In return for bearing that risk, investors are paid a premium, in the form of higher interest rates, which reflects the perceived risk that the bond will default. 1161, p. 5. A total of 8.7 million Americans lost their jobs because of the financial crisis and the ensuing recession.32 According to Better Markets, nearly one-third of mortgages were underwater at one point during the recession, and 15 million homes were foreclosed upon.
The BIS estimates that every percentage point increase in the capital ratio could be absorbed by a 3.5% decrease in operating costs.15 According to the GAO, costs associated with regulation should be reflected on banks’ financial statements as increased noninterest expense, which includes many expenses like employee wages and has generally fallen since Dodd-Frank was signed into law.16, Our analysis of costs is based on projections by the BIS’ long-term economic impact (LEI) report, which incorporates the effects of capital and liquidity requirements, but not those of compliance costs.
Capital is the equity portion on a balance sheet. Available at: https://www.imf.org/External/Pubs/FT/GFSR/2015/02/index.htm.
Basel Committee on Banking Supervision, “An assessment of the long-term economic impact of stronger capital and liquidity requirements,” Report, Bank for International Settlements, August 18, 2010, p. 23. Economists Simon Gilchrist and Egon Zakrajsek derived a new statistic from corporate borrowing data that can help us predict the magnitude of social costs when financial conditions deteriorate. Therefore, the BIS estimates that liquidity requirements generate the following additional costs: An analysis by the Federal Reserve Bank of New York replicated these results.10 The New York Fed took the additional step of performing a sensitivity analysis for the U.S. economy based on various levels of capital and liquidity ratios (but excluding the G-SIB surcharge implementation).
Therefore, banks with robust balance sheets, i.e., which have the resources to assume unexpected losses, will become more attractive both for investors and savers.
Whenever investors lend money to corporations—by purchasing corporate bonds—they take on a certain amount of risk that exceeds what they would endure by simply holding Treasury bonds. Similar to capital requirements, liquidity requirements slow down lending because they increase the amount of cash that banks must set aside rather than lend out. Available at: https://www.cbo.gov/publication/51129. Macroeconomic Assessment Group, “Assessment of the macroeconomic impact of higher loss absorbency for global systemically important banks,” Report, Bank for International Settlements, October 10, 2011, p. 4. On the other hand, Dodd-Frank regulations generate valuable benefits to GDP, because they make future financial crises less likely to occur—and less costly when they do occur. 2, 19. This is called taking on leverage. This being said, an important caveat must be kept in mind: These findings are specific to reforms in the banking sector only.
Available at: http://pages.stern.nyu.edu/~sternfin/vacharya/public_html/pdfs/Financial%20Sector%20Health%20Since%202007%20v2.pdf. Accessed January 10, 2017. Seung Jung Lee and Viktors Stebunovs, “Bank Capital Pressures, Loan Substitutability, and Nonfinancial Employment,” Board of Governors of the Federal Reserve System, International Finance Discussion Papers, April 2016, No.
Available at: http://www.fsb.org/wp-content/uploads/2015-update-of-list-of-global-systemically-important-banks-G-SIBs.pdf. Assume a bank can do only two things with deposits: invest them in very safe assets (like cash or Treasury bonds) or make loans to customers (which are also considered assets, but riskier). Accessed April 15, 2016. Non-SIFIs make up about 90% of all U.S. bank establishments, but only 5.5% of the banking industry by share of assets.21.
Highs won’t be as high, but lows won’t be as low, either.
It’s worth noting that SRISK to GDP hit a post-crisis high of 4% during the standoff over the debt ceiling in August of 2011.31 This political brinksmanship and the ensuing uncertainty about whether the U.S. would miss scheduled debt payments put the entire economy at risk of a self-inflicted crisis. United States, Board of Governors of the Federal Reserve System, “Total Assets, All Commercial Banks,” retrieved from Federal Reserve Bank of St. Louis Economic Research (FRED).
The potential resolution of a bank could have major ramifications on the economies where it operates.
Accessed January 10, 2017. Sometimes, when investors are collectively upbeat and eager to take on more risk, competition will bid premiums down. He points to the October 15, 2014, “Flash Crash” as evidence.25, That being said, it’s still debated whether Dodd-Frank has affected market liquidity at all. On the one hand, it could paralyze economic activity (as lending declines dramatically) and concurrently, it could create a contagion effect that leads to continuous capital flight resulting in additional insolvency proceedings. Accessed January 10, 2017.
Accessed January 10, 2017. John Kell, “U.S.
Thus, the same chain of cause and effect on the overall economy follows. Available at: https://www.newyorkfed.org/research/staff_reports/sr485.html. Many economists have voiced concerns that action still must be taken to mitigate problems that could arise in shadow banking, mutual funds, and exchange-traded funds (ETFs). Accessed January 10, 2017. Accessed January 10, 2017. Available at: http://www.federalreserve.gov/econresdata/ifdp/2016/index.htm. Available at: http://www.bis.org/publ/bcbs173.htm. The probability that another one could happen will never be 0%.
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