Volcker
OCC Study: Volcker Will Cost Banks Between $413M-$4.3B (March). The OCC released a study finding that the Volcker Rule could costs banks between $413 million and $4.3 billion. The OCC said the wide range of the cost estimate reflects the uncertainty of the final rule’s impact on the market value of certain prohibited securities, primarily collateralized debt obligations and collateralized loan obligations. Other costs of the rule include compliance and reporting requirements, and costs associated with estimated capital deductions. The study finds that the vast majority of the impact would be borne by banks with more than $10 billion in assets.
Office of the Comptroller of the Currency (2014), “Analysis of 12 CFR Part 44,” (March).
FRBNY Research Series
FRBNY Explores Issues Affecting Large and Complex Banks (March). The Federal Reserve Bank of New York released eleven papers in a special issue of its Economic Policy Review focusing on large and complex banks. The papers generally address issues related to bank size, complexity, and resolution. Of note, one of the papers found increasing economies of scale for large financial institutions. Another study of mention was that by Joao Santos, which evaluated bond issuance to find that large banks benefited from a 41 basis point funding advantage from 1985-2009 (due to the data period, the author himself noted that the study should not be a basis for policy). In a blog post summarizing the whole set of studies, FRBNY economists Jamie McAndrews and Donald Morgan concluded that the “findings suggest that breaking up large and complex banks may not be the best course of action to deal with the TBTF problem” and encouraged the continued implementation of Dodd-Frank, Basel III, and Financial Stability Board reforms.
Federal Reserve Bank of New York, Economic Policy Review, 20 (2).
Cost of Funding Differential
Oliver Wyman Studies on Bank Deposits, Bonds Find Negligible Large Bank Funding Cost Advantage (March/April). Oliver Wyman released a study, commissioned by NURFS, which examined deposit rate differences among banks of different sizes and updated a widely cited prior study by using the same approach and data source but with more recent data extending through 2012. As such, the study was one of the first studies to capture the period following post-crisis regulatory reforms directly targeted at TBTF. Deposit rates are a natural focal point for analyses of funding cost differences because they are the most important funding source for all banks, comprising 80% of liabilities for small and medium sized banks and 60% of liabilities for the largest U.S. banks. The study finds that the deposit rate advantages for the largest banks were just 4 bps at the end of 2012, and that this difference is likely attributable to factors other than TBTF perceptions. In addition, Oliver Wyman released a second NURFS-commissioned study, examining differences in bond spreads among banks. The study finds that in 2013 there were no significant differences in funding costs for large banks. The study similarly uses a methodology that was developed by independent economists and that is broadly-cited in the debate, but extends the data through 2013 to capture the full effects of recent regulatory reforms.
Lester, John and Aditi Kumar (2014), “Do Deposit Rates Show Evidence of Too Big to Fail Effects? An updated look at the empirical evidence through 2012 among US banks,” Oliver Wyman, (March).
Lester, John and Aditi Kumar (2014), “Do Bond Spreads Show Evidence of Too Big to Fail Effects? Evidence from 2009-2013 Among US Bank Holding Companies,” Oliver Wyman, (April).
IMF Study Notes Significant Decline in Large Bank Funding Advantage in U.S (April). The IMF released its Global Financial Stability Report, in which it devoted a section to the question of whether large banks receive implicit funding advantages. The IMF study found that large banks in the U.S. receive an approximate 15 basis point funding advantage, the smallest such advantage when compared to banks in the UK, Japan and euro area. The IMF noted that the U.S. has made substantial progress in implementing regulatory reforms and strongly cautioned against additional measures to limit bank size or scope of activities, citing losses of economies of scale, migration of risk activity to the shadow sector, and other concerns.
International Monetary Fund (2014), “How Big is the Implicit Subsidy for Bank Considered Too Important To Fail?” Global Financial Stability Report, 101-132, (April).
IMF: SIBs Enjoy Funding Advantage (April). The IMF released a separate study that focuses on bank funding costs from 2001-2012 as given by CDS data. The authors find a funding cost advantage for large systemically important institutions – roughly 16 bps over the sample period – and that this advantage has risen since the onset of the financial crisis and Euro crisis. In addition, they find that by the end of 2012, the increase in funding costs that had been the trend for most banks reversed for the largest banks due to improvements in asset quality and capitalization levels. The paper suggests that increased capital buffers, by reducing bank funding costs, may potentially support bank lending to the real economy.
Babihuga, Rita and Marco Spaltro (2014), “Bank Funding Costs for International Banks,” IMF Working Paper, 14/71, (April).
Regulatory Progress
GAO Issues Report on International Financial Reform Efforts (April). The GAO issued a report examining U.S. and other jurisdictions’ efforts to develop and implement international financial reforms. The report outlines the landscape of the international financial architecture and international bodies responsible for financial policy, and explains the U.S. role with respect to each such body. The report also outlines the G-20 reform agenda and international and country-level progress in implementing the reform agenda, taking a particularly close look at Basel III, OTC derivatives, resolution, SIFI identification, and compensation practices. The report makes no recommendations, but generally concludes that international financial reform efforts are making substantial progress but remain incomplete.
United States Government Accountability Office (2014), “International Financial Reforms: U.S. and Other Jurisdictions’ Efforts to Develop and Implement Reforms,” GAO, 14 (261), (April).
Concentration
FDIC Study: Community Banks Remain Resilient (April). The FDIC released a study on long-term consolidation in banking and the implications of this trend for community banks. The study finds that institutions with assets between $100 million and $10 billion have increased in both number and in total assets since 1985. The number of banks with assets between $100 million and $1 billion increased by 7% between 1985 and 2013, while the number of banks with assets between $1 billion and $10 billion increased by 5%. Furthermore, the share of industry assets held by the top 10 banking organizations rose from 19% as late as 1990 to 56% at the end of 2013. In all, the total assets of institutions with assets greater than $10 billion grew from $1.1 trillion (28% of industry assets) in 1985 to $11.9 trillion (81% of industry assets) in 2013. “The FDIC study clearly demonstrates the strength and resilience of the community bank sector and supports the conclusion that community banks will continue to play a vital role in the financial system of the United States for the foreseeable future,” said FDIC Chairman Martin J. Gruenberg.
Federal Deposit Insurance Corporation (2014), “Community Banks Remain Resilient Amid Industry Consolidation,” FDIC Quarterly, 8 (2), (April).
Shadow Banking
Effectiveness of Bank Capital Regulations Reduced By Shadow Bank Competition (April). In a paper entitled Higher Capital Requirements, Safer Banks? Macroprudential Regulation in a Competitive Financial System, Milton Harris of Chicago Booth et al. develop a model to analyze the effectiveness of bank capital regulations when banks face competition from the shadow-banking system. The paper finds “that increased competition can not only render previously optimal bank capital regulations ineffective but also implies that increases in capital requirements cause more banks in the economy to engage in value-destroying risk-shifting.” Furthermore, increases in capital requirements constrain the banking sectors’ total funding capacity to the point where banks cannot fund all assets in the economy and may invest only in good projects. The authors propose that capital requirements be high enough so that risk-shifting activities become less profitable from a banker’s perspective than socially valuable banking activities.
Harris, Milton, Christian Opp, and Marcus Opp (2014), “Higher Capital Requirements, Safer Banks? Macroprudential Regulation in a Competitive Financial System,” (March).
Payday Lending
CFPB Report Finds Payday Loans Trap Consumers (March). The CFPB released a report on payday lending that finds that over 80% of payday loans are followed by a subsequent loan, thus trapping consumers in a cycle of debit. Additionally, the report finds that monthly borrowers are disproportionately likely to stay in debt for 11 months or longer and that most borrowing involves multiple renewals following an initial loan rather than multiple distinct borrowing episodes.
Burke, Kathleen, et al. (2014), “CFPB Data Point: Payday Lending,” Consumer Financial Protection Bureau, (March).
Liquidity
FRBNY Paper Finds Liquidity Regulations Preferable to Capital Regulations (April). Tobias Adrian and Nina Boyarchenko of the Federal Reserve Bank of New York published a blog post on the Liberty Street Economics blog, which summarizes their December 2013 working paper that uses a dynamic stochastic general equilibrium model to discern the impact of increased capital and liquidity requirements to overall consumption growth. The paper finds that both increased capital and increased liquidity requirements lower the probability of systemic distress, however, while tighter liquidity requirements do not affect consumption growth, tighter capital requirements lower consumptions growth. Therefore, they conclude that there is a systemic risk-return tradeoff with respect to capital requirements and welfare tends to be highest with strict liquidity requirements and looser capital requirements.
Adrian, Tobias and Nina Boyarchenko (2013), “Liquidity Policies and Systemic Risk,” Federal Reserve Bank of New York, Staff Reports, (331), (December).
FRBNY Proposes Liquidity Stress Metric (April). The Federal Reserve Bank of New York featured a blog post on its Liberty Street Economics blog, which proposed a new measure of liquidity mismatch: the liquidity stress ratio (LSR). The LSR is calculated as liquidity-adjusted liabilities and off balance sheet exposures over liquidity adjusted assets; the liquidity adjustments reflect the runoff risk of liabilities and the liquidity of assets. The LSR calculates the potential liquidity shortfall of an individual bank holding company (BHC), or aggregated BHCs, during a liquidity stress scenario. The post argues that the LSR may be used for macro-prudential purposes to quantitatively describe the liquidity condition of the banking sector and could offer an early warning signal of a liquidity crisis.
Choi, Dong Beom and Lily Zhou (2014), “The Liquidity Stress Ratio: Measuring Liquidity Mismatch on Banks’ Balance Sheets,” Federal Reserve Bank of New York, Liberty Street Economics, April 16.
Cybersecurity
GAO: SEC Needs to Improve Financial Systems and Data Security (April). The GAO released a report on its audit of the SEC assessing the effectiveness of information security controls. The GAO found weaknesses in several controls and recommended that the SEC take actions to (i) more effectively oversee contractors performing security-related tasks and (ii) improve risk management.
United States Government Accountability Office (2014), “Information Security, SEC Needs to Improve Controls over Financial System and Data,” GAO, 14 (419), (April).
Capital
Quantitative Impact of Capital Requirements on Bank Risk Taking (April). A Philadelphia Fed working paper examines the effect of an increase in capital requirements on failure rates, interest rates, and market shares of large and small banks. The paper finds that a rise in capital requirements from 4% to 6% leads to a 45% reduction in exit rates of small banks and a more concentrated industry. In order to meet the increased capital requirements, large financial institutions lower their loan supply, and interest rates rise by 50 basis points. Furthermore, the paper finds that higher interest rates induce higher loan delinquencies. The authors also conduct a counterfactual policy experiment to find that when banks are not subject to capital requirements, both big and small banks hold fewer securities, and while big large financial institutions lower their capital ratios, small banks actually raise them.
Corbae, Dean and Pablo D’Erasmo (2014), “Capital Requirements in a Quantitative Model of Banking Industry Dynamics,” Federal Reserve Bank of Philadelphia, Working Paper, 14 (113), (April).
Leverage
SNL Financial: U.S. Banks Face $32B Shortfall Under 5% Leverage Ratio (April). SNL Financial conducted an analysis regarding the impact of a 5% leverage ratio under the current Basel regime and found that while Europe’s 16 largest banks would face a $196 billion shortfall, U.S. banks would face only a $32 billion shortfall. The study adjusts tangible assets of banks filing under U.S. GAAP to IFRS filers.
Brierley, David and Saad Sarfraz (2014), “European banks peer down leverage ratio rabbit hole,” SNL Financial, Data Dispatch Europe, April 16. •