The Future of Payments

Research Rundown 106 BANKING PERSPECTIVES QUARTER 4 2018 net for depositors. Double liability is a system under which shareholders of failing banks both lose their initial investment and compensate depositors up to the current value of their shares. The authors model competing effects of double liability: a direct effect by which banks take fewer risks because shareholders have more skin in the game and an indirect effect by which banks take more risks because depositors feel safer and are less responsive bank risk-taking. They then test the model’s predictions by comparing banks with different liability rules, finding not that double-liability banks were no less risky than other banks prior to the Great Depression but that double liability made banks less susceptible to runs during the Great Depression. BANK REGULATION, INNOVATION, AND OTHER ANALYZING THE EFFECTS OF CFPB OVERSIGHT (Fuster, Plosser & Vickery) This paper evaluates the effect of the Consumer Financial Protection Bureau’s oversight on the supply of mortgage credit. The authors take advantage of the fact that banks with less than $10 billion in total assets are generally exempt from CFPB oversight. This allows them to compare banks just under and just above the threshold, before and after the CFPB begins to operate in July 2011. They find that CFPB oversight has no noticeable effect on mortgage lending volume but that CFPB-supervised banks shift away from making loans to riskier borrowers. DOES THE G-SIB FRAMEWORK INCENTIVISE WINDOW-DRESSING BEHAVIOR? EVIDENCE OF G-SIBS AND REPORTING BANKS (Behn et al.) This paper evaluates whether the framework for regulating global systemically important banks incentivizes window-dressing behavior and whether capital market activities are an important component. G-SIBs are assigned a capital surcharge on the basis of year-end measurements of risk indicators; “window- dressing” is when banks reduce their indicators in the fourth quarter in order to reduce their surcharge. The authors find that banks have reduced their risk score and some risk indicators at year-end and that capital market activities are a main driver of this behavior. PERCEPTION OF HOUSE PRICE RISK AND HOMEOWNERSHIP (Adelino, Schoar & Severino) This paper finds that decisions about whether to buy or rent housing are strongly correlated with perceptions of house price risk. Current renters are more likely to perceive housing as a risky investment, though the majority of U.S. households still believe that housing is safe. This paper also finds that while all households update their beliefs in response to local house price changes, renters update their beliefs more slowly. Combined with renters’ sensitivity to house price risk, this may prolong the housing cycle. GLOBAL TRENDS IN INTEREST RATES (Del Negro et al.) This paper examines the current low-interest-rate- environment in a historical and global context. To do so, the authors analyze changes in short- and long-term interest rates, inflation, and consumption since 1870 using a vector autoregression with common trends. They find that the trend in the world real interest rate remained near 2% until 1980; since then, the rate has steadily declined, reaching 0.5% in 2016. The trend is driven by increasing convenience yields and a declining global growth rate of per-capital consumption. EIGHT LESSONS FOR FIGHTING THE NEXT FINANCIAL CRISIS (Liang, McConnell & Swagel) This paper describes lessons learned from the response to the financial crisis. These lessons address regulatory and supervisory structure, crisis management capabilities, navigating uncertainty, and the timing of interventions. THE PROCYCLICALITY OF EXPECTED CREDIT LOSS PROVISIONS (Abad & Suarez) This paper assesses the impact of different approaches to loan loss provisioning on the cyclicality of bank profits