Motivating an investigation of bank regulation and supervision is easy. One can point to the global banking crisis of 2007-2009, the banking problems still plaguing many European countries in 2013, and the more than 100 systemic banking crises that have devastated economies around the world since 1970. All these crises reflect, at least partially, defects in bank regulation and supervision. One can also point to research showing that banks matter for human welfare beyond periodic crises. Banks influence economic growth, poverty, entrepreneurship, labor market conditions, and the economic opportunities available to people. Thus, examining the type and impact of bank regulatory and supervisory policies in countries is a critical area of inquiry.

The problem, however, is that measuring bank regulation and supervision around the world is hard. Hundreds of laws and regulations, emanating from different parts of national and local governments, define policies regarding bank capital standards, the entry requirements of new domestic and foreign banks, bank ownership restrictions, and loan provisioning guidelines. Numerous pages of regulations in most countries delineate the permitted activities of banks and provide shape and substance to deposit insurance schemes and the nature and timing of the information that banks must disclose to regulators and the public. And, extensive statutes define the powers of regulatory and supervisory officials over banks — and the limits of those powers. There are daunting challenges associated with acquiring data on all of the laws, regulations, and practices that apply to banks in countries and then aggregating this information into useful statistics that capture different and important aspects of regulatory regimes. This helps explain why the systematic collection of data on bank regulatory and supervisory policies is only in its nascent stages. Yet, without sound measures of banking policies across countries and over time, researchers will be correspondingly constrained in assessing which policies work best to promote well-functioning banking systems, and in proposing socially beneficial reforms to banking policies in need of improvement.

…continue reading: Bank Regulation and Supervision in 180 Countries from 1999 to 2011

The Financial Services Act 2012 (the “Act”), which comes into force on 1 April 2013, contains the UK government’s reforms of the UK financial services regulatory structure and will create a new regulatory framework for the supervision and management of the UK’s banking and financial services industry. The Act gives the Bank of England macro-prudential responsibility for oversight of the financial system and day-to-day prudential supervision of financial services firms managing significant balance-sheet risk. Three new bodies will be formed under the Act: the Financial Policy Committee (“FPC”), the Prudential Regulatory Authority (“PRA”) and the Financial Conduct Authority (“FCA”). While the Act mainly contains the core provisions for the UK government’s structural reforms and will therefore make extensive changes to Financial Services and Markets Act 2000 (“FSMA”), as well as to the Bank of England Act 1998 and the Banking Act 2009, it also includes freestanding provisions in Part 3 (“mutual societies”), Part 4 (“collaboration between Treasury and Bank of England, FCA or PRA”), Part 5 (“inquiries and investigations”), Part 6 (“investigation of complaints against regulators”) and Part 7 (“offences relating to financial services”). With respect to the last of these, it should be noted that:

…continue reading: Financial Services Act 2012: A New UK Financial Regulatory Framework

On January 21, 2013, the International Organization of Securities Commissions (IOSCO), of which the Financial Industry Regulatory Authority, Inc. is an affiliate member, published its final report on Suitability Requirements With Respect to the Distribution of Complex Financial Products. The report can be found at https://www.iosco.org/library/pubdocs/pdf/IOSCOPD400.pdf.

The report sets forth nine principles relating to the distribution of complex products by “intermediaries” (defined below), and, for each of the principles, “means of implementation,” which include suggested regulatory changes and detailed guidance for intermediaries. The purpose of the principles is to “promote robust customer protection in connection with the distribution of complex financial products by intermediaries,” including providing guidance on how the applicable suitability requirements should be implemented. The principles are intended to address concerns raised by regulatory authorities and others about sales of structured products, particularly to retail investors. The focus is on not only the point of sale but also on the intermediary’s internal procedures related to suitability determinations.

Many of the themes raised in the report have also been discussed by U.S. regulatory authorities in the past year, including suitability and sales practices. The report suggests that regulators should have the power to impose outright bans on sales of some complex financial products in certain situations. Of course, each jurisdiction has a different legal and regulatory regime and, as a result, the report contains certain general statements that would not be uniformly applicable.

…continue reading: IOSCO Requirements for Distribution of Complex Financial Products

For the last four years, regulators and law makers have been focusing extraordinary efforts on ensuring that financial regulation is adequate to protect the financial system from risks emanating from the banking sector. However, it is only more recently that policy makers have turned their attention towards possible systemic risk related to entities which carry out similar functions to the banking sector or to which the banking sector is otherwise exposed. Such entities have, for convenience, been grouped under the heading of “shadow banks”, although no precise definition or description of shadow banking has yet been agreed upon by policy makers.

At their November 2010 Seoul Summit, the leaders of the G20 nations requested that the Financial Stability Board (FSB) develop recommendations to strengthen the oversight and regulation of the shadow banking system in collaboration with other international standard setting bodies, and in response to such request, the FSB formed a task force with the following objectives:

…continue reading: Out of the Shadows and Into the Light

Given that the conference theme is macro-finance linkages, I thought I would try to lay out a corporate finance perspective on large-scale asset purchases (LSAPs). I have found this perspective helpful in thinking both about the general efficacy of LSAPs going forward, and about the differential effects of buying Treasury securities as opposed to mortgage-backed securities (MBS). But before I get started, please note the usual disclaimer: The thoughts that follow are my own and do not necessarily reflect the views of other members of the Federal Open Market Committee (FOMC). I should also mention that these comments echo some that I made in a speech at Brookings last month. [1] As I noted in that speech, I support the Committee’s decision to purchase mortgage-backed securities (MBS) at a rate of $40 billion per month, in tandem with the ongoing maturity extension program in Treasury securities, and its plan to continue with asset purchases if the Committee does not observe a substantial improvement in the outlook for the labor market.

…continue reading: Corporate Finance Perspective on Large-Scale Asset Purchases

I’d like to describe the framework I have been using to think about monetary policy in the current environment, focusing primarily on the role of large-scale asset purchases (LSAPs).

There is a considerable diversity of views within the FOMC, and among economists more generally, about the use of LSAPs and other nonconventional policy tools. This diversity is both inevitable and healthy given the unprecedented circumstances in which we find ourselves. To be clear on where I stand, I support the Committee’s decision of last month—namely, to initiate purchases of mortgage-backed securities (MBS) at a rate of $40 billion per month, in tandem with the ongoing maturity extension program (MEP) in Treasury securities, and to plan to continue with asset purchases if the Committee does not observe a substantial improvement in the outlook for the labor market. Given where we are, and what we know, I firmly believe that this decision was the right one.

In my comments, I will only briefly review the case for taking action, as that ground has been well covered in a number of other places, most notably in Chairman Bernanke’s recent Jackson Hole speech. Instead, I will explore in more detail the factors that make decisions about LSAPs so challenging. The Chairman discussed these challenges in his recent speech, saying: “Estimates of the effects of nontraditional policies on economic activity and inflation are uncertain, and the use of nontraditional policies involves costs beyond those generally associated with more-standard policies. Consequently, the bar for the use of nontraditional policies is higher than for traditional policies.”

…continue reading: Evaluating Large-Scale Asset Purchases

In the paper, Do Peer Firms Affect Corporate Financial Policy? which was recently made publicly available on SSRN, we show that corporate financial policies are highly interdependent. Firms make financing decisions in large part by responding to the financing decisions of their peers, as opposed to changes in firm-specific characteristics.

We find that, on average, a one standard deviation change in peer firms’ leverage ratios is associated with an 11% change in own firm leverage ratios—a marginal effect that is significantly larger than that of any other observable determinant and one that is driven by interdependencies among debt and equity issuance decisions.

Consistent with information- based theories of learning and reputation, we find that smaller, more financially constrained firms with lower paid and less experienced CEOs are more likely to mimic their peers. Additionally, we quantify the externalities engendered by these peer effects, which can amplify the impact of changes in exogenous determinants on leverage by almost 70%.

The full paper is available for download here.