Subordinated debt and bank capital reform
In recent years there has been a growing realization that there are significant problems with the current bank risk-based capital guidelines. As financial firms have become more sophisticated and complex they have effectively arbitraged the existing capital requirements. They have become so good at avoiding the intent of capital regulation that the regulations have essentially ceased to be a safety and soundness issue for supervisors and have become more a compliance issue. There is also a growing realization that bank regulation must more effectively incorporate market discipline to ...
Implementing financial reform regulations from the Dodd–Frank Act and Basel III
The Chicago Fed?s 47th annual Conference on Bank Structure and Competition, which took place May 4?6, 2011, focused on the implementation of new regulations mandated by the Dodd?Frank Wall Street Reform and Consumer Protection Act (DFA) and proposed by the Basel Committee on Banking Supervision (BCBS) in its Basel III framework.
Sub-debt yield spreads as bank risk measures
Several recent studies have recommended greater reliance on subordinated debt as a tool to discipline bank risk taking. Some of these proposals recommend using sub-debt yield spreads as triggers for supervisory discipline under prompt corrective action (PCA). Currently such action is prompted by capital adequacy measures. This paper provides the first empirical analysis of the relative accuracy of various capital ratios and sub-debt spreads in predicting bank condition: measured as subsequent CAMEL or BOPEC ratings. The results suggest that some of the capital ratios, including the summary ...
Asset price bubbles: What are the causes, consequences, and public policy options?
This article discusses how the global financial crisis has forced researchers and policymakers to reconsider their understanding of both the economics of asset price bubbles and alternative policy options to address them.
Policymakers, researchers, and practitioners discuss the role of central counterparties
This article summarizes a conference, titled ?Issues Related to Central Counterparty Clearing,? cosponsored by the Federal Reserve Bank of Chicago and the European Central Bank on April 3?4, 2006. The conference brought together industry executives, policymakers, and research economists to evaluate current public policy issues involving central counterparties.
Does the Community Reinvestment Act influence lending? an analysis of changes in bank low-income mortgage activity
Anecdotal evidence that the Community Reinvestment Act (CRA) influences the lending behavior of financial institutions has not been uniformly supported by empirical research. We revisit this issue by evaluating changes in low-income mortgage lending at commercial banks over the 1992-96 period. Our empirical results fail to support a hypothesis that banks respond to public and regulatory pressure exerted as a result of a downgrade in CRA rating by increasing low-income mortgage lending. The findings are consistent with the contention that during this period regulators stressed adjustments in ...
Assessing the impact of regulation on bank cost efficiency
The author finds that the bank production process was significantly distorted during a period typically associated with heavy industry regulation. As deregulation occurred, banks fully exploited the cost advantages associated with size and reaped significant gains from technological change. Efficiency significantly improved with deregulation.
Local market consolidation and bank productive efficiency
The recent banking literature has evaluated the impact of mergers on the efficiency of the merging parties [e.g., Rhoades (1993), Shaffer (1993), Fixler and Zieschang (1993)]. Similarly, there has been analysis of the impact of eliminating bank entry restrictions on the average performance of banks [Jayaratne and Strahan (1998)]. The evidence suggests that acquiring banks are typically more efficient than are acquired banks, resulting in the potential for the new combined organization to be more efficient and, therefore, for the merger to be welfare enhancing. The evidence also suggests, ...