Publications

Banking Perspective Q4 - 2014


Fire Extinguishers and Smoke Detectors: Macroprudential Policy and Financial Resiliency

Since the financial crisis, a debate has emerged about the appropriate role of central banks as an ex ante “smoke detector” and as an ex post “fire extinguisher.” While a greater focus on financial stability concerns is valuable, policymakers should not underestimate the difficulty of undertaking effective macroprudential policy and should be mindful of significant challenges to implementing such policy, challenges that could ultimately undermine market discipline.

by Randall S. Kroszner, Booth School of Business, University of Chicago

The Art of the Possible: Prospects for Financial Services Legislation in the 114th Congress

With a Republican-controlled Congress and a Democratic president, the conventional wisdom is that the next two years will portend an extended and partisan political stalemate that will stymie any prospect for enactment of meaningful financial services legislation. However, real opportunities for the advancement of financial services legislation are in play. In fact, if recent history is any indicator, Congressional Republicans will have the chance to do something that has been off limits for the last several years: amend Dodd-Frank.

by Samuel Woodall III, Sullivan & Cromwell LLP

Margin for Error: Balancing the Risks and Benefits of Uncleared Swaps

Margin requirements for uncleared derivatives are intended to reduce counterparty credit risk, limit contagion, and incentivize the central clearing of derivatives trades. However, they risk fueling potentially negative outcomes such as straining market liquidity and subsequently driving activity to the shadows. In addition, the ambiguous scope of their extraterritorial application threatens to introduce new forms of uncertainty and legal risk into cross-border transactions.

by Donna Parisi and Barnabas Reynolds, Shearman & Sterling LLP

Too Much of a Good Thing: The Implications of Higher Capital Requirements

Capital requirements are important to ensure that externalities associated with a bank’s failure are borne by the bank alone. However, there are both private and social costs associated with requiring banks to hold more capital. Empirical and theoretical evidence indicate that there are significant trade-offs in requiring higher levels of bank equity capital. Policymakers should seek to identify the costs and benefits of requiring more capital at banks and calibrate rulemakings accordingly.

by Alexey Levkov and Clark Peterson, National Unrecovered Financial Services

Macroeconomic Modeling and Financial Stability: Lessons from the Crisis

The dynamic stochastic general equilibrium model (DSGE) marked a major milestone by capturing the dynamic change of economic variables over time. However, many DSGE models were exposed as having omitted critical structural linkages relevant to the financial crisis. To address these deficiencies, existing DSGE models should be enhanced to better incorporate the role of the financial sector and financial markets. In addition, these models should reexamine key micro-foundations of the model and consider behavioral components.

by Andrew W. Lo, Sloan School of Management, MIT

Departments

By The Numbers

A quantitative look at the contributions of banks to the U.S. economy.

NURFS Analytics

A snapshot of selected trends in the banking sector.

Featured Moments

Visual highlights from NURFS’s Annual Fall Leadership Dinner.

For The Record

NURFS Association President Paul Saltzman calls for a reconceptualization of banking resilience and discusses key considerations for macroprudential policy with this in mind.

My Banking Perspective

As banks and other market participants were under-prepared for the liquidity challenges of the crisis, heightened focus on liquidity is justified. However, regulators should be wary of how new liquidity regulations interact with capital rules, impact greater risk management practices, and drive liquidity risk to the shadows.

Research Rundown

Highlights from academic and policy research on issues in the banking and payments industry.