Do term premiums matter? Transmission via exchange rate dynamics
by Mitsuru Katagiri and Koji TakahashiUsing a small open economy model with long-term bonds, we ask whether term premia affect the inflation rate and the economy via the exchange rate.
Labour markets and inflation in the wake of the pandemic
by Frederic Boissay, Emanuel Kohlscheen, Richhild Moessner and Daniel ReesThe pandemic had a significant effect on labour markets. Working hours fell sharply almost everywhere, but the drivers of these declines varied greatly across countries, depending on whether policies to protect worker-firm relationships were in place. Labour markets have bounced back faster than after recent recessions, albeit unevenly. Even in countries where unemployment rates remain high, job vacancies have risen, including in the sectors hardest hit by the pandemic. Frictions are most pronounced where policy responses did not protect worker-firm relationships. Wages are generally rising more slowly than before the pandemic. However, there is significant dispersion across sectors. Wages are rising fastest in sectors such as information & communications where the pandemic boosted demand, and also in high-contact sectors such as recreation where labour supply has receded. A generalised pickup in wage growth still seems unlikely, even though some countries and sectors have seen increases. However, a retreat in globalisation could make inflation more responsive to labour market pressures.
Where is the Fed Vice Chair for Supervision?
Randal Quarles, the first Trump appointment to the Federal Reserve’s Board of Governors, finished his four-year term as the Vice Chair for Supervision on October 13, 2021. To replace him, President Biden has nominated no one. The Fed replaced him with no one. For now, the Fed’s vital supervisory and regulatory priorities will be managed by the Fed’s Board of Governors, through their committee structure.
There is much to lament with this state of affairs. Quarles was the first to hold the position: it was created in 2010 in the Dodd-Frank Act to encourage the Fed to focus more completely on the vital work of bank regulation and supervision, areas that many feared had become neglected during the Greenspan years. Even though the position was created under a signature law of the Obama administration, that administration did not prioritize the formal appointment, relying instead on Fed Governor Tarullo to manage the portfolio, just as former Fed Governors had done. Today, for reasons known only to the administration itself, if known at all, the Biden administration has been plagued by delays in filling Fed and other financial regulatory vacancies. Even though the Vice Chair’s term is fixed by statute at four years, we still have no insight into the people the administration is even considering to succeed Quarles, as the administration has not even announced an intent to nominate anyone to any position at the Fed.
Quarles, a Republican, pursued a bank regulatory and supervisory agenda with expertise and a clear vision. He is no favorite of some Democrats, who do not endorse his vision, have little use for his expertise, and have been eager to see him depart the scene. Whether the Democrats would prefer it otherwise or not, Quarles is not going anywhere for now. He remains a Fed Governor, with the same important responsibilities over regulatory, supervisory, and monetary policy as his colleagues on the Board. That term is fixed for fourteen years and will not expire until 2032.
Here is the good news. Despite the mishandling of these vacancies from the Biden administration, the Fed’s decision not to reassign these priorities to another Governor is exactly the right thing to do. Its other alternatives are not attractive. It could have given now-Governor Quarles the responsibilities despite the expired term, but his ability to operate without the benefit of his statutory status would be significantly curtailed. The other option is hardly better: the Fed could have given these responsibilities to a candidate more in line with Democratic priorities—Fed Governor Lael Brainard, an expert on virtually every regulatory and supervisory question before the Fed, would fit this bill nicely. But Governor Brainard herself is a candidate to succeed Fed Chair Jay Powell, whose term as Chairman expires in January, and any move to reassign her portfolio could look like meddling in the Fed Chair sweepstakes that is still ongoing.
And so, the Vice Chair for Supervision—that unique creature of governance created by Congress just a decade ago—remains vacant, creating the possibility that financial regulation and supervision will not take their place at the forefront of the Fed’s policymaking. What’s more, the replacement of the Vice Chair position with a committee will devolve more authority to the Fed’s staff to handle this highly political and politicized portfolio.
So why is this good news? Because public oversight of the Federal Reserve System is primarily a product of public governance. We need, as a public, to have rigorous debates about who we want our central bankers to be. One such debate is underway as the Biden administration continues to consider the president’s appointment of the Fed Chair. Those who support Jay Powell, the incumbent, praise his leadership during the 2020 pandemic crisis and his management of a major shift in monetary policy regime. His detractors argue that his regulatory priorities are insufficiently aligned with those of the president, especially around bank regulation, financial stability, and climate change. While the tone of this debate can veer toward hyperbole—an American political tradition as old as the Republic—this is what politics looks like. We should welcome it.
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What we are not having, however, is that same level of debate around the priorities that the Fed should pursue as a regulator and supervisor. For this debate, we need to have time to consider viable candidates for this position. And we need the Fed not to do this work for us by pretending that the work of bank regulation and supervision has no political content in it.
The position obviously does have political content. The act of regulating and supervising the financial system is almost top to bottom a political exercise. We have elections to let that content and those exercises dictate the course that regulation and supervision should take. Just because the Biden administration has inexplicably dodged its responsibility for sponsoring that debate does not mean that the Fed should skip the debate entirely. By failing to appoint a successor to Quarles, the Fed has turned up the heat on the politicians to give us—the people and institutions affected most by the Fed’s regulatory and supervisory work—the chance to perform our role in vetting the nominees for this job.
Let’s hope the president accepts the Fed’s invitation as quickly as possible.
The Brookings Institution is financed through the support of a diverse array of foundations, corporations, governments, individuals, as well as an endowment. A list of donors can be found in our annual reports published online here. The findings, interpretations, and conclusions in this report are solely those of its author(s) and are not influenced by any donation.
Big techs in finance: on the new nexus between data privacy and competition
by Frederic Boissay, Torsten Ehlers, Leonardo Gambacorta and Hyun Song ShinBig techs’ entry in finance builds on their established digital platforms in e-commerce, search and social media, and holds the prospect of efficiency gains and greater financial inclusion.
Policymakers must enable consumer data rights and protections in financial services
After years of inactivity, momentum is gathering for policy action on issues related to consumer financial data in the United States. In July, the president issued an executive order encouraging the Consumer Financial Protection Bureau (CFPB) to enable data portability in financial services. The CFPB issued an advance notice of proposed rulemaking last year and expects to commence a rulemaking process in spring 2022. Congress has shown interest in the subject as well, most recently by holding a Task Force on Financial Technology hearing on consumers’ right to access financial data.
Such momentum is long overdue. Data portability in financial services has the potential to help consumers in their choice of financial service provider and enable innovation by new entrants seeking to offer a better deal or a novel product or service. While data portability is necessary to realize a more competitive and innovative financial services sector, other consumer data rights and protections are also needed. Our research indicates that consumers are demanding greater control than the current legal and regulatory framework governing financial data provides. To be responsive to these important interests, both regulatory and legislative action is needed to ensure that consumers have appropriate data rights and protections.
Background
In the wake of the global financial crisis and the ensuing public outrage over the behavior of “too big to fail” banks, policymakers in the early 2010s found themselves looking for ways to promote competition in financial services. While many debated the merits of breaking up large banks or a new Glass-Steagall Act to separate retail and investment banking, others looked for ways to promote competition from the ground up. Around the world, policymakers began to contemplate data portability measures as a way to loosen banks’ hold on dissatisfied customers.1
In the United States, this responsibility fell to the CFPB. Under Section 1033 of the Dodd Frank Wall Street Reform and Consumer Protection Act of 2010, the CFPB was empowered to prescribe rules to enable data portability in financial services.2 However, with numerous other priorities on the CFPB’s to-do list, rulemaking on Section 1033 never took place. Instead, the CFPB issued non-binding principles for data sharing and closely monitored developments in the market.
Meanwhile, consumer demand for data portability accelerated, driven by the burgeoning fintech revolution. To meet this demand, “data aggregation” companies such as Plaid began to connect consumers’ favorite fintech apps to their bank accounts. Data aggregators often used online banking login credentials shared by consumers to gain entry to consumer accounts and “screen-scrape” data available to consumers via online banking portals. Though this practice is still in use, aggregators have more recently begun to enter into contracts with banks, credit unions, core technology providers, and others to lessen dependence on credential-sharing and screen-scraping in favor of the use of tokenized account access and application program interfaces (APIs).
The financial data sharing ecosystem largely built on this technological framework has given rise to a vibrant fintech market, including many innovative companies who use consumer financial data to design products and services that help consumers improve their financial health. Today, fintechs offer products that use consumers’ financial data to help them avoid costly overdraft fees when their balances dwindle, build emergency savings when their balances grow, and optimize their bill payments to ensure that bills are paid on time without creating a liquidity shortfall. Other fintechs use cashflow data for underwriting purposes, a practice that shows evidence of increasing access to credit among those without a credit history or a credit score and those whose credit scores understate their creditworthiness.3 Still other fintechs use financial data to enable their customers to send money to friends and family within and between countries. These services are widely used, and their popularity has only increased as more and more banking activity moved online during the COVID-19 crisis.
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In early 2021, the Financial Health Network conducted a nationally representative survey to explore consumers’ interactions with, and attitudes towards, the financial data ecosystem. According to our research, more than two thirds of banked consumers are fintech users, having linked financial apps to their checking account. In contrast with banks and credit unions,4 young people and people of color are particularly likely to use fintech apps, with apps used to send money to friends and family being the most common type of fintech app and the type of fintech app used most frequently.
The need for data portability
The lack of a comprehensive legal framework designed to govern the rights and duties of the various players in this ecosystem creates risks for individual consumers, financial institutions, and the functioning of the financial data ecosystem as a whole. Last year, the Financial Health Network partnered with FinRegLab, Flourish Ventures, and the Mitchell Sandler law firm to produce a comprehensive analysis of the legal and regulatory landscape governing consumer financial data. This analysis uncovered numerous open interpretive and policy questions related to Section 1033 as well as older statutes covering a set of interlocking issues including privacy and security under the Gramm-Leach-Bliley Act, accuracy and privacy under the Fair Credit Reporting Act, fairness under the Equal Credit Opportunity Act, and liability under the Electronic Funds Transfer Act.
Unless regulators take action, these open questions will continue to fester and have the potential to impede data portability. Already there are reports of some financial institutions restricting access to consumer data.5 Such restrictions can serve to entrench incumbent institutions and limit competition to the detriment of consumers. These restrictions also are out of step with consumer preferences. According to our research, 62 percent of consumers are in favor of data portability, believing that their bank or credit union should be required to share their personal data with another company (such as a fintech provider) if the consumer directs it to do so.
Importantly, this majority holds across demographic groups, including age, gender, education, race/ethnicity, and household income. Support for data portability in financial services is also bipartisan, with majorities of self-identified Democrats, Republicans, and Independents in favor of it.
Support for data portability holds regardless of the type of institution that serves as a consumer’s primary bank or credit union. This underscores the importance of ensuring that customers of small financial institutions with more limited technological resources have access to secure, affordable solutions to enable data portability.
These results confirm a broad consensus in favor of data portability that has been increasingly apparent for some time. Indeed, at the CFPB’s Symposium on Consumer Access to Financial Records in early 2020, few participants disputed that data portability is a right that should be available to consumers and that rulemaking on Section 1033 should guarantee.6 What they did not agree on was what other rights and protections should be guaranteed and how best to do so.
The data minimization principle
Among the issues dividing large banks, small banks, fintechs, data aggregators, and other market participants at the CFPB’s 2020 Symposium was the question of the scope. What kind of data fields should be able to be shared under Section 1033, and who should decide what kind of data are appropriate for what use case?
In the absence of regulatory guidance, the scope of data available to be shared at a consumer’s direction today varies greatly depending on where a consumer banks. Practically, this means that while some consumers currently enjoy a high degree of data portability, others have a much more limited ability to consistently share their data. As a result, consumers are unlikely to understand the scope of the data they share unless they carefully read complex legal disclosures.
The Financial Health Network asked fintech app users who had connected their fintech app to their checking account how much of their checking account data their fintech app is capable of accessing. 41 percent reported believing it could only access the data it needed, 25 percent reported believing it could access all of their checking account data, and the remaining third of respondents reported that they did not know.
When asked about how much of their checking account data fintech apps should be able to access, 87 percent reported believing that their fintech app should only be able to access the data it needs. Only 11 percent reported believing it should be able to access all the data in their checking account. In other words, consumers know what rules they want, but they are not sure if the current system is aligned with their preferences.
As with data portability, this preference for data minimization holds across demographic groups, including age, gender, education, race/ethnicity, household income, and political party affiliation. Unlike data portability, the preference for data minimization is overwhelming, with support usually in the high 80s to low 90s, with at least 75 percent of each demographic group in favor.
This indicates that while consumers desire the right to data portability, they have a strong preference for discretion as they share their data and do not wish to share any data beyond what is required for a given use case. Some data holding financial institutions (such as banks) have also emphasized this data minimization principle. However, those entities have their own competitive incentives to limit data flows and would not be impartial arbiters of what data are needed for a given use case.
With this market dynamic in mind, the CFPB should use its authority under Section 1033 to determine what data must be accessible, how often they must be made available, how long those data can be accessed for, and to whom they may be made available. If the CFPB does not feel it has the authority to impose data minimization limitations on data aggregators and recipients without impeding data portability, further legislative action may be needed to empower the Bureau to ensure that those entities are only accessing the data they need for a given use case, and are only storing that data for the minimum amount of time necessary. Congress will find strong support for this principle across the political and socio-economic spectrums.
Protecting consumers’ privacy
Consumers’ preference for discretion is not limited to the data they choose to share with fintech apps. Indeed, our research indicates that consumers are equally sensitive to financial or personal data about them being shared without their affirmative consent, no matter what institution is doing the sharing. Just as consumers do not want big tech companies sharing data about their browsing patterns without consent, consumers likewise do not want their bank or fintech app sharing financial data about them without their consent. Our survey shows consumers seem to view these forms of data sharing in much the same way, despite other research indicating that consumers have differing levels of trust for these institutions more broadly.7
Almost 90 percent of consumers (consistent among all demographic groups) expressed a preference for data sharing by their primary bank or credit union to be bound by an opt-in standard rather than an opt-out standard.
This strong preference for an opt-in standard stands in sharp contrast with current legal requirements which cannot be changed without legislative action. At present, consumers who do not want their data to be shared must opt-out, and even their ability to do that is limited. Banks are still permitted under the Gramm-Leach-Bliley Act to share consumer data with non-affiliated third parties if the information sharing is subject to one of the numerous exceptions under the law, regardless of whether a consumer might prefer them not to share.8 In other words, the current law places the burden of protecting privacy on consumers, who are expected to carefully parse complex legal disclosures provided by their financial institution and affirmatively opt-out of any optional data sharing. According to our research, only about 1 in 4 consumers reports having done this. As low as that is, it may under-state how rare it is for consumers to opt-out of data sharing. The plurality of banks interviewed in a 2020 study by the Government Accountability Office reported opt-out rates less than 5 percent.
In order to ensure that privacy protections are reflective of consumers’ preferences, we believe that legislative change is needed. The United States is past due for comprehensive data privacy legislation that not only addresses open issues in financial services but also ensures that consumers are afforded strong and consistent data rights and protections when they interact with tech platforms, healthcare providers, educational institutions, and others. However, if such a comprehensive effort remains beyond the reach of Congress, lawmakers should nevertheless build on the bipartisan consensus among consumers and past interest from both Republicans and Democrats in updating consumers’ data rights and protections in financial services. At the very least, data sharing by financial institutions should be bound by an opt-in standard.
Conclusion
As the financial data ecosystem evolves, regulatory and legislative action to ensure that consumers have strong data rights and protections is increasingly urgent. With momentum for action building and consumers having an unusual level of agreement on the need for data portability, data minimization, and data privacy, policymakers should proceed with the clear goal of ensuring that consumers are the primary beneficiary of the use of their financial data.
Inter-agency coordination bodies and the speed of prudential policy responses to the Covid-19 pandemic
by Michael Brei and Blaise GadaneczThis paper investigates whether the presence of inter-agency coordination bodies for financial stability (IABs) has been associated with faster prudential policy responses to the Covid-19 pandemic.
Indebted Demand
by Atif Mian, Ludwig Straub and Amir SufiThis paper explains the concomitant rise in debt and fall in interest rates by the liberalisation of the financial sector and income inequality.
Joined at the hip: monetary and fiscal policy in a liquidity-dependent world
by Guillermo Calvo and Andrés VelascoWe study the effects of monetary and fiscal policies when both money and government bonds provide liquidity services.
The Treasury market in spring 2020 and the response of the Federal Reserve
by Annette Vissing-JørgensenThe paper shows that Treasury yields did not spike due to a loss of confidence in Treasury fundamentals.
Stability and inclusivity of stablecoins: A conversation with Circle CEO Jeremy Allaire
While cryptocurrency has been around for over a decade, it has only gained mainstream popularity recently. Crypto backers see the technology as the way of the future, but its instability leaves others skeptical. As a less volatile alternative to traditional cryptocurrencies, asset-backed stablecoins have joined the market. But as with all new technology, important questions must be resolved before stablecoins could become a more widely accepted part of our financial system.
In this fireside chat with Circle co-founder, chairman, and CEO Jeremy Allaire, we will discuss the rise of stablecoins, the state of regulation of stablecoins, and the potential for greater inclusion through new financial technology (fintech). The dialogue will cut through much of the hype of cryptocurrency – stablecoins in particular – and dive into the two important and distinct issues surrounding stablecoins: financial stability and inclusion.
This event will be part of the Brookings Center on Regulation and Markets’ Series on Financial Markets and Regulation, which looks at financial institutions and markets broadly and explores how regulatory policy affects consumers, businesses, investors, fintech, financial stability, and economic growth.
Viewers can submit questions for speakers by emailing events@brookings.edu or via Twitter using #Stablecoin.