Eduardo Aninat on Capital Tax Increases and Chilean Growth

CFS Advisory Board member and former Chilean Finance Minister Eduardo Aninat comments on proposed policies in Chile to increase the corporate tax rate from 20% to 35% and to eliminate the FUT. He expresses concern regarding the affects the plan will have on investment and growth and challenges the government to show how it came to the conclusion that investment would be unchanged.

See The Wall Street Journal article by Mary Anastasia O’Grady article titled “Assault on the Chilean Miracle.”

Banque de France 18th Edition Financial Stability Review

Banque de France released its annual financial stability review this month.

“The focus of this 18th edition of the Financial Stability Review (FSR) is macroprudential policies; how they are implemented and their channels of transmission, and the way they interact with other policies, notably microprudential, fiscal and monetary policies.

The onset of the financial crisis and its consequences have led policymakers to take a more macroeconomic approach to financial system supervision, in order to safeguard its solidity and guarantee the financing and growth of the economy.

This 2014 edition of the FSR provides wide ranging views, emanating from most prominent international experts, and is also an opportunity for some of the pioneering countries in this field to share their experiences of macroprudential policy.”

– Macroprudential policies: rationale and objectives

Five questions and six answers about macroprudential policy
Jaime CARUANA and Benjamin H. COHEN, Bank for International Settlements

Governance of macroprudential policy
Klaas KNOT, De Nederlandsche Bank

From tapering to preventive policy
Charles GOODHART, London School of Economics, Financial Markets Group
and Enrico PEROTTI, University of Amsterdam and Centre for Economic Policy Research

Collective action problems in macroprudential policy and the need for international coordination
José VIÑALS and Erlend NIER, International Monetary Fund

A macroprudential perspective on regulating large financial institutions
Daniel K. TARULLO, Federal Reserve System

The impact of macroprudential policy on financial integration
Andreas DOMBRET, Deutsche Bundesbank

– Experiences regarding macro prudential policies

European macroprudential policy from gestation to infancy
Ignazio ANGELONI, European Central Bank

Macroprudential policy in France: requirements and implementation
Anne Le LORIER Banque de France

Implementing macroprudential policies: the Swiss approach
Jean‑Pierre DANTHINE, Swiss National Bank

The effects of macroprudential policies on housing market risks: evidence from Hong Kong
Dong HE, Hong Kong Monetary Authority

Macroprudential policies in Korea – Key measures and experiences
Choongsoo KIM, Bank of Korea

Framework for the conduct of macroprudential policy in India: experiences and perspectives
Kamalesh C. CHAKRABARTY, Reserve Bank of India

Learning from the history of American macroprudential policy
Douglas J. ELLIOTT, The Brookings Institution

Macroprudential policy and quantitative instruments: a European historical perspective
Anna KELBER and Éric MONNET, Banque de France

– Macroprudential policy interactions and transmission channels

Macroprudential policy beyond banking regulation
Olivier JEANNE and Anton KORINEK, Johns Hopkins University, Department of Economics

Principles for macroprudential regulation
Anil K KASHYAP, University of Chicago Booth School of Business,
Dimitrios P. TSOMOCOS, Said Business School, St Edmund Hall, University of Oxford
and Alexandros VARDOULAKIS, Federal Reserve System

Macroprudential capital tools: assessing their rationale and effectiveness
Laurent CLERC, Banque de France, Alexis DERVIZ, Czech National Bank,
Caterina MENDICINO, Banco de Portugal, Stéphane MOYEN, Deutsche Bundesbank,
Kalin NIKOLOV, Livio STRACCA, European Central Bank,
Javier SUAREZ, CEMFI, and Alexandros VAR DOULA KIS, Federal Reserve System

The housing market: the impact of macroprudential measures in France
Sanvi AVOUYI-DOVI, Rémy LECAT, Banque de France
and Claire LABONNE, Autorité de contrôle prudentiel et de résolution

Three criticisms of prudential banking regulations
Vivien LEVY-GARBOUA, Sciences Po and BNP Paribas
and Gérard MAAREK, EDHEC

Macroprudential policy and credit supply cycles
José‑Luis PEYDRÓ, Catalan Institution for Research and Advanced Studies, Universitat Pompeu Fabra

Interactions between monetary and macroprudential policies
Pamfili ANTIPA and Julien MATHERON, Banque de France

Banque de France’s financial stability report can be found on the CFS FSR page.

Financial Stability Reports from Japan, Korea, South Africa, Brazil, the Netherlands, and Iceland

The following financial stability reports were published and made available recently:

  • Central Bank of Iceland came out with volume 14 of its financial stability report.
  • De Nederlandsche Bank came out with its spring 2014 report.
  • Banco Central do Brasil came out with volume 13 of its report.
  • South African Reserve Bank released the March 2014 Financial Stability Review.
  • The Bank of Korea just came out with its financial stability report today. There is an English version of the executive summary currently. A full English translation will be uploaded shortly.
  • The Bank of Japan came out with the April 2014 Financial System Report. Below is the comprehensive assessment of the financial system from the Bank of Japan website:

    “Japan’s financial system as a whole has been maintaining stability.

    Judging from developments in financial markets and financial institutions’ behavior, there is no indication warning of financial imbalances such as excessively bullish expectations. The volatility of stock prices temporarily increased from the beginning of 2014, but volatility has generally been low in the Japanese government bond (JGB) and foreign exchange markets.

    Capital bases of financial institutions such as banks and shinkin banks have been adequate on the whole, and these institutions have sufficient funding liquidity. Thus, they generally have strong resilience against various economic and financial shocks, as they would maintain their capital adequacy ratios above regulatory levels even under stresses arising in scenarios involving a significant economic downturn and a substantial rise in interest rates. However, attention should be paid to the possibility that the impacts of an economic downturn and an interest rate rise spread to the financial system, depending on the speed and extent of the economic downturn and the rise in interest rates, as well as the factors behind them. Some financial institutions have relatively weak capital bases, and are behind the curve in improving asset quality following the Lehman shock. These institutions need to steadily strengthen their capital.

    Financial intermediation has operated more smoothly than it did at the time of the previous Report.

    Financial institutions have adopted more proactive lending attitudes at home and abroad, and some of them have increasingly taken on risks associated with securities investment, albeit to a small extent. Financial intermediation through financial markets has become prevalent. In these circumstances, financial conditions among firms and households have become more accommodative. Financial institutions’ loans have grown at a faster pace, particularly those to small and medium-sized firms, and these institutions have extended loans to a wider range of industries and regions.

    The recent economic recovery has had positive effects on the profits of financial institutions. The positive effects include an increase in profits related to stock investment, an increase in sales of stock investment trusts, and a decrease in credit costs. However, the core profitability of domestic business operations relating to deposits and loans has remained on a downtrend, mainly due to the continued narrowing of interest rate spreads on loans. Business conditions among regional financial institutions are particularly severe. The decline in core profitability does not immediately affect the stability or functioning of the overall financial system. Nonetheless, the declining trend in core profitability is a challenge that should be resolved because it may constrain financial institutions’ ability to absorb losses and take on risks in the medium to long term.”

  • Financial stability reports can be found here.

    Forecasting Bank Credit Ratings

    We recently added Forecasting Bank Credit Ratings by Periklis Gogas, Theophilos Papadimitriou and Anna Agrapetidou from the Department of Economics, Democritus University of Thrace, Komotini, Greece to our policy library. The study was recently published in The Journal of Risk Finance (Volume 15, Issue 2, pp 195-209). Below is the abstract:

    Purpose – This study aims to present an empirical model designed to forecast bank credit ratings using only quantitative and publicly available information from their financial statements. For this reason, the authors use the long-term ratings provided by Fitch in 2012. The sample consists of 92 US banks and publicly available information in annual frequency from their financial statements from 2008 to 2011.

    Design/methodology/approach – First, in the effort to select the most informative regressors from a long list of financial variables and ratios, the authors use stepwise least squares and select several alternative sets of variables. Then, these sets of variables are used in an ordered probit regression setting to forecast the long-term credit ratings.

    Findings – Under this scheme, the forecasting accuracy of the best model reaches 83.70 percent when nine explanatory variables are used.

    Originality/value – The results indicate that bank credit ratings largely rely on historical data making them respond sluggishly and after any financial problems are already known to the public.

    Australian, Hong Kong, and Malaysian Financial Stability Reports Released

    The Reserve Bank of Australia, Hong Kong Monetary Authority, and Bank Negara Malaysia recently released financial stability reports. See:

  • Reserve Bank of Australia Financial Stability Review
  • Hong Kong Monetary Authority March 2014 Half-Yearly Monetary and Financial Stability Report.
  • Bank Negara Malaysia 2013 Financial Stability and Payment Systems Report
  • For more on financial stability, including country reports, work from regulatory bodies, and studies from the IMF and BIS, see here.

    Don’t Regulate Asset Managers As If They Were Banks

    CFS Advisory Board Member Randal Quarles co-authored a letter with past SEC Chairmen, FDIC Chairmen, CFTC Commissioners, and SEC Commissioners encouraging thoughtful discussion and consideration of alternatives with regards to regulating asset managers. The letter was printed in The Wall Street Journal and is a response to a recent report titled “Asset Management and Financial Stability” that was put forth by the Office of Financial Research.

    See: Randal Quarles’ Letter to the WSJ Titled “Don’t Regulate Asset Managers as If They Were Banks”

    Studies Referenced in the Letter
    See: Office of Financial Research Study
    See: General Accountability Office Report

    CFS Comments
    See: Steven Lofchie’s Assessment of the OFR Study

    Divisia Money Measures, Milton Friedman, the UK Recovery, and NGDP Correlation

    There have been some very interesting, recent blog posts to which I would like to draw your attention. Of particular note, they use our own CFS Director Bill Barnett’s Divisia money measures. Also referenced in two of the blog posts is a post by Duncan Brown correlating UK Divisia money growth and NGDP growth.

    For Lars Christensen’s post on the UK economy citing a recovery:

    For JP Koning’s post on Divisia measures, Milton Friedman, and Anna Schwartz:

    For an indicator of UK current economic conditions from “the Britmouse:”

    For Duncan Brown’s post correlating UK Divisia money growth and NGDP growth:

    CFS Congratulates Dr. Bill Barnett, Recipient of the Higuchi-KU Endowment Research Achievement Award

    The Higuchi-KU Endowment Research Awards recognize the exceptional long-term research accomplishments of faculty at Kansas Board of Regents universities. CFS Director William A. Barnett was one of four recipients to be awarded the state’s most prestigious recognition for scholarly excellence.

    This year’s recipients of Higuchi-KU Endowment Research Achievement Awards:

    Balfour Jeffrey Award in Humanities and Social Sciences

    William Barnett is the world’s leading figure in the study of methods for the accurate measurement of monetary and financial aggregates, an essential component of monetary policy by the world’s central banks. Barnett came to KU in 2002 from Washington University in St. Louis, and he was previously the Stuart Professor of Economics at the University of Texas at Austin. His academic background includes a Bachelor of Science from M.I.T., an MBA from the University of California, Berkeley, and a Master of Arts and doctorate from Carnegie Mellon University.

    Dolph Simons Award in Biomedical Sciences

    William Groutas is internationally known for his work combating such diseases as West Nile virus, Dengue virus, norovirus and chronic obstructive pulmonary disease. He came to Wichita State as an assistant professor in 1980 from the University of Wisconsin-Eau Claire. Groutas became a professor in 1987 and was named a distinguished professor in 1991. His academic background includes a Bachelor of Science and diploma in education from the American University of Beirut in Lebanon and a doctorate from the University of Kentucky. He served as a postdoctoral fellow at Cornell University.

    Olin Petefish Award in Basic Science

    Siyuan Han is one of the world’s leading researchers in quantum computing, especially the development of superconducting devices. Practical quantum computing based on qubits (quantum bits) is in its infancy but will increase computing speed tremendously, enabling scientists to solve certain extremely hard problems. Han came to KU as an associate professor in 1997 from Stony Brook University and became a professor in 2003. His academic background includes a Bachelor of Science degree from the University of Science and Technology of China and a doctorate from Iowa State University.

    Irvin Youngberg Award for Applied Sciences

    Mary Beth Kirkham is an international authority on the plant-water relations of winter wheat and the uptake of heavy metals by crops grown on polluted soil. She was the first to document the effects of elevated levels of carbon dioxide on crops grown under semi-arid conditions. Kirkham came to Kansas State in 1980 following faculty appointments at Oklahoma State University and the University of Massachusetts Amherst. Her academic background includes a Bachelor of Arts from Wellesley College and master’s and doctoral degrees from the University of Wisconsin-Madison.

    The full announcement can be found here.