Table of Contents

Parsing the Content of Bank Supervision

Paul Goldsmith-Pinkham, Federal Reserve Banks - Federal Reserve Bank of New York
Beverly Hirtle, Federal Reserve Bank of New York - Banking Studies Department
David O. Lucca, Federal Reserve Banks - Federal Reserve Bank of New York

High School Financial Literacy Mandate Could Boost Texans' Economic Well-Being

Camden Cornwell, Federal Reserve Banks - Federal Reserve Bank of Dallas
Anthony Murphy, Federal Reserve Banks - Federal Reserve Bank of Dallas

The Effect of Required Minimum Distribution Rules on Withdrawals from Traditional Individual Retirement Accounts

Jacob A. Mortenson, Georgetown University - Department of Economics, Joint Committee on Taxation, US Congress
Heidi R. Schramm, Joint Committee on Taxation, U.S. Congress
Andrew Whitten, Georgetown University - Department of Economics, Joint Committee on Taxation, US Congress

Banking Consolidation and Small Firm Financing for Research and Development

Andrew C. Chang, Board of Governors of the Federal Reserve System

Regulation of Financial Innovation Stability vs. Progress?

Daniel Blochinger, Ulm University - Institute of Economics

Financial Advisors, Financial Ecologies and the Variegated Financialisation of Everyday Investors

Karen P. Y. Lai, National University of Singapore (NUS) - Department of Geography


REGULATION OF FINANCIAL INSTITUTIONS eJOURNAL

"Parsing the Content of Bank Supervision" Free Download
FRB of NY Staff Report No. 770

PAUL GOLDSMITH-PINKHAM, Federal Reserve Banks - Federal Reserve Bank of New York
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BEVERLY HIRTLE, Federal Reserve Bank of New York - Banking Studies Department
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DAVID O. LUCCA, Federal Reserve Banks - Federal Reserve Bank of New York
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We measure bank supervision using the database of supervisory issues, known as matters requiring attention or immediate attention, raised by Federal Reserve examiners to banking organizations. The volume of supervisory issues increases with banks’ asset size, especially for the largest and most complex banks, and decreases with profitability and the quality of the loan portfolio. Stressed banks are faster at resolving issues, but all else equal, resolving new issues takes longer the more issues a bank faces, which may suggest capacity constraints in addressing multiple supervisory issues. Using computational linguistic methods on the text of the issue description, we define five categorical issue topics. The subset of issues related to capital levels and loan portfolio are the most consequential in terms of regulatory rating downgrades and are directly related to changes in banks’ balance sheet characteristics and profitability. Other issues appear to reflect soft information and are less correlated with bank observables. By categorizing questions asked by analysts at banks’ quarterly earnings calls using the same linguistic approach, we find that market monitors raise issues similar to those of supervisors when the issues are related to hard information (such as loan quality or capital) and public supervisory assessment programs.

"High School Financial Literacy Mandate Could Boost Texans' Economic Well-Being" Free Download
Southwest Economy, Issue Q1, pp. 10-13, 2016

CAMDEN CORNWELL, Federal Reserve Banks - Federal Reserve Bank of Dallas
ANTHONY MURPHY, Federal Reserve Banks - Federal Reserve Bank of Dallas
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National surveys suggest Texans have a relatively low level of financial literacy that can adversely affect decision-making. Since state lawmakers mandated high school financial coursework in 2007, consumer credit measures of young Texas adults have improved.

"The Effect of Required Minimum Distribution Rules on Withdrawals from Traditional Individual Retirement Accounts" Free Download

JACOB A. MORTENSON, Georgetown University - Department of Economics, Joint Committee on Taxation, US Congress
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HEIDI R. SCHRAMM, Joint Committee on Taxation, U.S. Congress
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ANDREW WHITTEN, Georgetown University - Department of Economics, Joint Committee on Taxation, US Congress
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Traditional Individual Retirement Accounts (IRAs) are a substantial source of retirement savings for current retirees. In 2013, individuals age 60 or older held $3.8 trillion in wealth in IRAs. Under current law, some fraction of these funds must be withdrawn each year beginning the year one turns 70.5 years of age, with the required fraction increasing in age. We study the effects of these Required Minimum Distribution (RMD) rules on the decumulation behavior of retirees using a 16-year panel of administrative tax data. Our data consist of a 5% random sample of individuals age 60 and older from 1999 to 2014, with approximately 2.6 million individuals per year. This period encompasses a unique policy change that we exploit for identification: a one-year suspension of the RMD rules in 2009. Though the RMD rules are modest -- leaving one third of the original balance intact by age 90 even if investments generate zero returns -- our empirical analysis shows they have large effects on individual behavior. Using a semiparametric technique developed by DiNardo et al. (1996), we estimate the counterfactual density of IRA distributions in 2009 that would have prevailed if the rules had not been suspended. We estimate that at least 41% of the individuals subject to the RMD rules would take an IRA distribution less than their required minimum if they were unconstrained. In addition, we document an extensive margin effect among individuals newly subject to the rules, and provide suggestive evidence of optimization frictions in retirees' financial decisions.

"Banking Consolidation and Small Firm Financing for Research and Development" Free Download
FEDS Working Paper No. 2016-029

ANDREW C. CHANG, Board of Governors of the Federal Reserve System
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This paper examines the effect of increased market concentration of the banking industry caused by the Riegle-Neal Interstate Banking and Branching Efficiency Act (IBBEA) on the availability of finance for small firms engaged in research and development (R&D). I measure the financing decisions of these small firms using a balanced panel of Small Business Innovation Research (SBIR) applications. Using difference-in-differences, I find IBBEA decreased the supply of finance for small R&D firms. This effect is larger for late adopters of IBBEA, which tended to be states with stronger small banking sectors pre-IBBEA.

"Regulation of Financial Innovation Stability vs. Progress?" Free Download

DANIEL BLOCHINGER, Ulm University - Institute of Economics
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This paper analyzes the impact of financial regulation on the process of financial innovation. We use a discrete investment choice model to examine the potential trade-off between a more innovative and a more stable financial system, which regulators might face when intervening in the process of financial innovation. While the trade-off holds in a simple setting, it can break when inefficiencies are added into the model. We find clumping behavior and preemptive moves as two examples of inefficiencies that break the trade-off. Regulators can combat those inefficiencies and thereby improve both innovativeness and stability at the same time.

"Financial Advisors, Financial Ecologies and the Variegated Financialisation of Everyday Investors" Free Download
Lai, Karen P.Y. (2016) ‘Financial advisors, financial ecologies and the variegated financialisation of everyday investors’, Transactions of the Institute of British Geographers, Vol. 41, No. 1, pp. 27-40

KAREN P. Y. LAI, National University of Singapore (NUS) - Department of Geography
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While recent work on financialisation of everyday life has elucidated the reshaping of everyday consumers as risk-taking investors, the role of financial advisors (FAs) has been overlooked even though they are key intermediaries in articulating households and individuals into circuits of global finance. Through a financial ecologies approach, this paper focuses on FAs to reveal the ambiguities and inconsistencies inherent in their professional practice as varied modes of corporate management and organisational practices lead to differentiated encounters that shape the financial knowledge and investment decisions of clients. Empirical analysis is based on industry reports, regulatory documents, personal interviews and ethnographic fieldwork at professional training and networking events. The findings demonstrate how professional intermediaries like FAs are vital in explaining the shifting and uneven configuration of investor subjects. A critical analysis of FAs reveals how the decision-making process and investment practices of consumers are fraught with knowledge asymmetries and embedded in distinctive financial ecologies with variegated outcomes. The ecologies concept also offers greater topological finesse in explaining the resilience or fragility of relational formations, the entanglement of diverse elements and motivations in the variegated formation of investor subjects, and the operation of constitutive ecologies within the financial system.

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This eJournal distributes working and accepted paper abstracts covering regulatory and legal aspects of national and international financial institutions. The eJournal welcomes research that deals with legal aspects of depository institutions including banks, credit unions, trust companies, and mortgage loan companies. Topics also include regulation of insurance companies, brokers, underwriters, and investment funds.

Editors: G. William Schwert, University of Rochester, and Rene M. Stulz, Ohio State University (OSU)

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BANKING & FINANCIAL INSTITUTIONS EJOURNALS

MICHAEL C. JENSEN
Social Science Electronic Publishing (SSEP), Inc., Harvard Business School, National Bureau of Economic Research (NBER), European Corporate Governance Institute (ECGI)
Email: michael_jensen@ssrn.com

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Advisory Board

Regulation of Financial Institutions eJournal

EDWARD I. ALTMAN
Senior Advisor, Credit and Debt Markets Research Program, New York University (NYU) - Salomon Center, Max L. Heine Emeritus Professor of Finance, New York University (NYU) - Department of Finance

DENNIS R. CAPOZZA
Professor Emeritus, Ross School of Business, University of Michigan

DONALD CHEW
Morgan Stanley Investment Management

J. DAVID CUMMINS
Joseph E. Boettner Professor, Temple University - Risk Management & Insurance & Actuarial Science

DOUGLAS W. DIAMOND
Merton H. Miller Distinguished Service Professor of Finance, University of Chicago - Booth School of Business, National Bureau of Economic Research (NBER)

EUGENE F. FAMA
Robert R. McCormick Distinguished Service Professor of Finance, University of Chicago - Finance

STEPHEN FIGLEWSKI
Professor of Finance, New York University - Stern School of Business

STUART I. GREENBAUM
Bank of America Professor of Managerial Leadership, Washington University in St. Louis - Olin Business School

MICHAEL C. JENSEN
Co-Founder, Chairman, Managing Director and Integrity Officer, Social Science Electronic Publishing (SSEP), Inc., Jesse Isidor Straus Professor of Business Administration, Emeritus, Harvard Business School, Research Associate, National Bureau of Economic Research (NBER), Fellow, European Corporate Governance Institute (ECGI)

JONATHAN M. KARPOFF
Washington Mutual Endowed Chair in Innovation Professor of Finance, University of Washington - Michael G. Foster School of Business

KENNETH LEHN
Professor of Business Administration, University of Pittsburgh - Finance Group

STANLEY R. PLISKA
University of Illinois at Chicago - Department of Finance

CHARLES I. PLOSSER
President, Federal Reserve Bank of Philadelphia, National Bureau of Economic Research (NBER)

KATHERINE SCHIPPER
Duke University - Fuqua School of Business

ALAN SCHWARTZ
Sterling Professor of Law, Yale Law School

G. WILLIAM SCHWERT
Distinguished University Professor of Finance and Statistics, University of Rochester - Simon Business School, National Bureau of Economic Research (NBER)

RENE M. STULZ
Everett D. Reese Chair of Banking and Monetary Economics, Ohio State University (OSU) - Department of Finance, National Bureau of Economic Research (NBER), Fellow, European Corporate Governance Institute (ECGI)

ROSS L. WATTS
Erwin H. Schell Professor of Management, Massachusetts Institute of Technology (MIT) - Sloan School of Management