Deposit insurance, bank incentives, and the design of regulatory policy

This paper was presented at the conference "Financial services at the crossroads: capital regulation in the twenty-first century" as part of session 6, "The role of capital regulation in bank supervision." The conference, held at the Federal Reserve Bank of New York on February 26-27, 1998, was designed to encourage a consensus between the public and private sectors on an agenda for capital regulation in the new century.Deposit insurance ; Bank investments ; Bank supervision ; Bank capital

Environmental and Genetic Determinants of Colony Morphology in Yeast

Nutrient stresses trigger a variety of developmental switches in the budding yeast Saccharomyces cerevisiae. One of the least understood of such responses is the development of complex colony morphology, characterized by intricate, organized, and strain-specific patterns of colony growth and architecture. The genetic bases of this phenotype and the key environmental signals involved in its induction have heretofore remained poorly understood. By surveying multiple strain backgrounds and a large number of growth conditions, we show that limitation for fermentable carbon sources coupled with a rich nitrogen source is the primary trigger for the colony morphology response in budding yeast. Using knockout mutants and transposon-mediated mutagenesis, we demonstrate that two key signaling networks regulating this response are the filamentous growth MAP kinase cascade and the Ras-cAMP-PKA pathway. We further show synergistic epistasis between Rim15, a kinase involved in integration of nutrient signals, and other genes in these pathways. Ploidy, mating-type, and genotype-by-environment interactions also appear to play a role in the controlling colony morphology. Our study highlights the high degree of network reuse in this model eukaryote; yeast use the same core signaling pathways in multiple contexts to integrate information about environmental and physiological states and generate diverse developmental outputs

FEDERAL RESERVE ACCOUNTABILITY AND REFORM

The Federal Reserve was created by and enjoys duties and powers delimited by laws passed by Congress. Congress retains the legal right and social responsibility to amend the Federal Reserve Act and related legislation when such amendments are judged to be in the national interest. To exercise this duty, the Congress must have the right to assess the performance of existing Federal Reserve powers and responsibilities.New legislation is required should Congress decide to assess the Federal Reserves’ monetary policy performance using the Government Accountability Office (GAO). The Federal Banking Agency Audit Act of 1978 restricts the GAO from evaluating Federal Reserve activities related to the Fed’s monetary policy functions.No new legislation is required to use the GAO to assess many other Federal Reserve activities and process including the expanded regulatory powers granted to the Federal Reserve and the Board of Governors by the Dodd-Frank Act.Many Federal Reserve regulatory initiatives related to their Dodd-Frank expanded powers merit closer Congressional oversight. In this testimony, I will limit my discussion to three areas that have especially important ramifications for the safety and vitality of the entire U.S. financial system: The Congress should exercise closer oversight over the Federal Reserve’s ongoing interactions with international standard-setting bodies like the Financial Stability Board, the International Association of Insurance Supervisors, and the Basel Committee on Banking Supervision.Congresses should instruct the GAO to assess the costs, benefits, and processes associated with the recurring Board of Governors stress tests mandated by Section 165 of the Dodd-Frank Act. These stress tests are very resource-intensive, both for banks and for the banking regulators, and there is little evidence that they are a cost effective and objective means for regulating individual financial institutions.Congress should assess potential conflicts that may be developing between the Federal Reserve’s Dodd-Frank expanded powers over the domestic insurance industry and state insurance regulations. There are indications that new Federal Reserve examination and capital policies for insurers affiliated with a depository institution may be generating serious conflicts with existing state insurance supervision and regulation, contrary to the intent of the Dodd-Frank Act

The New Basel Capital Accord

This paper considers characteristics of the capital requirements proposed in The New Basel Capital Accord (2001). Formal analysis identifies calibration features that could give rise to unintended consequences that may include: concentration of credit risk in institutions that are less well equipped to measure and manage risks; an overabundance of thinly capitalized high quality long-maturity credits in foundation Internal Ratings-Based (IRB) banks; distortions in the secondary market for discount or premium credits; an increase in the difficulty of resolving distressed financial institutions; and incentives to distort the accuracy of loan loss provisions.

Margin requirements, volatility, and market integrity: what have we learned since the crash?

This study assesses the state of the policy debate that surrounds the federal regulation of margin requirements. A relatively comprehensive review of the literature finds no undisputed evidence that supports the hypothesis that margin requirements can be used to control stock return volatility and correspondingly little evidence that suggests that margin-related leverage is an important underlying source of "excess" volatility. The evidence does not support the hypothesis that there is a stable inverse relationship between the level of Regulation T margin requirements and stock returns volatility nor does it support the hypothesis that the leverage advantage in equity derivative products is a source of additional returns volatility in the stock market.Securities

Calibrating Your Intuition

Value-at-Risk (VaR) models often are used to estimate the equity investment that is required to limit the default rate on funding debt. Typical VaR "buffer stock" capital calculations produce biased estimates. To ensure accuracy, VaR must be modified by: (1) measuring loss relative to initial market value; and (2) augmenting VaR to account for the interest income required by investors. While this issue has been identified in the market risk setting, it has yet to be recognized in the credit risk literature. Credit VaR techniques, as typically described, are not an appropriate basis for setting equity capital allocations.Credit risk;bond, market risk, equity capital, stock capital, discount bond, future value, capital requirements, cash flows, risk management, applications, risk managers, risk modeling, risk market, bond valuation, credit risks, bond investors, financial services, risk measure, financial institutions, derivative, equity finance, bonds, financial assets, equity share, arbitrage, stock ? capital, discounting, present value, financial economics