CONTACT: Julia Lawless
WASHINGTON, DC – Last week, turbulence in the market for short-term repurchase, or “repo,” loans spurred the Federal Reserve to intervene to stabilize the market. Before, those interventions may have been unnecessary as private capital would flow in to meet demand. A recent column by Greg Ip in The Wall Street Journal explains post-2008 crisis reforms, including capital regulations, that were intended to make large financial institutions safer may have disincentivized the lending necessary to keep financial markets healthy and stable.
Ip’s article covers last week’s events in the repo market as well as other recent “flash crashes” and volatility in the markets for Treasury bonds, foreign currencies, and stocks. These events illustrate the tradeoffs of how certain reforms may have hamstrung a financial system once equipped to smooth out such issues. Key points from the article:
- The largest U.S. banks face stiff capital requirements “that penalize them for adding new loans.” As Bill Nelson, chief economist at the Bank Policy Institute, points out, such requirements make banks “less able to respond to asset-price movements as a buffer against big swings in supply and demand.”
- Per Karen Petrou, head of Federal Financial Analytics, “It is a fallacy to believe that ‘safer banks means safer markets’.”
- This episode is not unique, “In a report this spring, the International Monetary Fund attributed a growing incidence of ‘flash crashes,’ such as in the Japanese yen in January, U.S. stock futures last December and U.S. Treasurys in June 2018 in part to banks dialing back intermediation in response to regulations.”
- And, as Ip notes, the post-crisis regulatory framework is intact, “In the decade since the global financial crisis the U.S. financial system in many ways is much safer…”
You can read Ip’s full piece here.
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