Many observers have argued that the regulatory framework in place prior to the global financial crisis was deficient because it was largely "microprudential" in nature. A microprudential approach is one in which regulation is partial equilibrium in its conception and aimed at preventing the costly failure of individual financial institutions. By contrast, a "macroprudential" approach recognizes the importance of general equilibrium effects, and seeks to safeguard the financial system as a whole. In the aftermath of the crisis, there seems to be agreement among both academics and policymakers that financial regulation needs to move in a macroprudential direction. In this paper, we offer a detailed vision for how a macroprudential regime might be designed. Our prescriptions follow from a specific theory of how modern financial crises unfold and why both an unregulated financial system, as well as one based on capital rules that only apply to traditional banks, is likely to be fragile. We begin by identifying the key market failures at work: why individual financial firms, acting in their own interests, deviate from what a social planner would have them do. Next, we discuss a number of concrete steps to remedy these market failures. We conclude the paper by comparing our proposals to recent regulatory reforms in the United States and to proposed global banking reforms.

/pdf/a-macroprudential-approach-to-financial-regulation-4gf7fn0dyt.pdf

A Macroprudential Approach to Financial Regulation

https://web.yonsei.ac.kr/jinseocho/JSCHO_05_25_15_QARDL.pdf

Quantile cointegration in the autoregressive distributed-lag modeling framework

Employing a large number of financial indicators, we use Bayesian model averaging (BMA) to forecast real-time measures of economic activity. The indicators include credit spreads based on portfolios, constructed directly from the secondary market prices of outstanding bonds, sorted by maturity and credit risk. Relative to an autoregressive benchmark, BMA yields consistent improvements in the prediction of the cyclically sensitive measures of economic activity at horizons from the current quarter out to four quarters hence. The gains in forecast accuracy are statistically significant and economically important and owe almost exclusively to the inclusion of credit spreads in the set of predictors.

/pdf/credit-spreads-as-predictors-of-real-time-economic-activity-3j2qu5urwf.pdf

Credit Spreads as Predictors of Real-Time Economic Activity: A Bayesian Model-Averaging Approach

Lending implications of U.S. bank stress tests: Costs or benefits?

The U.S. bank stress tests aim to improve financial system stability. However, they may also affect bank credit supply. We formulate and test opposing hypotheses about these effects. Our findings are consistent with the Risk Management Hypothesis, under which stress-tested banks reduce credit supply – particularly to relatively risky borrowers – to decrease their credit risk. The findings do not support the Moral Hazard Hypothesis, in which these banks expand credit supply – particularly to relatively risky borrowers that pay high spreads – increasing their risk. Results are generally stronger for safer banks, banks that passed the stress tests, and the earlier stress tests.

https://papers.ssrn.com/sol3/Delivery.cfm/SSRN_ID3021014_code1641760.pdf?abstractid=2972919

Lending Implications of U.S. Bank Stress Tests: Costs or Benefits?

https://www.federalreserve.gov/pubs/feds/2013/201355/201355pap.pdf

Stress-testing US bank holding companies: A dynamic panel quantile regression approach

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Stress-testing US bank holding companies: A dynamic panel quantile regression approach