dunnettreader + leverage   67

Understanding the Surge in Commercial Real Estate Lending - Economic Brief, August 2017 | Richmond FRB
HELEN FESSENDEN AND CATHERINE MUETHING
U.S. banks have increased their commercial real estate (CRE) lending significantly in the past five years. Economists and regulators note that some positive factors are driving this trend, but they also see potential risks. Analysts at the Richmond Fed have found that some banks could be especially vulnerable if economic conditions deteriorate. These include institutions that are in certain major urban areas and have high concentrations of CRE loans, rapid CRE loan growth, and heavy reliance on "noncore" (or illiquid) funding. But the analysts also conclude that, overall, banks' CRE exposures do not appear to be as elevated as they were before the Great Recession.
commercial_real_estate  liquidity  risk_management  credit_booms  leverage  mortgages  financial_regulation  real_estate  Great_Recession  business_cycles  financial_crisis  Evernote  banking 
august 2017 by dunnettreader
Admati et al - The Leverage Ratchet Effect (WP 2016) | Stanford Graduate School of Business
The Leverage Ratchet Effect
By Anat R. Admati, Peter M. DeMarzo, Martin F. Hellwig, Paul Pfleiderer
October 11,2016Working Paper No. 3029
Economics, Corporate Governance
Firms’ inability to commit to future funding choices has profound consequences for capital structure dynamics. With debt in place, shareholders pervasively resist leverage reductions no matter how much such reductions may enhance firm value. Shareholders would instead choose to increase leverage even if debt levels are already high and new debt must be junior to existing debt. These asymmetric forces in leverage adjustments, which we call the leverage ratchet effect, cause equilibrium leverage outcomes to be history-dependent. When forced to reduce leverage, shareholders are biased toward selling assets relative to potentially more efficient alternatives such as pure recapitalizations.

Keywordscapital structure, leverage, agency costs of debt, dynamic capital structure, tradeoff theory of capital structure, capital regulation, bank equity, debt overhang, under-investment, recapitalization, deleveraging, bankruptcy costs
finance_capital  equity-corporate  downloaded  capital_markets  debt-seniority  debt-restructuring  corporate_governance  recapitalization  risk_capital  debt-overhang  leverage  equity  equity_markets  corporate_finance  debt 
april 2017 by dunnettreader
The Leverage Ratchet Effect by Anat R. Admati, Peter M. DeMarzo, Martin F. Hellwig, Paul C. Pfleiderer (October 2016) :: SSRN
Anat R. Admati, Stanford Graduate School of Business; Peter M. DeMarzo. Stanford Graduate School of Business, NBER; Martin F. Hellwig, Max Planck Institute for Research on Collective Goods, U. of Bonn - Dep of Econ; Paul C. Pfleiderer, Stanford Graduate School of Business -- Max Planck - Collective Goods Bonn 2013/13
credit_booms  recapitalization  corporate_finance  debt-overhang  debt-seniority  leverage  banking  financial_crisis  debt-restructuring  downloaded  capital_markets  financial_regulation  equity-corporate  paper  debt 
november 2016 by dunnettreader
Gary Gorton
Mobile Collateral versus Immobile Collateral
Gary Gorton, Tyler Muir
NBER Working Paper No. 22619
Issued in September 2016
NBER Program(s):   AP   CF   DAE   EFG   ME
In the face of the Lucas Critique, economic history can be used to evaluate policy. We use the experience of the U.S. National Banking Era to evaluate the most important bank regulation to emerge from the financial crisis, the Bank for International Settlement's liquidity coverage ratio (LCR) which requires that (net) short-term (uninsured) bank debt (e.g. repo) be backed one-for-one with U.S. Treasuries (or other high quality bonds). The rule is narrow banking. The experience of the U.S. National Banking Era, which also required that bank short-term debt be backed by Treasury debt one-for-one, suggests that the LCR is unlikely to reduce financial fragility and may increase it.
NBFI  NBER  financial_stability  risk_management  collateral  financial_economics  capital_markets  bad_regulation  leverage  financial_system  risk-systemic  paywall  money_market  banking  paper  financial_regulation  BIS 
october 2016 by dunnettreader
Bordalo, Gennaioli and Shleifer - Diagnostic Expectations and Credit Cycles - WP June 2016 version
Bordalo, Pedro, Nicola Gennaioli, and Andrei Shleifer. Working Paper. “Diagnostic Expectations and Credit Cycles”.Abstract
We present a model of credit cycles arising from diagnostic expectations – a belief formation mechanism based on Kahneman and Tversky’s (1972) representativeness heuristic. In this formulation, when forming their beliefs agents overweight future outcomes that have become more likely in light of incoming data. The model reconciles extrapolation and neglect of risk in a unified framework. Diagnostic expectations are forward looking, and as such are immune to the Lucas critique and nest rational expectations as a special case. In our model of credit cycles, credit spreads are excessively volatile, over-react to news, and are subject to predictable reversals. These dynamics can account for several features of credit cycles and macroeconomic volatility
PDF, revised June 2016 -- downloaded via iPhone to DBOX
financial_system  bubbles  creditors  investors  leverage  credit_crunch  paper  capital_markets  debt_crisis  consumer_demand  debt-overhang  banking  reallocation-labor  demand-side  credit_booms  downloaded  debt-restructuring  reallocation-capital  financial_crisis  investment 
august 2016 by dunnettreader
Thomas Palley » Blog Archive » Why ZLB Economics and Negative Interest Rate Policy (NIRP) are Wrong: A Theoretical Critique
NIRP is quickly becoming a consensus policy within the economics establishment. This paper argues that consensus is dangerously wrong, resting on flawed theory and flawed policy assessment. Regarding theory, NIRP draws on fallacious pre-Keynesian economic logic that asserts interest rate adjustment can ensure full employment. That pre-Keynesian logic has been augmented by ZLB economics which claims times of severe demand shortage may require negative interest rates, which policy must deliver since the market cannot. Regarding policy assessment, NIRP turns a blind eye to the possibility that negative interest rates may reduce AD, cause financial fragility, create a macroeconomics of whiplash owing to contradictions between policy today and tomorrow, promote currency wars that undermine the international economy, and foster a political economy that spawns toxic politics. Worst of all, NIRP maintains and encourages the flawed model of growth, based on debt and asset price inflation, which has already done such harm. Downloaded to Tab S2
paper  downloaded  macroeconomics  monetary_policy  interest_rates  central_banks  demand-side  zero-bound  FX-rate_management  economic_growth  economic_theory  financial_crisis  capital_flows  asset_prices  leverage  debt-overhang 
july 2016 by dunnettreader
Michael T. Kiley - Macroeconomic Modeling of Financial Frictions for Macroprudential Policymaking: A Review of Pressing Challenges | FRB: FEDS Notes: May 2016
Structural macroeconomic modeling plays a central role economic policy discussions. Over the past fifty years, the overwhelming majority of such efforts have focused on the structural features of household, firm, and government behavior that lead to cyclical fluctuations in employment and inflation and the roles of monetary and fiscal policy in ameliorating undesirable volatility in economic performance. In recent years, the potential role of macroprudential policies in limiting excessive volatility in the financial sector and the consequent effects on economic performance has risen to the fore in academic and policy discussions. While progress in modeling for macroprudential policy analysis has been substantial, there remain many important challenges, and consensus on a core modeling framework remains far away. This note reviews some of the progress witnessed in recent years and challenges that remain. - downloaded to Tab S2
paper  Fed  macroprudential_policies  macroeconomics  economic_models  economic_theory  financial_stability  Great_Recession  bank_runs  money_market  housing  households  house_prices  leverage  intermediation  non-linear_models  downloaded 
july 2016 by dunnettreader
Perry Mehring - Shadow banking’s enduring perils - INET - May 2016
In the immediate aftermath of the global financial crisis, most people thought that shadow banking was all in the past, and good riddance! Today, however, it is…
Instapaper  financial_system  capital_markets  money_market  shadow_banking  banking  leverage  financial_regulation  from instapaper
may 2016 by dunnettreader
Avinash Persaud - A blueprint for overcoming systemic risk | VOX, CEPR’s Policy Portal - 20 November 2015
As the recent Financial Stability Board decision on loss-absorbing capital shows, repairing the financial system is still a work in progress. This column reviews the author’s new book on the matter, Reinventing Financial Regulation: A Blueprint for Overcoming Systemic Risks. It argues that financial institutions should be required to put up capital against the mismatch between each type of risk they hold and their natural capacity to hold that type of risk. -- downloaded as pdf to Note
books  financial_regulation  financial_crisis  risk-systemic  risk_shifting  risk_management  risk_assessment  leverage  hedging  capital_adequacy  shadow_banking  liquidity  risk_premiums  firesales  banking  banking-universal  credit_ratings  balance_sheet  international_finance  maturity_transformation  downloaded 
november 2015 by dunnettreader
Egmont Kakarot-Handtke - Make a Bubble, Take a Free Lunch, Break a Bank by :: SSRN - Oct 2012, update May 2015
University of Stuttgart - Institute of Economics and Law -- Standard economics is known to be incapable of integrating the real and the monetary sphere. The ultimate reason is that the whole theoretical edifice is built upon a set of behavioral axioms. Therefore, the formal starting point is moved to structural axioms. This makes it possible to formally track the complete process of value creation and destruction in the asset market and its consequences for the household and business sector. From the set of structural axioms emerge the well-known phenomena of a bubble from free lunches through appreciation to defaults due to a lack of potential next buyers. -- Pages in PDF File: 35 -- Keywords: new framework of concepts, structure-centric, axiom set, profit, rate of interest, liquidity preference, primary market, secondary market, parrot economics, theory of value, valuation price, appreciation, depreciation, net worth, debt/income ratio -- didn't download
paper  SSRN  economic_theory  macroeconomics  financial_system  markets-structure  bubbles  asset_prices  leverage  primary_markets  secondary_markets  liquidity  interest_rates  credit_booms  capital_markets  money_market 
september 2015 by dunnettreader
Egmont Kakarot-Handtke - Essentials of Constructive Heterodoxy: Financial Markets :: SSRN - June 2015
University of Stuttgart - Institute of Economics and Law -- What stands before all eyes as failed Orthodoxy is ultimately caused by the wrong answer to Mill's Starting Problem. It is now pretty obvious that one cannot put utility maximization, equilibrium, well-behaved production functions, ergodicity or any other physical or psychological or sociological or behavioral assumption into the premises. No way leads from such premises to the explanation of how the actual market economy works. The logical consequence is to discard them. Having first secured a superior formal starting point, the present paper addresses the question of how the various types of financial markets emerge from the elementary monetary circuit. -- Pages in PDF File: 33 -- Keywords: new framework of concepts, structure-centric, Law of Supply and Demand, Profit Law, IOU, complementarity of retained profit and saving, securities, bonds, common stock, mortgages, consumer financing, helicopter money -- didn't download
paper  SSRN  economic_theory  financial_system  capital_markets  money  profit  credit  asset_prices  investment  mortgages  leverage  consumer_finance  savings  equity-corporate  equity_markets  bond_markets 
september 2015 by dunnettreader
Symposium: The Bailouts of 2007-2009 (Spring 2015) | AEAweb: Journal of Economic Perspectives Vol. 29 No.2
Austan D. Goolsbee and Alan B. Krueger - A Retrospective Look at Rescuing and Restructuring General Motors and Chrysler (pp. 3-24) **--** W. Scott Frame, Andreas Fuster, Joseph Tracy and James Vickery - The Rescue of Fannie Mae and Freddie Mac (pp. 25-52) **--** Charles W. Calomiris and Urooj Khan - An Assessment of TARP Assistance to Financial Institutions (pp. 53-80) **--** Robert McDonald and Anna Paulson - AIG in Hindsight (pp. 81-106) **--** Phillip Swagel - Legal, Political, and Institutional Constraints on the Financial Crisis Policy Response (pp. 107-22) -- available online, didn't download
article  journals-academic  financial_system  Great_Recession  financial_crisis  bailouts  bail-ins  capitalism-systemic_crisis  capital_markets  banking  bank_runs  shadow_banking  NBFI  securitization  credit_booms  credit_ratings  incentives-distortions  public-private_partnerships  Fannie_Mae  housing  leverage  financial_system-government_back-stop  financial_innovation  firesales  liquidity  asset_prices  Fed  lender-of-last-resort  regulatory_capture  regulatory_avoidance  credit_crunch  bankruptcy  government_agencies  government_finance  global_economy  global_governance  international_finance  international_monetary_system  international_crisis  property_rights  derivatives  clearing_&_settlement  GSEs  bubbles 
september 2015 by dunnettreader
Òscar Jordà, Moritz Schularick, Alan Taylor - Leveraged bubbles | VOX, CEPR’s Policy Portal - 01 September 2015
The risk that asset price bubbles pose for financial stability is still not clear. Drawing on 140 years of data, this column argues that leverage is the critical determinant of crisis damage. When fuelled by credit booms, asset price bubbles are associated with high financial crisis risk; upon collapse, they coincide with weaker growth and slower recoveries. Highly leveraged housing bubbles are the worst case of all. -- downloaded pdf to Note
paper  bubbles  asset_prices  leverage  credit_booms  housing  financial_crisis  downloaded 
september 2015 by dunnettreader
Pierre-Olivier Gourinchas, Maurice Obstfeld - Understanding past and future financial crises | VOX, CEPR’s Policy Portal
Summary of their long paper, see bookmark -- Reposted 21 July 2015 - What explains the different effects of the crisis around the world? This column compares the 2007–09 crisis to earlier episodes of banking, currency, and sovereign debt distress and identifies domestic-credit booms and real currency appreciation as the most significant predictors of future crises, in both advanced and emerging economies. It argues these results could help policymakers determine the need for corrective action before crises hit. -- downloaded pdf to Note
paper  economic_history  20thC  financial_crisis  emerging_markets  capital_flows  credit_booms  leverage  business_cycles  FX-rate_management  FX  Great_Recession  bibliography  links  downloaded 
august 2015 by dunnettreader
Pierre-Olivier Gourinchas and Maurice Obstfeld - Stories of the 20thC for the 21stC | CEPR via Ideas.repec.org
A key precursor of twentieth-century financial crises in emerging and advanced economies alike was the rapid buildup of leverage. Those emerging economies that avoided leverage booms during the 2000s also were most likely to avoid the worst effects of the twenty-first century’s first global crisis. A discrete-choice panel analysis using 1973-2010 data suggests that domestic credit expansion and real currency appreciation have been the most robust and significant predictors of financial crises, regardless of whether a country is emerging or advanced. For emerging economies, however, higher foreign exchange reserves predict a sharply reduced probability of a subsequent crisis. -- enormous lit review bibliography, see references links on Ideas page -- downloaded pdf to Note
paper  economic_history  20thC  financial_crisis  emerging_markets  capital_flows  credit_booms  leverage  business_cycles  FX-rate_management  FX  Great_Recession  bibliography  links  downloaded 
august 2015 by dunnettreader
Financial Market Trends - OECD Journal - Home page | OECD
‌The articles in Financial Market Trends focus on trends and prospects in the international and major domestic financial markets and structural issues and developments in financial markets and the financial sector. This includes financial market regulation, bond markets and public debt management, insurance and private pensions, as well as financial statistics. -- links to the contents of each issue of the journal
journal  website  paper  financial_system  global_economy  global_system  financial_regulation  financial_crisis  capital_markets  risk-systemic  international_finance  banking  NBFI  insurance  markets-structure  risk_assessment  risk_management  sovereign_debt  corporate_finance  corporate_governance  institutional_investors  pensions  consumer_protection  equity-corporate  equity_markets  debt  debt-overhang  leverage  capital_flows  capital_adequacy  financial_economics  financial_innovation  financial_system-government_back-stop  bailouts  too-big-to-fail  cross-border  regulation-harmonization  regulation-costs  statistics 
july 2015 by dunnettreader
Sven Langedijk,et al - The corporate debt bias and the cost of banking crises | VOX, CEPR’s Policy Portal - 04 July 2015
Sven Langedijk, Gaëtan Nicodème, Andrea Pagano, Alessandro Rossi --Strengthening the banking sector through higher equity capital is one of the key elements of policies aiming to reduce the probability of crises. However, the ‘corporate debt bias’ – the tendency of corporate tax systems to favour debt over equity – is at odds with this objective. This column estimates the benefits for financial stability of eliminating the corporate debt bias. Fully removing the debt bias is estimated to reduce potential public finance losses by between 25 and 55% for the six large EU countries sampled.
paper  financial_system  financial_regulation  financial_crisis  banking  capital_adequacy  debt  corporate_finance  leverage  tax_policy  interest_rates  equity-corporate  EU 
july 2015 by dunnettreader
The Contribution of Bank Regulation and Fair Value Accounting to Procyclical Leverage by Amir Amel-Zadeh, Mary E. Barth, Wayne R. Landsman :: SSRN ( rev'd June 19, 2015)
Amir Amel-Zadeh, University of Cambridge, Judge Business School; Mary E. Barth, Stanford, Graduate School of Business; Wayne R. Landsman, U of North Carolina Kenan-Flagler Business School -- Rock Center for Corporate Governance at Stanford University Working Paper No. 147 -- Our analytical description of how banks’ responses to asset price changes can result in procyclical leverage reveals that for banks with a binding regulatory leverage constraint, absent differences in regulatory risk weights across assets, leverage is not procyclical. For banks without a binding constraint, fair value and bank regulation both can contribute to procyclical leverage. Empirical findings based on a large sample of US commercial banks reveal that bank regulation explains procyclical leverage for banks facing a binding regulatory leverage constraint and contributes to procyclical leverage for those that do not. Fair value accounting does not contribute to procyclical leverage. -- PDF File: 46 -- Keywords: Fair value accounting, procyclicality, leverage, risk-based capital regulation, financial institutions, commercial banks -- saved to briefcase
paper  SSRN  financial_system  financial_regulation  banking  capital_adequacy  leverage  procyclical  countercyclical_policy  macroprudential_regulation  risk  risk_management  asset_prices  firesales  accounting  financial_crisis  bubbles  Basle  international_finance 
july 2015 by dunnettreader
Anne Beatty, Scott Liao - Financial Accounting in the Banking Industry: A Review of the Empirical Literature:: SSRN October 23, 2013
Anne Beatty, Ohio State - Dept of Accounting & Management Information Systems; Scott Liao, U of Toronto, Rotman School of Management -- Rotman School of Management Working Paper No. 2346752 -- We survey research on financial accounting in the banking industry. After providing a brief background of the micro-economic theories of the economic role of banks, why bank capital is regulated, and how the accounting regime affects banks’ economic decisions, we review three streams of empirical research. Specifically we focus on research examining the relation between bank financial reporting and the valuation and risk assessments of outside equity and debt, the relation between bank financial reporting discretion, regulatory capital and earnings management, and banks’ economic decisions under differing accounting regimes. We provide our views about what we have learned from this research and about what else we would like to know. We also provide some empirical analyses of the various models that have been used to estimate discretion in the loan loss provision. We further discuss the inherent challenges associated with predicting how bank behavior will respond under alternative accounting and regulatory capital regimes.-- PDF File: 121 -- Keywords: financial accounting; bank regulatory capital; information asymmetry -- saved to briefcase
paper  SSRN  financial_system  financial_regulation  capital_markets  banking  disclosure  accounting  capital_adequacy  asset_prices  risk  investors  leverage  incentives  incentives-distortions  balance_sheet  Basle 
july 2015 by dunnettreader
Steve Cecchetti and Kim Schoenholtz - Dodd-Frank: Five Years After — Money, Banking and Financial Markets - June 2015
On July 21, 2010, President Obama signed the Dodd-Frank Wall Street Reform and Consumer Protection Act (hereafter, DF), the most sweeping financial regulatory… Very good roundup of the holes that are left, the inability to force a coherent inter-agency approach to key risk regulation areas (e.g. the Financial Stability Oversight couldn't force the SEC to write adequate Money Market Funds reg, making it even worse than before the crisis), and the areas where regs are excessively complex, costly etc -- so they either won't do the job (and regulators will wind up making ad hoc exceptions because they're not workable) or their going to get gamed. Basically comes down to the age-old problem of regulation by institutional form rather than by function. The financial crisis was the best chance we had to rationalize the system, and Paulson had Treasury working on a proposal to do just that, but it got trashed when the financial system blew up and everybody was battling for narrow interests in a crisis atmosphere with inflamed populist politics -- only thing positive was finally getting rid of OCC. I do think they're unnecessarily suspicious of the new consumer protection agency -- given that a full overhaul wasn't possible, somebody needs to be responsible for looking out for consumers, since the main regulators are focused on financial risk issues at the institutional or system level.
Instapaper  US_economy  US_politics  financial_regulation  financial_crisis  Fed  SEC  banking  capital_markets  government_agencies  risk  risk-systemic  risk_management  NBFI  shadow_banking  money_market  institutional_investors  consumer_protection  leverage  capital_adequacy  inter-agency  liquidity  arbitrage  markets-structure  intermediation  financial_instiutions  financial_system-government_back-stop  from instapaper
june 2015 by dunnettreader
Macroprudentialism – A new Vox eBook | VOX, CEPR’s Policy Portal 15 December 2014
Dirk Schoenmaker -- overview and TOC -- Macroprudentialism is now part of the standard macroeconomic toolkit but it involves a set of relatively untested policies. This column introduces a new VoX eBook that collects the thinking of a broad range of leading US and European economists on the matter. A consensus emerges on broad objectives of macroprudential supervision, but important disagreements remain among the authors. -- downloaded pdf to Note
financial_system  financial_regulation  financial_crisis  central_banks  macroprudential_regulation  leverage  business_cycles  banking  NBFI  shadow_banking  monetary_policy  EU  Eurozone  OECD_economies  credit  mortgages  downloaded 
june 2015 by dunnettreader
Caspar Siegert and Matthew Willison - Estimating the extent of the ‘too big to fail’ problem – a review of existing approaches | Bank of England -- Financial Stability Paper 32: 13 February 2015
​How big is the ‘too big to fail’ (TBTF) problem? Different approaches have been developed to estimate the impact being perceived as TBTF might have on banks’ costs of funding. One approach is to look at how the values of banks’ equity and debt change in response to events that may have altered expectations that banks are TBTF. Another is to estimate whether debt costs vary across banks according to features that make them more or less likely to be considered TBTF. A third approach is to estimate a model of the expected value of government support to banks in distress. We review these different approaches, discussing their pros and cons. Policy measures are being implemented to end the TBTF problem. Approaches to estimating the extent of the problem could play a useful role in the future in evaluating the success of those policies. With that in mind, we conclude by outlining in what ways we think approaches need to develop and suggest ideas for future research. -- didn't download
paper  banking  financial_crisis  bank_runs  financial_system-government_back-stop  too-big-to-fail  rents  rent-seeking  risk_premiums  capital_markets  margin_requirements  equity_markets  leverage 
may 2015 by dunnettreader
Filippo Occhino - Debt-Overhang Banking Crises | Cleveland Fed - Dec 2014
WP 14-25 -- This paper studies how a worsening of the debt overhang distortion on bank lending can explain banking solvency crises that are accompanied by a plunge of bank asset values and by a severe contraction of lending and economic activity. Since the value of bank assets depends on economic prospects, a pessimistic view of the economy can be self-fulfilling and can trigger a financial crisis: If economic prospects are poor, bank asset values decline, the bank risk of default rises, and the associated debt overhang distortion worsens. The worsening of the distortion leads to a contraction in bank loans and a decline in economic activity, which confirms the initial pessimistic view. Signals of the existence of systemic risk include: a rise in the volatility and the presence of two modes in the probability distribution functions of the returns of bank-issued bonds and of portfolios of bank-issued bonds and equities; and a surge in the correlation between bank-issued bond returns. Macroprudential policy should limit the sensitivity of bank balance sheets to the aggregate economy and to the financial sector, using investment restrictions, capital requirements, and stress tests. In the event of a crisis, policy options include reducing the above sensitivity with commitments and guarantees, stimulating the economy, and restructuring bank capital and ownership. -- didn't download -- wonder if he uses Minsky
paper  banking  financial_crisis  leverage  deleverage  economic_growth  risk-systemic  business_cycles  bank_runs  capital_markets  bond_markets  macroprudential_regulation  macroprudential_policies  volatility  default  firesales  FDIC  Fed  demand-side  credit  business-forecasts  Minsky  financial_economics 
may 2015 by dunnettreader
Xavier Giroud, Holger M. Mueller - Firm Leverage and Unemployment during the Great Recession | NBER April 2015
NBER Working Paper No. 21076 -- We argue that firms’ balance sheets were instrumental in the propagation of shocks during the Great Recession. Using establishment-level data, we show that firms that tightened their debt capacity in the run-up (“high-leverage firms”) exhibit a significantly larger decline in employment in response to household demand shocks than firms that freed up debt capacity (“low-leverage firms”). In fact, all of the job losses associated with falling house prices during the Great Recession are concentrated among establishments of high-leverage firms. At the county level, we find that counties with a larger fraction of establishments belonging to high-leverage firms exhibit a significantly larger decline in employment in response to household demand shocks. Thus, firms’ balance sheets also matter for aggregate employment. -- paywall
paper  paywall  NBER  Great_Recession  financial_crisis  corporate_finance  leverage  unemployment  macroeconomics  economic_models  economic_shocks-propagation  networks-business  demand-side  housing  business_practices  business_cycles 
may 2015 by dunnettreader
Steve Cecchetti and Kim Schoenholtz - The euro area's debt hangover — Money, Banking and Financial Markets - April 2015
You wouldn’t know it from the record low level of government bond yields, but much of Europe lives under a severe debt burden. Nonfinancial corporate debt exceeds 100 percent of GDP in Belgium, Finland, France, Ireland, Luxembourg, Netherlands, Portugal, and Spain. And, gross government debt (as measured by Eurostat) is close to or exceeds this threshold in Belgium, France, Greece, Ireland, Italy, Portugal and Spain. Debt levels this high have important long-run consequences. (...) they are a drag on growth. High debt means that households have more difficulty maintaining consumption when income falls; firms may be unable to keep up production and investment when revenue dips; and governments are in no position to smooth expenditure when revenue falls. More economic volatility means lower growth. Beyond that, high levels of debt reduce the effectiveness of central bank stimulus. (...) So, what is the euro area to do? We see three paths out of this predicament: (1) breathtaking supply reforms that trigger an investment boom; (2) inflation; or (3) a mix of asset sales and debt relief.The first option is the best. The alternatives would threaten the survival of the euro, undermine the fiscal credibility of major governments, or both. [After pointing out the problems with 1 and 2, they look at how much would sovereign_debt have to be reduced to reach debt sustainability targets embodied in Maastricht] For Greece, the write-down is 71% of face value; for Spain, 63%; and for France 50%. Taken as a whole, meeting the 60% Maastricht criterion (while maintaining bank system capital) would require that (..the) combined debt of [Greece, Spain and France of] €9.36 trillion be written down by a total of €5.07 trillion. As extreme as this sounds, it is, in fact, insufficient. Many euro-area governments also face significant unfunded pension liabilities. (...) The sooner they own up to this, the better for their long-term growth prospects. -- copied to Pocket
EU  Eurozone  debt  debt-overhang  debt-restructuring  sovereign_debt  leverage  deleverage  economic_growth  economic_reform  creditors  default  monetary_policy  ECB  central_banks  interest_rates  investment  deficit_finance  debt_crisis  corporate_finance  demand-side  supply-side  capital_markets  Great_Recession  financial_crisis  financial_system  banking  capital_adequacy  Pocket 
april 2015 by dunnettreader
Russell J. Lundholm, George Serafeim, Gwen Yu - FIN Around the World: The Contribution of Financing Activity to Profitability - July 1, 2012 :: SSRN
Russell J. Lundholm, University of British Columbia - Sauder School of Business -- George Serafeim ,Harvard University - Harvard Business School -- Gwen Yu, Harvard Business School -- Harvard Business School Accounting & Management Unit Working Paper No. 2113557 -- We study how the availability of domestic credit influences the contribution that financing activities make to a firm’s return on equity (ROE). Using a sample of 51,866 firms from 69 countries, we find that financing activities contribute more to a firm’s ROE in countries with higher domestic credit. The higher contribution of financing activities is not driven by firms taking greater leverage in these countries, but by firms realizing a higher spread (i.e., a greater difference in operating performance and borrowing cost) when more domestic credit is available. Also, we find that firms partially substitute trade credit for financial credit, with large firms exhibiting the greatest rate of substitution. For small firms, the rate of substitution improves with the country’s available domestic credit, while large firms are insensitive to this friction. The findings suggest that both country and firm-level factors have a significant impact on how financing activities contribute to corporate performance. -- Pages in PDF File: 51 -- Keywords: Domestic Credit, Financial Statement Analysis, Return on Equity, Corporate Performance -- didn't download
paper  SSRN  corporate_finance  profit  interest_rates  financial_sector_development  credit  SMEs  financial_access  trade_finance  leverage  shareholder_value 
april 2015 by dunnettreader
Andrew W. Lo, Thomas J. Brennan - Do Labyrinthine Legal Limits on Leverage Lessen the Likelihood of Losses?: An Analytical Framework - Texas Law Review, Vol. 90, No. 7, 2012 :: SSRN
Andrew Lo - Massachusetts Institute of Technology (MIT) - Sloan School of Management; Massachusetts Institute of Technology (MIT) - Computer Science and Artificial Intelligence Laboratory (CSAIL); National Bureau of Economic Research (NBER) *--* Thomas J. Brennan - Northwestern University School of Law. **--** A common theme in the regulation of financial institutions and transactions is leverage constraints. Although such constraints are implemented in various ways — from minimum net capital rules to margin requirements to credit limits — the basic motivation is the same: to limit the potential losses of certain counterparties. However, the emergence of dynamic trading strategies, derivative securities, and other financial innovations poses new challenges to these constraints. We propose a simple analytical framework for specifying leverage constraints that addresses this challenge by explicitly linking the likelihood of financial loss to the behavior of the financial entity under supervision and prevailing market conditions. An immediate implication of this framework is that not all leverage is created equal, and any fixed numerical limit can lead to dramatically different loss probabilities over time and across assets and investment styles. This framework can also be used to investigate the macroprudential policy implications of microprudential regulations through the general-equilibrium impact of leverage constraints on market parameters such as volatility and tail probabilities. -- Pages in PDF File: 36 -- Leverage, Liquidity, Financial Regulation, Capital Requirements, Macroprudential Policies, Net Capital Rules -- downloaded pdf to Note
article  SSRN  financial_system  financial_regulation  financial_crisis  markets-structure  banking  NBFI  shadow_banking  leverage  capital_adequacy  liquidity  capital_markets  money_market  derivatives  arbitrage  macroprudential_policies  macroprudential_regulation  risk-systemic  financial_innovation  bank_runs  downloaded 
april 2015 by dunnettreader
Living Wills or Phoenix Plans: Making sure banks can rise from their ashes — Money, Banking and Financial Markets
Re tranches of non-convertible debt in levels of subordination & conversion to equity in a resolution process - More important, safeguarding the financial system will still require other complex rules and enforcement. Above all, in addition to more equity, each systemic intermediary must issue an adequate supply of long-term debt in good times to absorb its potential losses in the worst times. Were it instead to issue short-term debt, the intermediary would be vulnerable to a run. In addition, (as one of us has argued here) rules must prevent other leveraged intermediaries from owning this risky long-term debt, because it is in fact a close substitute for equity capital. Otherwise, losses incurred by the holders of this debt would transmit one intermediary’s insolvency to the broader financial system. And there is no free lunch, at least not for the debt issuers. It remains to be seen whether unleveraged buyers of phoenix debt would price it in a way that is economically viable for systemic intermediaries. After all, in the worst state of the world, it is designed to be no different from equity. Making it attractive to buyers might require banks to issue more equity, to streamline and simplify their operations, and to become more transparent. But that kind of market discipline would go a long way to making the financial system safer, reducing our reliance on the omniscience of regulators.
financial_system  financial_crisis  banking  shadow_banking  financial_regulation  FDIC  capital_adequacy  leverage 
january 2015 by dunnettreader
Eric Rauchway, review - Martin Wolf, The Shifts and the Shocks (2014) | TLS Jan 2015
... his analysis, which holds that we knew how to avoid, counter and cure these troubles; we have simply – largely out of wilful ignorance and lack of courage – failed to do more than the barest minimum of what was necessary. Governments, banks and international institutions did “just enough, almost too late” to prevent the worst possible result, which would have been a note-for-note replay of the 1930s including a slide into fascism and world war. But having done no more than avoid world-historic catastrophe, we find ourselves mired in a dim morass of our own making, with no sunlit uplands in sight. Wolf offers a persuasive account that is also clear, though he relies on no single factor but several: hence the title of the book. It took both long-term shifts and a series of shocks to cause a crisis of such magnitude. Our world was born in the end of the Cold War. With capitalism triumphant, the victors liberalized their economies and so did the Communist nations, particularly China. Yet all was not well in this brave new world; international finance and trade threatened the stability of smaller, emerging economies, as the crises of the 1990s demonstrated.
financialization  bad_history  shadow  banking  Pocket  risk  global  economy  money  markets  global_imbalance  keynesian  business_influence  bad_economics  books  financial_regulation  liquidity  deregulation  minsky  investment  economic_growth  reviews  fed  Bank_of_England  great_recession  us_politics  leverage  capital_flows  race-to-the-bottom  business  ethics  political_economy  ecb  rents  uk  central_banks  investors  financial  crisis  financial_system  austerity  capital  economic_theory  us_economy  eurozone 
january 2015 by dunnettreader
Financial Stability Board - Strengthening Oversight and Regulation of Shadow Banking - Oct 2014
Strengthening Oversight and Regulation of Shadow Banking - Regulatory framework for haircuts on non-centrally cleared securities financing transactions -- downloaded pdf to iPhone
financial_regulation  shadow_banking  asset_prices  leverage  liquidity  collateral  money_market  downloaded 
january 2015 by dunnettreader
It's the leverage, stupid!
Minsky cycles have always applied especially to real estate due to the long time lags. These guys show how it was key for Great Recession. -- All of this leads us to draw two simple conclusions. First, investors and regulators need to be on the lookout for leverage; that’s the biggest villain. In the United States and many other countries, mortgage borrowing has been at the heart of financial instability, and it may be so again in the future. But we should not be lulled into a sense of security just because banks’ real estate exposure has declined. If leverage starts rising in real estate or elsewhere – on or off balance sheet – then we should be paying attention.
Great_Recession  financial_crisis  leverage  banking  NBFI  shadow_banking  financial_regulation 
december 2014 by dunnettreader
Lapavitsas, Costas - Banks and the Design of the Financial System: Underpinnings in Steuart, Smith and Hilferding (2002) - SOAS Research Online (School of Oriental and African Studies)
Banks in bank-based financial systems tend to engage in long-term lending that requires substantial own capital to guarantee solvency. In market-based systems, in contrast, they tend to undertake short-term lending that requires adequate reserves to guarantee liquidity. Theoretical support for these two approaches to banking can be found in, respectively, Steuart and Smith. The innovative Marxist analysis of banking by Hilferding combined elements of both. Banks in the early stages of development are Smith-like but, as the scale of fixed investment in industry grows, they lend long-term and become Steuart-like, also developing ‘commitment’ relations with enterprises. However, Hilferding also implied, erroneously, that financial systems historically evolve in a bank-based direction. Based on Hilferding but also drawing on Japanese Marxist analysis of finance, it is suggested instead that bank behaviour in bank-based systems results from institutional changes imposed by policy-makers in order to achieve ‘catching up.’ -- Item Type: Monographs (Working Paper) -- Keywords: Adam Smith, James Steuart, Rudolf Hilferding, banking theory, Marxist theory of finance -- SOAS Departments & Centres: Faculty of Law and Social Sciences > Department of Economics -- downloaded pdf to Note
paper  intellectual_history  economic_history  18thC  19thC  20thC  21stC  financial_system  finance_capital  banking  financial_economics  Marxist  leverage  credit  money_market  industrialization  investment  liquidity  financial_crisis  capital_adequacy  financial_sector_development  financial_innovation  Smith  Steuart_James  Hilferding  downloaded  EF-add 
october 2014 by dunnettreader
Bichler, Shimshon and Nitzan, Jonathan - Palan on Piketty - New Left Project, September 2014 | bnarchives
In late August, 2014, we received an invitation from the New Left Project to comment on Ronen Palan’s article ‘Capitalising the Future’. Palan’s piece examines Thomas Piketty’s book ‘Capital in the Twenty-First Century’ (2014), and the editors felt it had strong affinities with our approach. The affinities are certainly there (albeit unmentioned). But they are largely superficial. Palan demonstrates little understanding of our framework, and we very much doubt he has comprehended Piketty’s. His article contains so many elementary errors and fallacies that it is unclear how it got published in the first place. [The NLP piece has been revised to make the text less confrontational. For those interested, we also provide the original unedited version.] -- Keywords: futurity leverage, Sokal Hoax, postism Piketty -- Keywords includes "Sokal Hoax" so looks like B&N have vented their ire at posties on the hapless Palan -- downloaded pdf of unedited version to Note
article  books  review  Piketty  capitalism  inequality  capital_as_power  postmodern  capitalization  political_economy  capital  leverage  downloaded  EF-add 
october 2014 by dunnettreader
Andreas Fuster and James Vickery - Securitization and the Fixed-Rate Mortgage | FRBNY Staff Reports Number 594 - January 2013 - Revised June 2014
Fixed-rate mortgages (FRMs) dominate the U.S. mortgage market, with important consequences for monetary policy, household risk management, and financial stability. In this paper, we show that the share of FRMs is sharply lower when mortgages are difficult to securitize. Our analysis exploits plausibly exogenous variation in access to liquid securitization markets generated by a regulatory cutoff and time variation in private securitization activity. We interpret our findings as evidence that lenders are reluctant to retain the prepayment and interest rate risk embedded in FRMs. The form of securitization (private versus government-backed) has little effect on FRM supply during periods when private securitization markets are well-functioning. -- Duh! That requires 77 pages to show originators are indifferent as to a GSE or a private FI as long as they can unload their product? Let's see what the authors think the big deal is about "well-functioning private markets" - private securitizers have mostly been in the well-collateralized top end that the GSEs didn't handle but the rating agencies and investors could be comfortable with. The private market eats into the GSEs business only when there's a boom that's going to end in tears - although before the Great Recession the busts were localized, so the private securitizers (and their investors, even in the equity tranches) who got into booms weren't hurt too badly if they were geographically diversified or didn't go all-in with the skeeziest originators or local bankers who were big RE promoters of marginal development. -- downloaded pdf to Note
paper  Fed  capital_markets  banking  housing  securitization  GSEs  mortgages  US_economy  real_estate  financial_regulation  leverage  risk  maturity_transformation  interest_rates  monetary_policy  financial_stability  macroprudential_regulation  consumer_protection  rating_agencies  institutional_investors  downloaded  EF-add 
october 2014 by dunnettreader
Tobias Adrian, Emanuel Moench, and Hyun Song Shin - Leverage Asset Pricing | Federal Reserve Bank of New York - Staff Reports Number 625 - September 2013
We investigate intermediary asset pricing theories empirically and find strong support for intermediary book leverage as the relevant state variable. A parsimonious dynamic pricing model that uses detrended broker-dealer leverage as a price of risk variable, and innovations to broker-dealer leverage as pricing factor is shown to perform well in time series and cross sectional tests of a wide variety of equity and bond portfolios. The model outperforms alternative intermediary pricing specifications that use intermediary net worth as state variables, and performs well in comparison to benchmark asset pricing models. We draw implications for macroeconomic theories. -- cited in Report 690, September 2014 re forecasting US recessions and predictive power of broker-dealer margin accounts -- downloaded pdf to Note
paper  Fed  financial_system  intermediation  capital_markets  money_market  NBFI  shadow_banking  leverage  asset_prices  risk  risk_premiums  macroprudential_policies  downloaded  EF-add 
october 2014 by dunnettreader
Tobias Adrian and Nellie Liang - Monetary Policy, Financial Conditions, and Financial Stability | Federal Reserve Bank of New York - Staff Reports Number 690 - September 2014
In the conduct of monetary policy, there exists a risk-return trade-off between financial conditions and financial stability, which complements monetary policy’s traditional trade-off between inflation and real activity. The trade-off exists even if monetary policy does not target financial stability considerations independently of its inflation and real activity goals, because risks to future financial stability are increased by the buildup of financial vulnerabilities from persistent accommodative monetary policy when the economy is close to potential. We review monetary policy transmission channels and financial frictions that give rise to this trade-off between financial conditions and financial stability, within a monitoring program across asset markets, banking firms, shadow banking, and the nonfinancial sector. We focus on vulnerabilities that affect monetary policy’s risk-return trade-off, including 1) pricing of risk, 2) leverage, 3) maturity and liquidity mismatch, and
4) interconnectedness and complexity. We also discuss the extent to which structural and time-varying macroprudential policies can counteract the buildup of vulnerabilities, thus mitigating monetary policy’s risk-return trade-off. -- downloaded pdf to Note
paper  Fed  US_economy  macroeconomics  financial_system  monetary_policy  financial_stability  macroprudential_policies  macroprudential_regulation  money_market  capital_markets  banking  shadow_banking  NBFI  investors  institutional_investors  credit  risk_premiums  leverage  money_supply  monetarism  interest_rates  business_cycles  demand-side  investment  consumer_demand  open_market_operations  downloaded  EF-add 
october 2014 by dunnettreader
Weiling Liu and Emanuel Moench - What Predicts U.S. Recessions? | Federal Reserve Bank of New York - Staff Reports Number 691 - September 2014
We reassess the predictability of U.S. recessions at horizons from three months to two years ahead for a large number of previously proposed leading-indicator variables. We employ an efficient probit estimator for partially missing data and assess relative model performance based on the receiver operating characteristic (ROC) curve. While the Treasury term spread has the highest predictive power at horizons four to six quarters ahead, adding lagged observations of the term spread significantly improves the predictability of recessions at shorter horizons. Moreover, balances in broker-dealer margin accounts significantly improve the precision of recession predictions, especially at horizons further out than one year. -- spreads over Treasuries (across the yield curve? ) and broker-dealer margin accounts, hmmmm -- downloaded pdf to Note
paper  Fed  US_economy  economic_history  macroeconomics  forecasts  recessions  business_cycles  capital_markets  speculative_finance  leverage  risk_premiums  downloaded  EF-add 
october 2014 by dunnettreader
International Banking Research Network | Home (on NY Fed site)
The International Banking Research Network (IBRN) brings together central bank researchers from around the world to analyze issues pertaining to global banks. It was established in 2012 by Austrian, German, U.S., and U.K. researchers who saw a need for joint analysis of key questions, such as the role of cross-border banking in the transmission of financial shocks. The group has now expanded to include economists and analysts from a broad group of central banks, as well as the Bank for International Settlements and the International Monetary Fund. -- links to their research work and resources on banking, international finance, regulatory matters. Interesting it's not done under BIS auspices - has both BIS and IMF participation, but not World Bank or Financial Stability Board?
website  international_finance  banking  cross-border  financial_regulation  banking-universal  central_banks  financial_crisis  liquidity  leverage  contagion  shadow_banking  NBFI  capital_markets  money_market  monetary_policy  capital_adequacy 
october 2014 by dunnettreader
Sunanda Sen - The Meltdown of the Global Economy: A Keynes-Minsky Episode? - Working Paper No. 623 | Levy Economics Institute | September 2010
The paper begins with some theoretical concerns relating to factors that could trigger a crisis similar to the global economic crisis that began in 2008. The first concern relates to the deregulated financial institutions and the growing uncertainty that can be witnessed in these liberalized financial markets. The second relates to financial engineering with innovations in these markets, simultaneously providing cushions against risks while generating flows of liquidity that remain beyond the conventional sources of bank credit. Interpreting the role of uncertainty, one can observe the connections between investment and finance, both of which are subject to changes in the state of expectations. The initial formulation can be traced back to Keynes’s General Theory, where liquidity preference is linked to asset prices and new investments. The Keynesian analysis was reformulated in 1986 by Minsky, who introduced the possibility of sourcing external finance through debt, which further adds to the impact of uncertainty. Minsky’s characterization of deregulated financial markets considers the newfangled sources of nonbank credit, especially with the involvement of banks in the securities market under the universal banking model. As for the institutional arrangements that provide for profits on transactions, financial assets bought and sold in the primary market as initial public offerings of stocks are usually transacted later, in the secondary market, where these are no longer backed by physical assets.In the upswing, finance creates a myriad of financial claims and liabilities, and thus becomes increasingly remote from the real economy, while innovations to hedge and insulate assets continue to proliferate in the financial market, especially in the presence of uncertainty. The paper looks especially at the US. This is appended by a stylized account of the turn of events in terms of a theoretical model that highlights the role of uncertainty in the process. -- Associated Program: Monetary Policy and Financial Structure -- downloaded pdf to Note
paper  economic_theory  financial_crisis  bubbles  Great_Recession  financial_system  finance_capital  financialization  financial_innovation  banking  financial_regulation  derivatives  risk  risk-systemic  uncertainty  expectations  capital_markets  NBFI  intermediation  speculative_finance  securitization  Glass-Steagal  investment  investors  asset_management  real_economy  real_estate  Keynes  liquidity  Minsky  credit  debt  deleverage  leverage  asset_prices  banking-universal  disintermediation  money_market  Ponzi_finance  IPOs  secondary_markets  fragility  resilience  downloaded  EF-add 
october 2014 by dunnettreader
Coppola Comment: Debt hysteria - September 30, 2014
The global debt glut described in the Geneva 16 report, and the global saving glut described by Bernanke, are the same thing. The authors note that growth has been slowing in developed countries since 1980. Indeed it has - and during that time capital ownership and indebtedness have been increasing in tandem, as we might expect since they are opposite sides of the same coin. The report cites numerous analyses that show high debt levels - public AND private - tending to impede growth as resources that could have been turned to productive investment are spent on debt service. Secular stagnation is as much a consequence of over-indebtedness as it is of excess capital. -- When the private sector is highly indebted, saving can take the form of paying off debt. If the government runs a surplus, therefore, it impedes deleveraging in the private sector, and may even force some sectors (typically the poor) to increase debt. Reducing the sovereign debt not only reduces saving in the private sector, it comes at the price of continued and possibly rising indebtedness. The report rightly notes that transferring debt from the private to the public sector, as the US has done, isn't deleveraging. But transferring it back again isn't deleveraging either. And as transferring it back again is likely only to be possible with extensive sovereign guarantees (the UK's Help to Buy, for example), whose debt is it really, anyway? Reports such as this, that look on debt as a problem and ignore the associated savings, fail to address the real issue. The fact is that households, corporations and governments like to have savings and are terrified of loss. Writing down the debt in which people invest their savings means that people must lose their savings. THIS is the real "shock, horror". This is what people fear when they worry about a catastrophic debt default. This is what the world went to great lengths to prevent in 2008. The problem is not the debt, it is the savings.
global_imbalance  global_economy  international_political_economy  international_finance  savings  investment  institutional_investors  debt  debt-restructuring  debtors  credit  creditors  equity  equity-corporate  sovereign_debt  default  risk  risk-systemic  inflation  austerity  economic_growth  stagnation  OECD_economies  emerging_markets  banking  capital_markets  capital_adequacy  government_finance  leverage  deleverage  property_rights  pensions  interest_rates  Evernote 
october 2014 by dunnettreader
Edward J. Kane -The Flummery of Capital-Requirement Repairs Since The Crisis | The Institute for New Economic Thinking - September 16, 2014
Government safety nets give protected institutions an implicit subsidy and intensify incentives for value-maximizing boards and managers to risk the ruin of their firms. Standard accounting statements do not record the value of this subsidy and forcing subsidized institutions to show more accounting capital will do little to curb their enhanced appetite for tail risk. This paper proposes new accounting and ethical standards that would reclassify the legal status of the financial support a firm receives from the safety net and record it as an equity investment. The purpose is to recognize statutorily that a safety net is a contract that promises to deliver loss-absorbing equity capital to firms at times when no other investors will. The explicit recognition of the public's stakeholder interest in economically, politically, and administratively difficult-to-unwind firms is a first and necessary step toward assigning to their managers enforceable fiduciary duties of loyalty, competence, and care towards taxpayers. These duties are meant to parallel those that managers owe to shareholders, including the right to share in the firm’s profits and to receive information relevant for assessing their investment. The second step in this process is to change managerial behavior: to implement and enforce a series of requirements and penalties that can lead managers to measure and record on the balance sheet of each subsidized firm – as a special class of equity – the capitalized value of the safety-net subsidies it receives from its “taxpayer put.” -- and by defining a class of particularly vexing acts of safety-net arbitrage as criminal theft. -- downloaded pdf to Note
paper  law-and-economics  law-and-finance  corporate_governance  financial_system-government_back-stop  too-big-to-fail  financial_regulation  subsidies-financial_institutions  fiduciaries  accounting  risk-systemic  risk-mitigation  financial_crisis  bailouts  leverage  capital_adequacy  Basle  downloaded  EF-add 
september 2014 by dunnettreader
Eyes on Trade: A Deal Only Wall Street Could Love | Public Citizen - December 2013
Last week, US financial regulators took a step toward reining in some of the Wall Street risk-taking that led to the financial crisis by finalizing the Volcker Rule, designed to stop banks from engaging in risky, hedge-fund-like bets for their own profit. But this week, EU and US trade negotiators could move in the opposite direction, pursuing an agenda that could thwart such efforts to re-regulate Wall Street. Negotiators from both sides of the Atlantic are converging in Washington, D.C. this week for a third round of talks on the Trans-Atlantic Free Trade Agreement (TAFTA). What is TAFTA? A “trade” deal only in name, TAFTA would require the United States and EU to conform domestic financial laws and regulations, climate policies, food and product safety standards, data privacy protections and other non-trade policies to TAFTA rules. We profiled recently the top ten threats this deal poses to U.S. consumers. One area of particular concern is how TAFTA's expansive agenda implicates regulations to promote financial stability. Here's a synopsis. -- professionally done eviseration with lots of links
US_politics  US_economy  US_foreign_policy  Obama_administration  Congress  trade-policy  trade-agreements  EU  EU-foreign_policy  international_political_economy  global_governance  international_finance  financial_regulation  Transatlantic_Trade_and_InvestmentPartnership  FDI  banking  capital_markets  NBFI  shadow_banking  asset_management  derivatives  leverage  risk-systemic  financial_crisis  central_banks  macroprudential_regulation  too-big-to-fail  regulation-harmonization  cross-border  MNCs  tax_havens  investor-State_disputes  law-and-finance  administrative_law  race-to-the-bottom  lobbying  big_business  EF-add 
september 2014 by dunnettreader
Leaked document shows EU is going for a trade deal that will weaken financial regulation | Corporate Europe Observatory
According to a leaked document, the EU is bent on using the TTIP negotiations with the US to get an agreement on financial regulation that, according to this analysis by Kenneth Haar of Corporate Europe Observatory (CEO) and Myriam Vander Stichele of The Centre for Research on Multinational Corporations (SOMO) will weaken reform and control of the financial sector. If the EU has its way, a final agreement between the EU and the US to establish a free trade and investment agreement the Transatlantic Trade and Investment Partnership (TTIP) will weaken regulation and raise obstacles to much needed reform of the financial sector. That is the conclusion after the leak of an EU proposal for so-called “regulatory cooperation” on financial regulation.1 tabled by the EU in March 2014. Regulatory cooperation is a continuous process of ironing out disagreements and differences between the two Parties to ensure agreement on what constitutes legitimate regulation – which in this case, would serve the interests of the financial industry. In the document, the EU suggests a number of mechanisms that will both scale back existing regulation, and prevent future regulation that might contradict the interests of financial corporations from both sides of the Atlantic. The leak follows news that EU negotiators have increased political pressure on the US to accept negotiations on “financial regulatory cooperation", which the US negotiators have so far refused. -- lengthy analysis with tons of links to coverage of the issues in financial press -- downloaded pdf to Note
US_politics  US_economy  US_foreign_policy  Obama_administration  EU  EU_governance  Transatlantic_Trade_and_InvestmentPartnership  financial_system  financial_regulation  international_finance  banking  capital_markets  NBFI  leverage  too-big-to-fail  bailouts  derivatives  lobbying  regulation-harmonization  cross-border  trade-agreements  trade-policy  MNCs  transparency  accountability  civil_society  central_banks  downloaded  EF-add 
september 2014 by dunnettreader
Philip T. Hoffman, Gilles Postel-Vinay, Jean-Laurent Rosenthal - Surviving Large Losses: Financial Crises, the Middle Class, and the Development of Capital Markets (2009) | Harvard University Press
Since they're experts on especially French economic history from the 17thC onwards, the political economy approach should be interesting. **--** 1. The Political Economy of Financial Crises. -- 2. Information and Crises. -- 3. Crises and the Middle Class. -- 4. What Happens after Crises. -- 5. Financial Intermediaries and the Demand for Change. -- 6. Governments and the Demand for Reform. -- Conclusion: The Lessons of History
books  kindle-available  economic_history  economic_policy  political_economy  financial_system  financial_crisis  financial_sector_development  capital_markets  banking  middle_class  leverage  debtors  creditors  sovereign_debt  reform-economic  reform-political  distribution-wealth 
september 2014 by dunnettreader
Coen Teulings, Richard Baldwin - Secular stagnation: Facts, causes, and cures – a new Vox eBook | vox 10 September 2014
The CEPR Press eBook on secular stagnation has been viewed over 80,000 times since it was published on 15 August 2014. -- Six years after the Crisis and the recovery is still anaemic despite years of zero interest rates. Is ‘secular stagnation’ to blame? Introduction - Coen Teulings and Richard Baldwin **--** I. Opening the debate -- 1. Reflections on the ‘New Secular Stagnation Hypothesis’, Laurence H Summers. **--** II. Three issues: Potential growth, effective demand, and sclerosis -- 2. Secular stagnation: A review of the issues, Barry Eichengreen -- 3. The turtle’s progress: Secular stagnation meets the headwinds, Robert J Gordon -- 4 Four observations on secular stagnation, Paul Krugman. -- 5. Secular joblessness, Edward L Glaeser. **--** III. Further on potential growth. -- 6. Secular stagnation? Not in your life - Joel Mokyr. -- 7 Secular stagnation: US hypochondria, European disease?, Nicholas Crafts. **--** IV. Further on effective demand. -- 8. A prolonged period of low real interest rates?, Olivier Blanchard, Davide Furceri and Andrea Pescatori. -- 9. On the role of safe asset shortages in secular stagnation, Ricardo J Caballero and Emmanuel Farhi. -- 10. A model of secular stagnation, Gauti B. Eggertsson and Neil Mehrotra. -- 11. Balance sheet recession is the reason for secular stagnation, Richard C Koo. -- 12. Monetary policy cannot solve secular stagnation alone
Guntram B Wolff. **--** V. Further on sclerosis -- 13. Secular stagnation: A view from the Eurozone, Juan F. Jimeno, Frank Smets and Jonathan Yiangou -- downloaded pdf to Note
books  etexts  kindle-available  economic_history  18thC  19thC  20thC  21stC  economic_theory  economic_growth  Great_Recession  stagnation  international_political_economy  capitalism  financialization  productivity  investment  technology  Labor_markets  unemployment  demand-side  supply-side  infrastructure  welfare_state  sovereign_debt  fiscal_policy  monetary_policy  central_banks  leverage  risk  uncertainty  macroeconomics  macroprudential_policies  international_monetary_system  global_economy  global_imbalance  interest_rates  profit  wages  Eurozone  US_economy  downloaded  EF-add 
september 2014 by dunnettreader
Future shape of banking - Time for reformation of banking and banks? (report) | PwC - 2014
Given the current economic climate, in particular the focus on the European Central Banks Comprehensive Assessment and the move to the Single Supervisory Mechanism, a working group from the PwC Response to the economic crisis in Europe (REcCE) network has developed a provocative point of view paper on the future shape and nature of banking services and of “banks” themselves. Future shape of banking outlines four key areas banks need to address in order to remain relevant, as we argue that the future of banking will look very different to what we see today and that while the need for banking services remains – traditional banks need to sharpen their strategic focus and regulators and regulation will also need to adapt.... adding up to a paradigm shift in the banking landscape. -- downloaded pdf to Note
international_political_economy  international_finance  international_monetary_system  banking  financial_regulation  financial_innovation  disintermediation  payments_systems  central_banks  tech  NBFI  liquidity  leverage  investors  downloaded  EF-add 
september 2014 by dunnettreader
Tracy Alloway - RBS slashes US mortgage business - FT.com - May 2014
RBS is shrinking in the US under regulatory pressure from the Fed, with the loss of hundreds of jobs, mainly in mortgage trading, executives told staff on Tuesday. The moves solidify a sharp reversal in strategy from RBS, which built one of the biggest trading floors in the world in Stamford, Connecticut outside New York, but has now dramatically scaled back its ambitions. [New Fed rules] impose tough stress tests on foreign broker-dealers with more than $50bn in assets. -- In spite of the entreaties from Barclays and some officials such as Michel Barnier, the European commissioner, the Fed pushed ahead in March with the rules, including a stricter “leverage ratio”. Barclays argued the application of such a blunt measure of capital was unfair. In one concession that cheered foreign banks, the Fed did grant more time to comply. Typically, banks have been able to measure their capital on a global basis, with equity in one country counting against assets in another. But the Fed is concerned that US subsidiaries of banks with a large trading operation – particularly Barclays and Deutsche – could come unstuck and might come looking for US government support.
international_finance  US_economy  US_government  Fed  financial_regulation  capital_flows  leverage  banking  EU  securitization 
september 2014 by dunnettreader
Matthew Klein - Where are Americans’ debts? | FT Alphaville - September 3, 2014
Excessive US household borrowing of the 2000s was not evenly distributed. During the peak of the bubble, the average Nevadan carried about two-and-a-half times as much mortgage and consumer debt as the average Texan What’s striking to us, from a new research note published by the Federal Reserve Bank of Cleveland, is that the amount of variation within metro areas was often as big as, if not greater than, the variation between them. Debt reduction since 2007 has been heavily concentrated in extremely indebted neighborhoods, also according to the Cleveland Fed. Many of these ultra-borrowers did not reduce their debt burdens solely out of their income. According to a study from the New York Fed published at the end of last year, foreclosures (red) reduced mortgage balances more than paydowns (green). The concentration of extreme indebtedness among a relatively small subset of the US population may help explain why politicians had relatively little interest in doing anything to mitigate the damage caused by foreclosures. Hopefully the research produced in the aftermath of the crisis will help limit a repeat performance. -- fascinating charts of geographic distribution and debt reduction via foreclosures
US_economy  Great_Recession  housing  debt  consumer_demand  bubbles  US_politics  political_economy  banking  deleverage  leverage 
september 2014 by dunnettreader
James Kwak - Finance and Democracy | The Baseline Scenario - April 2014
Downloaded pdf to Note - Roger Myerson, he of the 2007 Nobel Prize, wrote a glowing review of The Banker’s New Clothes, by Admati and Hellwig, for the Journal of Economic Perspectives a while back. Considering the reviewer, the journal, and the content of the review (which describes the book as “worthy of such global attention as Keynes’s General Theory received in 1936″), it’s about the highest endorsement you can imagine. - long useful review, but leaves out 20 years of disintermediation history and development of capital and money markets pre Basle risk weighted capital and universal banking that got big banks back in the game
reviews  books  kindle-available20thC  economic_history  financial_system  financial_regulation  financial_crisis  Great_Recession  banking  leverage  risk  capital_markets  money_market  NBFI  downloaded  EF-add 
may 2014 by dunnettreader
Antill, Hou & Sarkar - The Growth of Murky Finance - Liberty Street Economics March 2014
In series on large, complex financial institutions -- By either measure, the financial sector has been a growing part of the economy. It has mostly increased in relative size over the past four decades, interrupted in a major way only by the recent financial crisis (see chart below). On average, the financial sector has accounted for about 50 percent of the asset values of publicly listed firms, but roughly 70 percent of total business sector liabilities. Hence, one reason to worry about the size of this sector is its high representation among private firms that have virtually no transparency.
financial_system  international_finance  banking  shadow_banking  financial_regulation  financialization  capital_markets  leverage  EF-add 
april 2014 by dunnettreader
Ernst Schaumburg - Has Automated Trading Promoted Efficiency in the FX Spot Market? - Liberty Street Economics March 2014
The relative merits of algorithmic and high-frequency trading are most often discussed in the context of equity markets. In this post, we look at the foreign exchange (FX) spot market. The growth of algorithmic and high-frequency trading in this market has introduced new entrants as well as new complexities and challenges that have important implications for the liquidity landscape and the risk management framework in FX markets. This post focuses narrowly on an important measure of FX market efficiency, absence of arbitrage opportunities, to discuss the improvements in this particular measure of efficiency that have coincided with significant growth in algorithmic and high-frequency trading. -- looking at triangular arbitrage in USD FX, looks like HFT has really squeezed the arbitrage opportunities out of the system, even in the financial crisis when liquidity impairment had a big impact
financial_system  financial_crisis  FX  capital_markets  liquidity  leverage  arbitrage  HFT 
march 2014 by dunnettreader
Crisis Chronicles: The Commercial Credit Crisis of 1763 and Today’s Tri-Party Repo Market - Liberty Street Economics
Crisis Chronicles: The Commercial Credit Crisis of 1763 and Today’s Tri-Party Repo Market. -- James Narron and David Skein -- During the economic boom and credit expansion that followed the Seven Years’ War (1756-63), Berlin was the equivalent of an emerging market, Amsterdam’s merchant bankers were the primary sources of credit, and the Hamburg banking houses served as intermediaries between the two. But some Amsterdam merchant bankers were leveraged far beyond their capacity. When a speculative grain deal went bad, the banks discovered that there were limits to how much risk could be effectively hedged. In this issue of Crisis Chronicles, we review how “fire sales” drove systemic risk in funding markets some 250 years ago and explain why this could still happen in today’s tri-party repo market.
economic_history  18thC  Prussia  Dutch  banking  money_market  financial_crisis  leverage  liquidity  Seven_Years_War  EF-add 
february 2014 by dunnettreader
Enrico Perotti, 16 January 2014 - The roots of shadow banking [update of 2012 column] | vox
My new CEPR Policy Insight No. 69 -- downloaded pdf to Note -- updates and fleshes out the analysis in my June 2012 Vox column (reproduced in full below). The Policy Insight reviews recent work that is finally shedding some light on this ill-defined and poorly understood segment of the financial system.

The Policy Insight offers a structural definition of shadow banking activities, showing that even proper banks use them to avoid stricter capital requirements. The decision by the Basel committee in these days to accept a relaxed definition of the leverage ratio, for which banks lobbied fiercely, appears a serious setback
financial_system  capital_markets  money_market  shadow_banking  banking  leverage  liquidity  financial_regulation  financial_crisis  Great_Recession  downloaded  EF-add 
january 2014 by dunnettreader
Frances Coppola - Zombie alert! | Pieria Dec 2013
There is a prevalent view that part of the reason for the UK’s slow recovery and poor productivity is the existence of large numbers of companies that should have died in the recession. “Zombie firms in danger of strangling the economy”, screams one newspaper headline. And another warns of the “Zombie businesses spreading like a virus”..... Papworth expresses some puzzlement that the rate of corporate insolvency appears low. His puzzlement is understandable. It is not low. He is looking at the wrong data. And because of this, the rest of the paper is seriously flawed. I am not going to argue with his use of Austrian business cycle theory, or Schumpeter’s theory of “creative destruction”. But since he is using the wrong data, he has not put together a convincing case for the existence of the zombies he says need to be cleared out....... Also, because it is widely believed that zombies are kept alive not just by low interest rates, but by damaged banks unable to take losses, there are calls for banks to “end forbearance” even if it means they fail themselves. This is madness. Every bank and building society in the UK has corporate debt on its books, and almost every bank and building society in the UK has a damaged balance sheet which could not cope with large amounts of insolvencies. So banks cannot “end forbearance”. Nor do we wish them to do so. Widespread losses across the entire UK banking sector would catapult the UK back into deep recession. I am no fan of damaged banks – indeed I have called for them to be bypassed so that the UK economy can get the credit it desperately needs. But that doesn’t mean that it would be sensible to bankrupt them all.

So it seems there is little evidence for the existence of zombie companies. But there is considerable evidence for the existence of zombie banks. Indeed the very term “zombie” was originally used about banks. During the American Savings & Loan Crisis of the 1980s & 90s,
UK_economy  banking  credit  SMEs  debt  creative_destruction  interest_rates  leverage  risk  bankruptcy 
december 2013 by dunnettreader
Daniel Davies - If this is “secular stagnation”, I want my old job back — Crooked Timber
My point here is that none of this was unknown at the time. The US economic policy structure was aware that they were accommodating China and NAFTA, and aware that the tool of demand management was consumer spending. They might or might not have been aware that the consumer spending was financed by borrowing against housing wealth, but if they weren’t, they thundering well should have been. They got a structural increase in personal sector debt because they wanted one and set policy in order to create one. There’s no good calling it a “bubble” or a “puzzle” now that the shit’s hit the fan.

And so, welcome to the world you made guys. These are the consequences of globalization, entirely predictable and in fact predicted (by Dean Baker, among others). The final conclusion is probably the same as if it was a mysterious secular stagnation; fiscal policy. But the need for fiscal policy is such an obviously correct and obvious fact that more or less any economic argument is going to end up there unless it has major logical or accounting errors. But really – there is no need to tell ourselves ghost stories about animal spirits. There’s no puzzle here. We got this outcome because we wanted it.
20thC  21stC  economic_history  US_economy  global_economy  global_imbalance  trade  geopolitics  international_political_economy  international_finance  bubbles  financial_crisis  banking  shadow_banking  fiscal_policy  monetary_policy  central_banks  Eurozone  housing  consumer_demand  investment  leverage  stagnation  economic_growth  EF-add 
november 2013 by dunnettreader
Doug Henwood - That consumption binge? It’s mostly health care
Some numbers to make these points: at the end of 1978, consumption was 61.5% of GDP; in the second quarter of 2008, it had risen to 70.3%, or 8.8 points. Well over half that increase, 5.0 points, came from spending on medical care. The share of GDP devoted to spending on goods actually fell by 4.7 points over that 30-year period.

The pattern is preserved if you start the clock in 1997, just as the stock and housing manias were taking off. Medical spending accounted for almost a third of that rise between 1997 and 2008. Energy accounted for another third. Spending on goods accounted for just 3% of the rise, or 0.1 point. In other words, the familiar story that Americans went hogwild buying all kinds of stuff is wrong.

So the much-lamented decline in the U.S. savings rate begins to look less lamentable in light of this news.
US_economy  consumer_demand  health_care  savings  leverage  global_imbalance  21stC  EF-add 
november 2013 by dunnettreader
Valuing Private Equity - Morten Sorensen, Neng Wang, Jinqiang Yang | NBER Nov 2013
NBER Working Paper No. 19612
Issued in November 2013 -- downloaded pdf to Note

We investigate whether the performance of Private Equity (PE) investments is sufficient to compensate investors (LPs) for risk, long-term illiquidity, management and incentive fees charged by the general partner (GP). We analyze the LP's portfolio-choice problem and find that management fees, carried interest and illiquidity are costly, and GPs must generate substantial alpha to compensate LPs for bearing these costs. Debt is cheap and reduces these costs, potentially explaining the high leverage of buyout transactions. Conventional interpretations of PE performance measures appear optimistic. On average, LPs may just break even, net of management fees, carry, risk, and costs of illiquidity.
financial_system  financial_innovation  finance_capital  investment  risk  profit  equity  Innovation  corporate_finance  leverage  downloaded  EF-add 
november 2013 by dunnettreader
Janet Yellen on Bubbles and Minsky Meltdowns (2009) « Multiplier Effect
Speech at Levy Institute Minsky conference -- The current crisis has afforded plentiful opportunities for supervisors to reflect on the effectiveness of our current system of micro-prudential supervision. The “lessons learned” will undoubtedly enhance its conduct going forward.(16) But, regardless of how well micro-prudential supervision is executed, on its own it will never be adequate to safeguard the economy from the destructive boom and bust cycles that Minsky considered endemic in capitalistic systems. Analogous to Keynes’s paradox of thrift, the assumption that safe institutions automatically result in a safe system reflects a fallacy of composition. Thus, macro-prudential supervision—to protect the system as a whole—is needed to mitigate financial crises.

The roles of micro- and macro-prudential supervision are fundamentally different. In principle, many individual institutions could be managing risk reasonably well, while the system as a whole remained vulnerable due to interconnections among financial institutions that could lead to contagious cycles of loss and illiquidity. For example, it is prudent for institutions to sell risky assets and pay off debt when a decline in asset prices depletes capital. But the simultaneous behavior of many institutions to protect themselves in this way only intensifies the decline in prices. Moreover, when many institutions try to de-lever simultaneously, market liquidity can instantly evaporate. Systemic risk is endogenous to the working of the financial system.
21stC  Great_Recession  financial_crisis  bubbles  monetary_policy  financial_system  international_finance  global_imbalance  global_economy  financial_regulation  macroprudential_policies  capital  leverage  central_banks  EF-add 
september 2013 by dunnettreader
Jeremy Bulow, Jacob Goldfield, Paul Klemperer - Market-based bank capital regulation | vox August 2013
Today’s regulatory rules – especially the ineffective capital requirements – have led to costly bank failures. This column proposes a new, robust approach that uses market information but does not depend upon markets being ‘right’. Under the proposed regulatory system (i) bank losses are credibly borne by the private sector (ii) systemically important institutions cannot collapse suddenly; (iii) bank investment is counter-cyclical; and (iv) regulatory actions depend upon market signals. One key innovation is ‘Equity Recourse Notes’ that gradually ‘bail in’ equity as needed. These are superficially similar to, but importantly distinct from, ’CoCos’ [contingent convertible bonds].
banking  financial_regulation  financial_crisis  capital  equity  capital_markets  leverage  creditors  EF-add 
september 2013 by dunnettreader
Hélène Rey Dilemma not Trilemma: The global financial cycle and monetary policy independence | vox August 2013
The global financial cycle has transformed the well-known trilemma into a ‘dilemma’. Independent monetary policies are possible if and only if the capital account is managed directly or indirectly. This column argues the right policies to deal with the ‘dilemma’ should aim at curbing excessive leverage and credit growth. A combination of macroprudential policies guided by aggressive stress‐testing and tougher leverage ratios are needed. Some capital controls may also be useful. -- At the heart of the transmission of monetary conditions is the ability of financial intermediaries to leverage up quickly to high levels when financing conditions are favourable (see Borio and Disyatat (2011)). Hence a sensible policy measure is to cut structurally the ability of financial intermediaries to be excessively procyclical by putting a tougher limit on leverage.
FX  capital_flows  international_finance  international_political_economy  global_system  global_economy  global_imbalance  capital_markets  monetary_policy  macroprudential_policies  emerging_markets  contagion  financial_regulation  leverage  EF-add 
september 2013 by dunnettreader

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