Regulatory forbearance

Bank Capital and Monetary Policy

Capital—the excess of assets over liabilities—determines solvency, so policymakers are used to thinking of it as a tool for keeping banks and the banking system safe. House Financial Services Chair Hensarling’s proposal to allow banks to opt for a simple capital standard that would substitute for other regulatory oversight is just the most recent example.

But bank capital also is a critical factor in the transmission of monetary policy. When central banks ease, their actions are intended to encourage banks to lend and firms to borrow.  And, to put it simply: healthy banks lend to healthy firms, while weak banks lend to weak firms (if at all)....

Read More

The Yin and the Yang of Shadow Banking in China

By almost any measure, China saves more than virtually any country in the world. Over the past decade, gross national savings has amounted to about one-half of GDP.  And that phenomenal rate continues: only Qatar and Macau save more  (see chart). There are many good reasons to save. At the top of the list in China has been the high marginal return on capital that naturally accompanies rapid economic growth.

Despite this, households in China until recently have had few attractive avenues for saving....

Read More