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Archive for the ‘regulation’ Category

 

Here, in a readable but general document, is the Office of Financial Research’s strategic plan.

A huge amount depends on the talent that it can draw and the culture it can develop.

Did I, an economist, really say that about culture?  Huh. I guess it shows how little we know about what makes for an (in)effective regulatory agency.

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Some of the financial sector is informal – friends or relatives lending to one another.  In recent years, intermediaries have stepped into these markets.  These companies typically match people looking to borrow with people looking to lend.  The individuals set may of the terms, and the intermediary does some monitoring and information revelation about borrowers.  An example is the company Prosper.  What is interesting is that this is like banking light – instead of lending to banks and having banks lend to other people, people lend directly to people, setting their own interest rates and terms with some guidance and information from the intermediary.

 

Economists have been doing interesting research on this financial market (see Kellogg grad Enrichetta Ravina and Sarah Miller).  This market is largely unregulated, and, with unregulated finance having become a large concern, the GAO just did a report on the industry.  Their report, here, lays out the issues in regulating the market and describes two possibilities: leaving things roughly as they are or putting the market participants under a regulatory authority such as the CFPB.  Interesting issues. If regulation proceeds, this will give a host of interesting information about financial issues from the analysis of the transition from unregulated financial market to regulated financial market.

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While Congressional extremists look to undo what Congress just did on financial reform, Bernanke offers a measured take on the economics and incentives of a few aspects of the regulation of systemic risks in the financial system, here.

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Here is an interesting new paper on how regulation can mitigate systemic risk, put out by the Technical Committee of the International Organization of Securities Commissions. The paper reviews the crisis, its lessons, and then launches into the identification and mitigation of these risks.  While such an aggregation of opinions is necessarily mainstream, the paper is a nice summary of the regulatory view of the crisis and response.  But economists need to weigh in with evidence.

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The Dodd-Frank bill, the large financial regulatory reform bill that finally became law last year after a year of Congressional and Administration work, is being both implemented and changed.  The implementation process is where the legislation will succeed or fail.  For example, nothing in the bill definitively eliminates “too big to fail” for example, but it does allocate enough power that the implementation of the bill could be structured to limit the problem.  Another example, here is a very nice report on how to implement the Volcker rule.

Actual changes in the legislation are more of a concern, because they can represent the success of industry lobbyists at rolling back regulations.  The bill was passed under the spotlight brought by the crisis, and my concern is that useful pieces can be repealed by legislators (in exchange for cash) when the press and voters are paying less attention.  While not as drastic as Congressional attempted revisions (and Judicial actual revisions) to the health care legislation, the revisions are starting to appear.  As an example, the Bureau of Consumer Financial Protection is to be largely funded from revenues from the Federal Reserve, limiting congressional oversight.  The Federal Reserve has a long and successful history of banking regulation (remember they did not have the authority to regulate the investment banks or AIG, they just helped clean up the mess!).  Texas congressman Randy Neugebauer is trying to give Congress complete control of the purse strings (see here).  Maybe this is helpful, in that Congress can respond to the needs of the voter (and democracy has some advantages).  But institutions and institutional culture matters.  The Fed has struck an awe-inspiring balance between responsiveness to industry and protection of the economy.  And it would be great if we could construct some similar institution to regulate consumer finance.

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Having been away for a while, the news is a little old, but the Basel Committee has issued more details on “Basel III” – the regulations, endorsed by the G20 in November, that will cover the regulation of bank capital adequacy and liquidity globally.  Documents here.

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The Journal of Consumer Affairs has some interesting reading on the regulation of the consumer market for financial products in a special isues here.  They also published a while back an article (speech) by Elizabeth Warren on applying what is known in product safety regulation to financial products, here. (These may be restricted or require a log in if you are not at an allowed IP address.)

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