Financial institutions

Financial institutions, flood insurance, etc.

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Institutional differences among nonbank financial institutions affected their participation in the Fed’s asset-backed securities lending facility (TALF) during the 2008 and 2020 crises, find the Chicago Fed’s Ralf Meisenzahl and Karen Pence of the Federal Reserve. The facility offered loans to investors in certain asset-backed securities to support lending to households and businesses. Using loan-level data, the authors find that the behavior of nonbank participants—and their willingness to support program goals—differed across institutional structures and incentives. They show that participants with more flexible investment parameters (e.g., hedge funds, insurance companies, and pension funds) participated in the program early. They find that when private market conditions subsequently stabilized, more “opportunistic” investors seeking short-term gains – including TALF-only investment vehicles – were more likely to exit the program. Some types of investors, such as hedge funds and real estate investment trusts, attempted to transfer risk to the government by submitting riskier collateral once market conditions normalized and they became less dependent funding from TALF. The authors conclude that allowing a wide range of investors to participate can benefit programs with multiple objectives, but the consequences of programs targeting non-banks can be difficult to predict.

Homeowners in flood prone areas are not legally required to carry federal flood insurance. However, homes in flood-prone areas designated by the Federal Emergency Management Agency are required to obtain and maintain insurance to be eligible for federal disaster relief and federal mortgage underwriting. Kristian S. Blickle and João AC Santos of the New York Fed find that, as a result, the probability of mortgage approval is lower in flood-prone areas, and those chances are even lower for low-risk borrowers. income and borrowers with lower credit scores. Banks may suspect that low-income, low-credit borrowers are unable to afford the extra cost of flood insurance, they say. Furthermore, they find that banks that do not have a local branch or ties to the region are less likely to approve mortgages in flood-prone areas, suggesting that non-local banks are unable or unwilling to monitor borrower compliance with flood insurance requirements. The authors conclude that compulsory insurance, although intended to share risk, limits access to credit for low-income borrowers.

National and local policies increasingly restrict employers’ access to the criminal records of job applicants. However, these policies do not address the underlying reasons why employers conduct criminal background checks. Zoe B. Cullen and Will S. Dobbie of Harvard and Mitchell Hoffman of the University of Toronto conduct a field experiment in which they ask nearly 1,000 American companies if they would offer employment to workers with criminal records. depending on availability and salary level. grants, crime and security insurance, past performance reviews and a more limited review of criminal records. They find that 39% of companies would be willing to hire workers with criminal records without additional incentives. This level of demand without incentives increases to about 45% for jobs that don’t involve customer interactions and 51% for jobs that don’t involve high-value inventory. The share of companies willing to hire such workers increases to 50% or more when companies are offered a modest level of crime and security assurance, a single performance review, or the most recent criminal record check. The authors conclude that policy makers can influence the demand for workers with criminal backgrounds by “directly addressing the underlying reasons why employers choose to conduct background checks, rather than simply prohibiting or delaying questions about the arrest and criminal record of job applicants during the hiring process”.

The IMF expects inflation to persist

Chart reproduced with the kind permission of the IMF

“There is a growing risk that inflation expectations will drift away from the central bank’s inflation targets, prompting a more aggressive tightening response from policymakers. In addition, increases in food and fuel prices may also greatly increase the prospect of social unrest in poorer countries. Immediately after the invasion, financial conditions tightened for emerging markets and developing countries. So far, this price revision has been mainly ordered Yet several risks of financial fragility remain, raising the prospect of a sharp tightening of global financial conditions as well as capital outflows,” says Pierre-Olivier Gourinchas, Economic Advisor and Research Director at the International Monetary Fund.

“Fiscally, policy space was already being eroded in many countries by the pandemic. The withdrawal of extraordinary budget support was to continue. Soaring commodity prices and rising global interest rates will further reduce fiscal space, especially for oil- and food-importing emerging markets and developing economies. The war also increases the risk of a more permanent fragmentation of the global economy into geopolitical blocs with distinct technological standards, cross-border payment systems and reserve currencies. Such a tectonic shift would lead to long-term efficiency losses, increase volatility, and pose a major challenge to the rules-based framework that has governed international and economic relations for the past 75 years.

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