In this report, we build on yesterday’s FedFin analysis of the FRB-NY studies (see Client Report TBTF14) to assess the more academic papers in the eleven formidable analyses released on Tuesday. Although these papers do not touch on the hot-button political issues we covered in our prior report – e.g., the big-BHC “subsidy” and bail-in debt – they nevertheless lay pipe for significant near-term regulatory actions. For example, we conclude from our analysis of the FRB-NY paper on dealer-bank collateral financing that the central bank may take a tough line on netting when it comes to measuring exposures for purposes of the pending single-counterparty credit limit (see FSM Report SYSTEMIC54), despite the decision by Basel to go easy on this in the new leverage rules (see FSM Report LEVERAGE4). One study on the growth of financial institutions includes much interesting academic data that provides one of the few careful analyses of the relative size and scope of traditional versus “shadow” banking, concluding that shadow firms have grown dramatically and may well require a different regulatory approach.
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