Addressing the calamity posed by the failure of large, global financial intermediaries has been high on the post-crisis regulatory reform agenda. When Lehman Brothers―a $600 billion entity―failed, it took heroic efforts by the world’s central bankers to prevent a financial meltdown. The lesson is that a robust resolution regime is a critical element of a resilient financial system.
Experts have been hard at work implementing a new mechanism so that the largest banks can continue operation, or be wound down in an orderly fashion, without resorting to taxpayer solvency support and without putting other parts of the financial system in danger. To enhance market discipline, the shareholders that own an entity and the bondholders that lent to it must face the consequences of poor performance.
How can we ensure that healthy operating subsidiaries of G-SIBs continue to serve their customers even during resolution? Authorities have proposed a solution that takes two forms: “single point of entry (SPOE)” and “multiple point of entry (MPOE).” A key difference between these two resolution methods is that the former allows for cross-subsidiary sharing of loss-absorbing capital and cross-jurisdictional transfers during resolution, while the latter does not. The purpose of this post is to describe SPOE and MPOE. We highlight both the relative efficiency of SPOE and the requirements for its sustainability: namely, adequate shared resources, an appropriate legal framework and a credible commitment among national resolution authorities to cooperate…. Read More
Guest post by Richard Berner, Executive-in-Residence (Center for Global Economy and Business) and Adjunct Professor, NYU Stern School of Business
America faces two interrelated long-term challenges: rising longevity and inadequate retirement saving. The combination of declining private, defined-benefit pension plans and concerns about the viability of federal entitlements has intensified these challenges. While the economic recovery has raised confidence about retirement resources at the margin (see here), workers and retirees remain concerned about how they will meet future basic expenses, medical needs or the cost of long-term care.
Those developments mean that achieving saving goals increasingly must rely on individuals’ thrift and intelligent, efficient investing. Tax-advantaged vehicles that encourage saving (like 401k and IRA accounts), and efficient investment vehicles like mutual funds that follow market-wide stock price indexes are cornerstones of that system.
Yet, some scholars of industrial organization claim that collective investment vehicles―mutual funds, exchange-traded funds (ETFs), and the like―involve “common ownership” that results in softened competition by the firms included in their portfolios (see here, here and here). And, key antitrust enforcers, like the European Competition Commissioner, are looking carefully at this issue. In this post, I argue that the evidence for a causal link between the rise of collective investment vehicles and diminished competition is weak, and far from sufficient to justify interventions that would diminish the attractiveness of these saving mechanisms…. Read More
Financial inclusion—providing universal access to financial services and encouraging their use—is an important means for promoting economic development. As of 2014, the World Bank estimated that there were still 2 billion adults without a bank account, and many others with only a tenuous connection to the financial system (see Global Findex). Better access will boost the efficiency of the payments system, promote household savings and access to credit, and improve people’s ability to manage risk. And, as it does all of these things, financial inclusion has the potential to reduce inequality and increase economic growth. In other words, reducing the multitudes of those that are unbanked will improve the fate of the poorest of the poor. (For more detail, see our earlier post.)
India’s unprecedented effort to “bank the unbanked” through the Pradhan Mantri Jan Dhan Yojana (PMJDY), or “Prime Minister’s People’s Wealth Scheme,” is by far the largest such undertaking. Launched merely three years ago, on August 28, 2014, the mission to provide no-frills, no-minimum-balance (hereafter, JDY) bank accounts to every adult (including the one-fifth of the population living below the poverty line and the large rural population with limited access to physical bank branches) has been remarkably successful. As of this writing, more than 300 million people have opened JDY accounts. And, while initial readings suggested limited use, over time, JDY account holders look to be learning about the benefits, so that use is rising toward levels observed for bank accounts of comparable individuals. Put differently, by lowering bank transactions costs, hundreds of millions of people who lacked access to financial services are revealing a latent demand.... Read More
Wills are for when you die. Living wills guide your affairs when you lose the capacity to act. We’re all mortal and fragile – not just people, but firms and banks, too. The Dodd-Frank Act of 2010 requires systemic intermediaries (and many others) to create “living wills” to guide their orderly resolution in bad times.
In August, these Dodd-Frank living wills made front-page business news when the FDIC and the Fed rejected those submitted by the biggest banks as inadequate. That should come as no surprise. In their current form, we doubt that living wills would do much to secure financial stability... Read More