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What do banks do? Ask an economist and you’ll get a variety of answers. Banks play
a vital role in allocating capital by linking savers and borrowers; they
produce information by screening and monitoring borrowers; they create liquidity;
they share and distribute risk; they engage in maturity transformation by
borrowing short and lending long. What you won’t usually hear is that banks may
help people stick to an optimal savings plan that they might not be able to stick
to if they invested their money themselves. In other words, banks may serve as piggy banks by preventing people from
consuming assets when the return to investing is high, even when the temptation
to consume is strong.
Looking far back, all the way to the Middle Ages, people were in many ways very
similar to those living today. Households acquired items of value, including
currency. In those times, when the question of where to keep money arose,
people didn’t typically have the option of a local bank. Instead, the answer
oftentimes involved keeping their valuables in a vessel made of pygg.
In recent years, regulators in the United States and abroad have begun to strengthen regulations governing over-the-counter (OTC) derivatives trading, driven by concerns over the decentralized and opaque nature of current trading practices. For example, the Dodd-Frank Act will require U.S.-based market participants to publicly report details of their interest rate derivatives (IRD) trades shortly after those transactions have been executed. Based on an analysis of new and detailed data on the trading activity of major dealers, this post discusses the possible costs and benefits of reporting requirements on the IRD market. In a previous post, we examined the same question for the credit default swap (CDS) market.
Credit rating agencies have been widely criticized in recent years for the poor performance of their ratings on mortgage-backed securities (MBS) and other structured-finance bonds. In response to the concerns of investors and other market participants, the 2010 Dodd-Frank Act incorporates a range of reforms likely to significantly reshape the rating industry. In this post, we discuss these reforms and their implications for investors, regulators, and the rating agencies themselves.
The credit default swap (CDS) market has grown rapidly since the asset class was developed in the 1990s. In recent years, and especially since the onset of the financial crisis, policymakers both in the United States and abroad have begun to strengthen regulations governing derivatives trading, with a particular focus on the decentralized and opaque nature of current trading arrangements. For example, the Dodd-Frank Act will require U.S.-based market participants to publicly report details of their CDS trades. In this post, we discuss the possible impact of increased transparency in the CDS market, based on our recent analysis of new and detailed data on the trading activity of major dealers. (See also new video coverage of our findings.)
Liberty Street Economics features insight and analysis from New York Fed economists working at the intersection of research and policy. Launched in 2011, the blog takes its name from the Bank’s headquarters at 33 Liberty Street in Manhattan’s Financial District.
The editors are Michael Fleming, Andrew Haughwout, Thomas Klitgaard, and Asani Sarkar, all economists in the Bank’s Research Group.
The views expressed are those of the authors, and do not necessarily reflect the position of the New York Fed or the Federal Reserve System.
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