Two key issues concerning the supervision of bank safety and soundness

This commentary focuses on two specific issues. The first asks, What are the market failures that actually create the need for the public regulation of bank safety and soundness? The second issue concerns the safety and soundness issues created by the two mortgage government-sponsored enterprises, Fannie Mae and Freddie Mac, whose very large financial obligations pose a serious systemic risk threat to U.S. financial markets.Banks and banking ; Bank supervision ; Government-sponsored enterprises

Catastrophe Insurance, Capital Markets and Uninsurable Risks

This paper examines the causes of the failure of the private market for catastrophe insurance and examines some public solutions. Although the standard explanations of insurance market failure (adverse selection and moral hazard, large imprecise risks) are present, we argue that the primary explanation for the failure of this market lies in the inability of insurance companies to arrange for the level of capital necessary to settle a large loss. We examine four reasons for this: a) accounting provisions which preclude the setting up of reserves against losses anticipated but not yet incurred, b) the absence of tax incentives to reserve, c) management fear of loss of control associated with takeovers of companies with large stocks of free cash, and d) reluctance of regulators to raise the rates of firms with large holdings of cash. We examine new capital instruments (catastrophe options, contingency bonds) but find that these new instruments at present fail to provide adequate quantities of capital to meet a large loss. We then examine public schemes in California, Florida, and Hawaii, and argue that if the accounting, tax and regulatory advantages enjoyed by these schemes were made available to the private sector, private corporations would be likely to reenter this market. This paper was presented at the Financial Institutions Center's May 1996 conference on "

The Future of the Government Sponsored Enterprises: The Role for Government in the U.S. Mortgage Market

This paper analyzes options for reforming the U.S. housing finance system in view of the failure of Fannie Mae and Freddie Mac as government sponsored enterprises (GSEs). The options considered include GSE reform, a range of possible new governmental mortgage guarantee plans, and greater reliance on private mortgage markets. The analysis also considers the likely consequences of adopting alternative roles for government in the U.S. housing and mortgage markets. We start by reviewing the history of the GSEs and their contributions to the operation of U.S. housing and mortgage markets, including the actions that led to their failure in conjunction with the recent mortgage market crisis. The reform options we consider include those proposed in a 2011 U.S. Treasury White Paper, plans for new government mortgage guarantees from various researchers and organizations, and the evidence from Western European countries for the efficacy of private mortgages markets.

Mortgage Credit Availability and Residential Construction

macroeconomics,mortgage credit, homebuilding

Presentation to FCIC on The Role of the GSEs and Housing Policy in the Financial Crisis Prepared by Dwight M. Jaffee

Paper Prepared for Presentation to the Financial Crisis Inquiry Commissio