Speevr | Finance

The premia on state-contingent sovereign debt instruments

by Deniz Igan, Taehoon Kim and Antoine LevyThis paper fills this gap in the literature by examining GDP-linked warrants issued by Argentina, Greece and Ukraine.

Zombies on the brink: Evidence from Japan on the reversal of monetary policy effectiveness

by Gee Hee Hong, Deniz Igan and Do LeeThis paper offers a corporate finance perspective on the effects and limitations of unconventional monetary policy.

Platform-based business models and financial inclusion

by Karen Croxson, Jon Frost, Leonardo Gambacorta and Tommaso VallettiWe show that platforms have helped to achieve impressive gains in financial inclusion, both in emerging market and developing economies and in advanced economies such as the United Kingdom.

Who should regulate: Chairs or majorities of the board

2021 ended with a mini-crisis at the Federal Deposit Insurance Corporation (FDIC) resulting in the chair resigning after being outvoted by a majority of the board of directors. While this fight received substantial press attention, a similar fight occurred at the National Credit Union Administration (NCUA) where a majority of its board overruled its chair. These incidents highlight how financial regulators’ ability to function in the current politically polarized environment can depend on the agencies regulatory structure. A careful examination of recent trends shows trouble on the horizon for regulators of all shapes and sizes.

Aaron Klein

Senior Fellow – Economic Studies

Twitter
AaronDKlein

The threat is not just messy politics regarding boards. The ability of single-headed agencies to remain independent of the electoral swings is in doubt. Two recent Supreme Court decisions—featuring the new conservative majority—struck down provisions of two major laws that emerged from the last financial crisis which aimed at creating stronger regulations to address consumer financial protection (CFPB case) and the government-sponsored housing finance agencies (FHFA case). The Court effectively turned the head of each agency into an at-will appointee easily removed by any sitting president, overturning Congress’ intent to create agency heads serving fixed terms meant to provide independence from easy removal by the president. The ironic result—a conservative court removing Trump-appointed regulators—may provide short-term comfort to pro-regulatory progressives. But the longer-term ramifications of the Court’s rulings effectively curtail political independence of single agency headed regulators, which should give pause to progressives. Given the long time periods required to implement financial regulation and the political difficulties inherent in regulation that gave rise to the desire for agency independence, the end result of the Court’s ruling will probably be deregulatory.
The ability of financial regulators to be independent of the president and to function effectively is at stake, and it is not clear when, how, or what the final outcome will be. An advantage of the board structure was supposed to be consensus-driven policy subject to majority rule. An advantage of a single agency head with a long term who is non-removable by the president was supposed to be the ability of an agency to achieve politically-difficult regulatory outcomes. Both objectives are threatened by recent changes.
Background
Some background for those not steeped in America’s byzantine and bifurcated financial regulatory system. Financial regulators come in all shapes and sizes: single agency heads to seven-member boards; no partisan affiliation to strict partisan splits; boards consisting of people chosen specifically for that purpose to boards that consist of officials from other agencies. The chart below shows the various structures of financial regulators with the footnote containing the full name of each of the alphabet soup of regulators.1
Financial Regulators by Agency Structure

Agency Structure
Single Head
3-Member Board
5-Member Board
7-Member Board

Agency
OCC, CFPB, FHFA, OFR
NCUA

FDIC
SEC
CFTC
Federal Reserve Board of Governors

Financial regulators are designed to have a greater level of independence from both the executive and legislative branches of government to avoid political interference and more effectively carry out their statutory missions. Each of the agencies mentioned has some independence, with details varying (for more details see this in-depth Congressional Research Service report). Part of this independence involves serving fixed terms ranging from five to 14 years that outlast any specific four-year presidential term. Single agency heads, however, find themselves in a different position. The comptroller is subject to removal by the president for “reasons to be communicated to the Senate,” and two recent Supreme Court decisions struck down provisions of the laws creating the CFPB and FHFA, making each agency head subject to removal at will.
Boards vs. single agency heads
Scholars debate how to balance regulatory independence with public accountability, including how much regulatory structure between boards and single agency heads matters. Congress and presidents of both parties have recently preferred single agency heads as opposed to boards. Financial regulatory agencies are usually created in response to financial crises, and the three most recently created financial regulators, FHFA, CFPB, and OFR, were all created in response to the 2008 crisis. Each was given a single agency head with terms that extend beyond the tenure of a presidential administration and limits placed on their removal by future presidents. The laws that created the three were signed by Presidents Bush 43 (FHFA) and Obama (CFPB and OFR) and had varying degrees of bipartisan support. While this structure was popular, it has been transmuted by these Supreme Court cases into agencies whose heads serve at the will of the president and can be quickly removed and replaced if they are at odds with the White House.
Boards were the more common structure for financial regulators created in the 20th century. Proponents of boards argue that by bringing multiple perspectives, often with bipartisan requirements, agreements can be worked out between different political and regulatory philosophies by non-elected but appointed individuals. Term appointments that cannot be rescinded at will provide board members the autonomy to form agreements not supported by elected political officials.
Different rules govern the role and designation process for the chair between the regulators. For the Federal Reserve, the position and term of chairmanship is separable from a position on the Board. This distinction between chair and Fed Board member came into play when President Trump publicly contemplated firing Fed Chairman Powell. The law was clear that Trump could not remove Powell from the Fed Board, but less clear as to whether Trump could remove Powell from the chairmanship. This was important as the Fed’s monetary policy arm, the Federal Open Market Committee (FOMC), elects its own chair and could in theory have kept Powell as chairman of the FOMC regardless of any attempt by Trump to demote his standing at the Board. Thus, the manner in which regulatory boards are structured can enhance independence.
Bank regulatory boards: Majority rule?
The FDIC and NCUA currently have chairs who are in the political and policy minority. The FDIC has a majority of Democratic members converging to overrule the Republican chair. Their first action was a request for public comment regarding bank mergers and acquisitions. The FDIC chair disputed the ability of the majority of the agency to take action without her consent. The regulatory action taken, inviting comment for a review of bank merger regulation, is consistent with the priorities of the Biden administration as the White House encouraged the FDIC to update their merger guidelines in an executive order issued in July 2021.
The FDIC action is further complicated by the chair’s position that no action has been taken because she has not agreed to place the item on the agenda for a formal vote. The other FDIC board members take the position that they have voted on this topic with one board member placing the request for comment on his agency’s website. That these conflicting actions can occur is possible because, uniquely among financial regulators, the FDIC Board contains two heads of other agencies (CFPB and OCC) as members. These agency heads have access to post actions in the Federal Register and on their own websites in a manner that other agencies’ non-chair members do not necessarily have. The FDIC Chair announced her resignation on New Year’s Eve, defusing the current crisis. However, had she not chosen to resign, then either the situation would have ended up in the courts or the president would have had to try to remove her. Either would have been a messy situation, leading to a period where basic operation and control of the institution insuring American’s bank accounts was in fundamental doubt.
The ability of financial regulators to be independent of the president and to function effectively is at stake.
In contrast, the NCUA has seen the two non-chair Republican board members outvote the Democratic chairman to pursue a deregulatory agenda, approving rules deregulating lending requirements on so-called payday alternatives and activities of service organizations affiliated with the credit union. This deregulation is consistent with the conservative ideology of the Republican Trump appointees who have worked together to override the position of the Democratic appointee whom President Biden designated as chairman.
Two financial regulators are pursuing two opposite paths consistent with the standard political positions among the majority of their boards. The NCUA is deregulating while the FDIC is starting down the path to likely increase regulatory thresholds. The NCUA’s actions have earned the praise of credit union industry advocates while the FDIC’s actions have drawn rebukes by industry. Industry supporting deregulation and opposing regulation is not surprising, but it is important to note the role process plays in the debate. Praise of NCUA focuses on the actions of the majority of the board, while opposition to the FDIC focuses on the process. This is important because the method for a chair to avoid being overruled is to manipulate the process such that the board never has an opportunity to vote on an item. Control of the process can equate to control of the agency, regardless of the will of the majority.
Boards are expected to operate under majority rule, creating the potential for a board chair to be in the minority. This is what happened at the NCUA, which garnered little fanfare or media attention. It is not unique to the NCUA. While the Federal Reserve Board operated recently under substantial consensus, this was not always the case. The late Fed Chairman Paul Volcker was outvoted 4-3 on an issue before the Fed Board of Governors in the 1980s, as he detailed in his memoir. More recently, SEC Chairman Donaldson, a Bush appointee, joined with Democratic commissioners to pass a rule regarding mutual funds on a 3-2 vote. Regardless of the politics of the members involved, the principle of majority rule has held.
Should a chair be able to block a majority, the threshold for regulatory action becomes even greater. A five-member board needs both a majority (three members) and the chair. If FDIC Chair McWilliams had been able to set this precedent, it would raise another challenge for the FDIC to act going forward given that: two of the five members are heads of other agencies; that of the three FDIC full-time board members two are frequently of the minority party (in order to satisfy the no more than three members of the same party split required); and the natural hurdle of giving one member greater power to block action than to allow it.
Regulators run by a single agency head inherently escape the dilemma between the chair and the will of the majority of a board. Yet a single agency head that is not structurally independent of the sitting president is easily removed every time the White House flips. That is the situation the new financial regulators find themselves in after the Supreme Court’s two rulings mentioned earlier. The Supreme Court has checked the desire of Congress and presidents of both parties to structure new financial regulators as agencies headed by single individuals with this level of independence. This check had immediate ramifications. President Biden changed CFPB directors on day one of his presidency, a big contrast from his general lack of nominations to other bank regulatory boards (by December 20, 2021 Biden had not nominated a single new person to the Federal Reserve Board of Governors or the FDIC). Biden removed the FHFA director immediately after the Supreme Court issued its ruling on that case.

Building benchmarks portfolios with decreasing carbon footprints

by Eric Jondeau, Benoit Mojon and Luiz Awazu Pereira da SilvaIn this paper, we build portfolios with a progressively falling carbon footprint, which passive investors could use as a new Paris-consistent (PC) benchmark while keeping their risk-adjusted returns at the same level as those of business-as-usual (BAU) benchmarks.

Managing banking crises in emerging market economies

FSI Insights No 38, December 2021. The latest FSI Insight looks into the strategies that authorities can employ to meet those challenges and the implications for public backstops.

Opening statement of Aaron Klein at roundtable on America’s unbanked and underbanked

Chairman Himes, Ranking Member Steil, members of the Committee, thank you for inviting me to participate at this roundtable on America’s unbanked and underbanked. I laud the Committee’s attention to these substantial problems that impact approximately one out of four American families. Rectifying these problems is essential to achieving this Committee’s goal of addressing the growing prosperity gap.

Aaron Klein

Senior Fellow – Economic Studies

Twitter
AaronDKlein

Basic financial services have become a reverse Robin Hood system whereby lower income Americans pay tens of billions for services that middle- and upper-income Americans receive for free.1 This is particularly the case for the underbanked. The Federal Deposit Insurance Corporation(FDIC) estimates that about one in six American households are underbanked, which they define as using a bank account but also using a payday lender, check casher, or wire transmitter service.2 In addition, one in twelve American families with bank accounts pay $350 a year or more in overdraft fees, according to the Consumer Financial Protection Bureau.3
Why are so many Americans paying so much for financial services when they have a bank account? The answer: our financial system is not well structured to provide the services people living paycheck-to-paycheck need at low costs. This forces many people into high cost workarounds. The result is that the less money you have the more money you spend to access your own money. Basic banking is one reason why it is expensive to be poor in America.
An example elucidates this problem. Consider depositing a check. Despite rapid improvements in the technology involved in clearing checks and legislative changes to enable this new technology (the Check 21 Act of 2004, which I worked on) it still takes sometimes as long as six days for the money from a check to be available in a consumer’s account. For those who always have money in the bank, this delay is relatively meaningless. But for those who are living paycheck to paycheck the results are devastating.
Consumers who run out of money while waiting for the payment to clear are left with bleak options: continue to pay bills and use your debit card, you face overdraft fees that average $35 per transaction; go to a payday lender and pay $50 for a few hundred dollars to make it through the weekend; or avoid the bank altogether and take your check to a check casher, paying on average $20 and get cash immediately.
Estimates for the total amount of overdraft fees paid range from $15 to $35 billion a year.4 5 Payday lending fees have been estimated at nearly $10 billion.6 These are fees only paid by people with bank accounts—by definition every overdraft fee is paid to a bank or credit union and every payday loan requires an account in order to give the lender a post-dated check as collateral. My research using FDIC data shows that 70 percent of check-cashing customers have bank accounts and that the majority of checks cashed are from these customers.7

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Focus on bank supervision, not just bank regulation

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Other elements of our slow payment system drive up these costs, including banks and credit unions’ ability to post debits before credits and the inability for consumers to even know when exactly their check or direct deposit will be available. Millions of Americans got paid on Friday, December 10. For most with so-called ‘direct deposit,’ the money was actually withdrawn from their employer several days earlier. This money has been sitting for days while people living paycheck-to-paycheck are spending potentially $50 billion a year in just these three fees alone as they wait for their own money to arrive.
This helps explain the main reason why people without a bank account report not having one: Bank accounts are too expensive and do not provide the service they need. Roughly half of the unbanked cite costs and fees as the main reason why they do not have a bank account.8 In comparison, less than one in twenty cite location or hours as the main reason. Far too many solutions to the ‘unbanked problem’ focus on questions of physical access when the main problems are cost and speed.
The problems in our banking and payment system impact federal government programs, reducing the effectiveness of policies meant to help. For example, Congress acted with incredible alacrity in providing emergency assistance to millions of American families who were suddenly without income at the beginning of the COVID-19 pandemic, enacting emergency payments to families just weeks after the shutdown hit on March 27, 2020. However, the U.S. Treasury did not start sending out money until April 10, and then it took another five days until April 15 before the funds were actually available to those who were lucky enough to receive the first batch. What were families supposed to do for those days while they waited for their money?
Less than half of all eligible Americans received their COVID-19 stimulus in that first round. More than one-third had to wait until May or later to receive their emergency funds.9 And when they did receive their money, for one in four it was by paper check or plastic card. How can it be that 95 percent of families in this country have a bank account, but Uncle Sam could not find 25 percent of Americans bank accounts to give them money in the midst of a national pandemic? Part of the reason is that the Treasury Department simply does not have the information, and another part is that they are unwilling and unable to work with those private sector companies that do.10 This problem still has not been solved, as one in seven families eligible for the child tax credit did not receive their money through direct deposit.11
The result is meaningful for those impacted. One estimate is that $66 million of the first round of CARES Act stimulus payments went to check cashers, as people couldn’t afford to continue waiting. There is still not an easy system for families who are receiving the child tax credit to use it as the regular direct deposit that is required by many banks and credit unions to be eligible for ‘free checking’ accounts.
There are several simple and hopefully bipartisan solutions to these problems. The single most impactful thing the federal government could do is to give people access to their own money immediately. This can be done by simply amending the Expedited Funds Availability Act to require immediate access for the first several thousand dollars of a deposit, instead of permitting the lengthy, costly delays that harm people living paycheck to paycheck. Empowering people to have access to their own money immediately ought to be the small ‘c’ conservative idea that crosses ideologies and forms sensible policy.
Access to digital money is a requirement to participate in the new digital economy. Accessing digital money is easy and free for those with money while for those without a lot of money, digital money is expensive. Requiring all banks to offer a low-cost, basic bank account is one solution to many aspects of this problem.12 The FDIC designed a Safe Account product, which has been picked up by the BankOn movement. Many banks and credit unions offer these types of accounts already. The American Bankers Association urges banks to offer such an account as part of its best practices.13 This best practice should be universal so that any American in any bank can open a basic low-cost, full-service account. Every bank and credit union has a charter from the government. That charter provides great benefits and also responsibilities. A basic, low-cost account is such a responsibility.
In conclusion, there are no magical, single-bullet solutions to fix the entire system. But there are a series of simple policy levers that can be pulled, each of which helps to fix a portion of the problem. Thank you very much for the opportunity to participate, and I look forward to engaging in a lively conversation.

Interoperability between payment systems across borders

by Codruta Boar, Stijn Claessens, Anneke Kosse, Ross Leckow and Tara Rice Interoperability among payment systems – as the foundation for enhancing cross-border payments – requires technical, semantic and business system compatibility so that end users can seamlessly transact with each other across systems. Public and private sector options in pursuing cross-border payment system interoperability can be illustrated using four stylised models, ordered in increasing complexity and cost but also greater efficiency – a single access point, bilateral link, hub and spoke or a common platform. The BIS Innovation Hub is putting theory into practice with several innovative projects to foster interoperability across the four stylised models. An ambitious, multi-year G20 programme to enhance cross-border payments is under way.

Project Jura – Cross-border settlement using wholesale CBDC

Jura explores the direct transfer of euro and Swiss franc wholesale central bank digital currencies (wCBDCs) between French and Swiss commercial banks on a single DLT platform operated by a third party. Tokenised asset and foreign exchange trades are settled safely and efficiently using payment versus payment (PvP) and delivery versus payment (DvP) mechanisms. The experiment is conducted in a near-real setting, using real-value transactions and complying with current regulatory requirements.

BIS Quarterly Review, December 2021

BIS Quarterly Review for December 2021 –