By Karen and Basil Petrou
In the raft of crisis retrospectives released during the ten-year anniversary of the Great Financial Crisis, general consensus continues the conventional wisdom that subprime mortgages were the spark of the subsequent conflagration. A new study from the Federal Reserve Banks of Atlanta and New York mobilizes formidable data to show that hapless subprime purchase-money borrowers were victims, not perpetrators. The borrowers who did the damage that precipitated the debacle were, they find, prime borrowers whipped into a speculative frenzy by the combination of low rates and flagrantly-unwise mortgage lending. Theoretically, post-crisis reforms have solved for this. Actually, maybe not given the exodus of mortgage securitization from regulated entities, sharp rise in cash-out refis, and investment-focused borrowing with house prices well above affordability thresholds in many major markets. Continue reading “It Wasn’t the Butler”
By Karen Shaw Petrou
On April 13, federal banking agencies released their plan to require regulatory-capital recognition of the FASB’s new current expected credit loss (CECL) accounting method. Doesn’t it sound technical, dull, and irrelevant to economic equality? The integration of capital regulation with CECL is indeed technical and often dull, but it’s absolutely critical to the ability of U.S. banks to make the long-term, higher-risk loans essential for reversing at least some U.S. income and wealth inequality. Continue reading “Very, Very Safe Banks and a Very, Very Unequal Economy”
By Karen Shaw Petrou
- CCAR now tries to make big banks a shadow U.S. central bank.
- Result: more systemic risk and still less economic inequality.
How do you make the financial system less stable and increase U.S. economic inequality at the same time? It’s not easy, but if you’re the Fed, then you accomplish this frightening feat by toughening up the annual CCAR stress test for the biggest banks without an eye to its systemic or market impact. Stress testing is fine – indeed an important addition to the post-crisis supervisory arsenal. But, CCAR itself is founded on two flawed premises: big BHCs are the heart of financial stability and nothing the central banks does adversely affects economic inequality. Continue reading “Caught in CCAR’s Cross-Fire”