank and four smaller regional development banks: the African Development Bank (AfDB), the Asian Development Bank (AsDB), the European Bank for Reconstruction and Development (EBRD), and the Inter- American Development Bank (IDB). The United States is a member of, and major donor to, each of the MDBs.
The MDBs provide financial assistance to developing countries in order to promote economic and social development. They primarily fund large infrastructure and other development projects and, increasingly, provide loans tied to policy reforms by the government. The MDBs provide nonconcessional financial assistance to middle-income countries and some creditworthy low-income countries on market-based terms. They also provide concessional assistance, including grants and loans at below-market rate interest rates, to low-income countries.
Critics argue that the MDBs focus on “getting money out the door” (rather than delivering results), are not transparent, and lack a clear division of labor. They also argue that providing aid multilaterally relinquishes U.S. control over where and how the money is spent. Proponents argue that providing assistance to developing countries is the “right” thing to do and has been successful in helping developing countries make strides in health and education over the past four decades. They also argue that MDB assistance is important for leveraging funds from bilateral donors, promoting policy reforms, and enhancing U.S. leadership.
Stress testing: Failures on the horizon?
Source: PricewaterHouse Coopers
On November 1, 2013, the Federal Reserve Board of Governors (“Fed”), along with the Office of the Comptroller of the Currency, released documents pertaining to the capital stress testing requirements under the Dodd-Frank Act. One set of documents contained the stress test macroeconomic scenarios (i.e., baseline, severe, and severely adverse) and instructions that outline the economic parameters to be used by bank holding companies (“BHCs”) and by banks with over $10 billion in assets. Concurrently, the Fed issued the 2014 Comprehensive Capital Analysis and Review (“CCAR”) guidance that outlines revised requirements for BHCs with over $50 billion in assets whose capital plans would require Fed review.
Beyond the changes in the scenario parameters, these documents outline a number of other important updates, including accelerating the timeline for calculation of Basel III capital ratios. Furthermore, BHCs and banks with $10 billion to $50 billion in assets will be conducting supervisory stress tests in 2014 for the first time, while the results of stress tests for certain BHCs with over $50 billion in assets (i.e., those BHCs that were subject to capital plan review in 2013 but not to CCAR) will be publicly released. Taken together, these and others changes evidence our previously stated expectation that the stress testing bar will continue to rise for large BHCs and that more failing grades are likely in the future.
Political, fiscal and banking union in the Eurozone? (PDF)
Source: European University Institute and Wharton School, University of Pennsylvania
From blog post (European University Institute Library):
The proceedings of a 2013 EUI conference on the Eurozone are now available as an e-book. Political, fiscal and banking union in the Eurozone? is edited by Franklin Allen, Elena Carletti and Joanna Gray with contributions by Edmond Alphandéry, Tony Barber, Andrea Enria, Luis Garicano, Daniel Gros, Mitu Gulati, Richard J. Herring, Robert P. Inman, Jan Pieter Krahnen, Mattias Kumm, Peter L. Lindseth, Patrick O’Callaghan, Richard Parker, Hélène Rey and Philip Wood.
The International Monetary System: Where Are We and Where Do We Need to Go?
Source: International Monetary Fund
The North Atlantic financial crisis of 2008-2009 has spurred renewed interest in reforming the international monetary system, which has been malfunctioning in many aspects. Large and volatile capital flows have promoted greater volatility in financial markets, leading to recurrent financial crises. The renewed focus on the broader role of the central banks, away from narrow price stability monetary policy frameworks, is necessary to ensure domestic macroeconomic and financial stability. Since international monetary cooperation might be difficult, though desirable, central banks in major advanced economies, going forward, need to internalize the implications of their monetary policies for the rest of the global economy to reduce the incidence of financial crises.
Towers Watson’s extreme risks ranking has a new top three: Food/water/energy crisis, Stagnation and Global temperature change – while Sovereign default and Insurance crisis have both fallen five places and Depression loses the top spot for the first time since the research began in 2009. While Food/water/energy crisis (previously Resource scarcity) rose ten places to take the top slot, other extreme risks that have also risen up the ranking this year are Global trade collapse (+4) and Global temperature change (+3). Extreme risks that, in Towers Watson’s view, are less of a threat than in 2011 include Sovereign default, which has fallen five places, as has an Insurance crisis, while a Currency crisis and a Banking crisisfell three and two places respectively.
Towers Watson’s research and ranking, entitled Extreme risks 2013, categorises very rare events that would have a high impact on global economic growth and asset returns if they occurred. The top 15 Extreme risks now for the first time include: Stagnation, Health progress backfire, Nuclear contamination, Extreme longevity and Terrorism, while those that have dropped out of the top 15 this year are: Euro break-up, Hyperinflation, Political crisis, Major war, End of fiat money and Killer pandemic.
With the Dodd-Frank Act’s creation of the Consumer Financial Protection Bureau (CFPB) in 2010, lawmakers signaled the beginning of a new era in consumer protection. The CFPB’s subsequent introduction of the Consumer Complaint Database in July 2012 underscored the CFPB’s intent to fulfill two core objectives: enforcing federal consumer protection laws more vigorously and analyzing consumers, financial services providers and market activities.
More than two years after the CFPB began collecting complaint data, the Consumer Complaint Database is now a public repository of over 100,000 consumer complaints. It’s a rich resource for CFPB analysts and financial institutions searching for emerging trends about consumer complaints relating to financial services products, including reasons for those complaints and actions financial institutions are taking to resolve them.
Deloitte’s analysis of the database has produced a number of valuable insights about the nature and sources of recent complaints, including:
- Troubled mortgages are behind the majority of the complaints – a growing trend
- Customer misunderstanding may create more complaints than financial institution error
- Affluent, established neighborhoods were more likely sources of complaints
- Complaint resolution times have improved
Making the case for postal banking in Canada
Source: Canadian Centre for Policy Alternatives
A new CCPA study finds that the traditional financial banking sector is not meeting the needs of all Canadians. According to the study there are many Canadians in large regions of the country not served by banking institutions, and an estimated 3% to 15% of Canadians do not have a bank account.
The study, by independent researcher John Anderson, suggests that the reintroduction of postal banking in Canada would offer access to financial services not now available to many Canadians. Anderson looks at five successful postal banking models in industrialized countries with relevance to Canadian options and demonstrates how postal banking would succeed in Canada and help improve and stabilize Canada Post’s services and revenues.
CFPB Finds Card Act Reduced Penalty Fees And Made Credit Card Costs Clearer
Source: Consumer Financial Protection Bureau
The Consumer Financial Protection Bureau (CFPB) today released a report detailing how the Credit Card Accountability Responsibility and Disclosure Act of 2009 (CARD Act) reduced penalty fees and made the cost of credit cards clearer to consumers. The report found that total cost of credit declined by two percentage points between 2008 and 2012 but that there are still areas of concern in the credit card market.
Smartphones for the Unbanked: How Mobile Money Will Drive Digital Inclusion in Developing Countries
Source: Brookings Institution
In much of the developing world, mobile phones far outnumber bank accounts. This imbalance has led to the growth of an increasingly complex “mobile money” ecosystem allowing funds to be transferred among mobile phone users.
Mobile money services, which were essentially non-existent at the turn of the century, are now available in over 70 countries, and are used to move billions of dollars every month.[i] In many countries, the number of outlets—storefronts where customers can open accounts and deposit or retrieve funds associated with transactions conducted on their mobile phones—exceeds the number of bank branches.[ii] For the unbanked, who lack access to traditional bank accounts but who nonetheless have high rates of mobile phone ownership, mobile money is playing a critical role in financial inclusion by providing access to stored value accounts and a growing set of financial services.
But there are broader implications as well. The growth of mobile money has closed the loop in a positive feedback cycle that increases the incentives for the unbanked to use mobile phones, which in turn increases the market for companies delivering phone-based financial services. As mobile phones become more capable and less expensive, mobile money will drive digital inclusion in developing countries in ways that go far beyond the set of currently available transaction-focused services.
Today, smartphone penetration rates are high in the wealthiest nations but still low among the unbanked, who typically use less expensive “feature phones”[iii] with more limited functionality. We already know what the developed world looks like when smartphones are everywhere. But the far more interesting question may be what the developing world will look like when cost declines bring entry-level smartphones within financial reach of nearly everyone. This paper proposes some answers to that question and identifies some ways to maximize financial and digital inclusion using mobile technologies.
Think Tank 20: The G-20 and Central Banks in the New World of Unconventional Monetary Policy
Source: Brookings Institution
Five years after the first meeting of G-20 leaders, and decisive action by the central banks and treasuries of the world’s major economies that prevented the financial crisis of 2008-2009 from turning into a 1930’s style world-wide depression, the world economy still remains fragile. The original fiscal stimulus agreed upon in the April 3rd 2009 second leader’s level G-20 London meeting has been withdrawn in the U.S. and Europe after 2011, not through a coordinated decision of the G-20, but in response to fears of rising public debt and a political process in which these fears came to dominate the debate. In China too, fiscal policy became less expansive, after the mega-stimulus of 2009, although a mini-stimulus has been declared for the summer of 2013 to counter a greater than expected output slowdown.
Monetary policy, however, remained extraordinarily expansionary in the U.S., the U.K., Japan and the eurozone. The balance sheets of the Federal Reserve (Fed), the Bank of England (BoE), the Bank of Japan (BoJ) and the European Central Bank (ECB) expanded by $2 trillion, £310 billion, ¥50 trillion, and €1.5 trillion, respectively between December 2007 and December 2012. The Fed’s, the BoE’s, the BoJ’s and the ECB’s balance sheets were as big as 6 percent, 7 percent, 21 percent and 15 percent of their GDP in 2007, whereas in 2012, their balance sheets represented 19 percent, 27 percent, 33 percent and 32 percent of their 2012 GDP levels, respectively. Repeated rounds of quantitative easing no doubt helped the U.S. economy recover, and the actions of the ECB prevented the crisis in the eurozone periphery to spin entirely out of control.
The Little Data Book on Private Sector Development 2013
Source: World Bank
Access to reliable cross-country data on private sector development is crucial when formulating responses to economic crises. The data sources presented in this book report on the scope and types of regulations that enhance and constrain business activity and provide information on business owners’ assessment of the business environment. The data have led to new research, enabled benchmarking, and informed the reform process in many developing countries. This guide book includes indicators on the economic and social context, the investment climate, private sector investment, finance and banking, and infrastructure. The indicators that are included in this book provide users with a general understanding of the private sector in each country. Indicators displayed in the tables are defined in the glossary, which also lists data sources.
The Effectiveness of Monetary Policy since the Onset of the Financial Crisis
Source: Organisation for Economic Co-operation and Development
In the wake of the Great Recession, a massive monetary policy stimulus was provided in the main OECD economies. It helped to stabilise financial markets and avoid deflation. Nonetheless, GDP growth has been sluggish and in some countries lower than expected given the measures taken, and estimated economic slack remains large. In this context, this paper assesses the effectiveness of monetary policy in recent years. It finds that notwithstanding an almost full transmission of policy interest rate cuts and unconventional policy measures to higher asset prices and lower cost of credit in and outside the banking sector in most countries, with the exception of vulnerable euro area economies, monetary policy stimulus did not show up in stronger growth due to a combination of three factors. First, lower policy interest rates may not have provided as much stimulus as expected given the evidence of a decrease in natural interest rates, resulting from the estimated decline in potential GDP growth in the wake of the crisis. Second, balance sheet adjustments of non-financial companies and households, large uncertainty as well as simultaneous and considerable fiscal consolidation in many OECD countries constituted important headwinds. Third, the bank lending channel of monetary policy transmission appears to have been impaired, mainly due to considerable balance sheet adjustments and prevailing uncertainty, which together limited banks’ capacity and willingness to supply credit. The paper also stresses that the monetary accommodation risks having unintended negative consequences which are likely to increase with its duration.
Department of Justice Sues Bank of America for Defrauding Investors in Connection with Sale of Over $850 Million of Residential Mortgage-Backed Securities
Attorney General Eric Holder and U.S. Attorney for the Western District of North Carolina Anne M. Tompkins announced today that the United States has filed a civil lawsuit against Bank of America Corporation and certain of its affiliates, including Merrill Lynch, Pierce, Fenner & Smith f/k/a/ Banc of America Securities, LLC, Bank of America, N.A., and Banc of America Mortgages Securities, Inc. (collectively “Bank of America”). The complaint alleges that Bank of America lied to investors about the relative riskiness of the mortgage loans backing the residential mortgage-backed securities (RMBS), made false statements after intentionally not performing proper due diligence and filled the securitization with a disproportionate amount of risky mortgages originated through third party mortgage brokers.
This announcement is part of the ongoing efforts of President Obama’s Financial Fraud Enforcement Task Force’s RMBS Working Group and is accompanied by an announcement by the Securities and Exchange Commission (SEC) that it has filed civil charges in federal court in Charlotte, N.C. against Bank of America for defrauding investors.
Heightened regulatory scrutiny and greater concerns over risk governance have led financial institutions to elevate their focus and attention on risk management, a new global survey from Deloitte Touche Tohmatsu Limited (DTTL) finds. In response, banks and other financial services firms are increasing their risk management budgets and enhancing their governance programs.
According to Deloitte’s eighth biennial survey on risk management practices, titled “Setting a Higher Bar,” about two-thirds of financial institutions (65 percent) reported an increase in spending on risk management and compliance, up from 55 percent in 2010.
A closer look at the numbers finds, though, that there is a divergence when it comes to the spending patterns of different-sized firms. The largest and the most systemically important firms have had several years of regulatory scrutiny and have continued their focus on distinct areas like risk governance, risk reporting, capital adequacy, and liquidity. In contrast, firms with assets of less than $10 billion are now concentrating on building capabilities to address a number of new regulatory requirements, which were applied first to the largest institutions and are now cascading further down the ladder.