Monetary Policy Requires Sound Banks, Study Find

Continuing our series analyzing papers presented at the FRB’s monetary policy conference, we here assess an academic paper entitled “Does the Lack of Financial Stability Impair the Transmission of Monetary Policy?” which concludes that risky banks frustrate accommodative monetary policy and that regulators should first address bank health during periods of stress before attempting to stimulate credit provision.

FDIC Tidies Up Mortgage Safe-Harbor Treatment

The FDIC today published a proposed revision to its safe-harbor rule clarifying the treatment of residential mortgages to conform its rules with relevant CFPB requirements. The underlying rule (see FSM Report ABS19) provides a safe harbor for investors from FDIC claims on ABS collateral in a receivership, with the rule “auto-conformed” as planned to the risk-retention requirements (see FSM Report ABS32) in a final rule published yesterday. This major issue remained for residential mortgages, identified by the FDIC only late in the day as it finalized the auto-conformance action, with counsel also arguing that it is so significant as to warrant this new NPR.

BIS Pushes For Combined Capital And Liquidity Stress Tests

The BIS yesterday released a paper on ways to incorporate liquidity risk, solvency, and systemic risk into stress tests. As our previous alert described, a senior BIS official yesterday cast doubt on the counter-cyclical benefits of stress tests, arguing that modelling now is premised on risks regulators foresee, not those they don’t which usually prove the most dangerous. The BIS paper does not address this concern, but does focus on one also identified by the U.S. Office of Financial Research: the need to correlate credit and liquidity stresses into a single, forward-looking macroprudential tool.

FRB Makes Tougher, But Not Tarullo-Tough-Enough Stress Tests Official

Just in time for no one to notice it until Monday (or so the FRB may hope), final capital-adequacy and stress-test rules were issued today. Largely similar to the proposal (see FSM Report STRESS21), the standards retain the timing and flexibility for phasing in certain capital requirements through 2016 and 2017. They also and more importantly retain the proposed demand that the next stress-test round use the new, tougher Basel III definitions of capital (see FSM Report CAPITAL199).

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