The Act is a wide-ranging set of financial reforms that make the largest change in financial regulation in decades. Among the most contentious provisions in the bill is the creation of the Bureau of Consumer Financial Protection (BCFP). The BCFP will consolidate consumer protection powers from a variety of agencies and will gain rulemaking and enforcement authority. This note will discuss key provisions of Dodd-Frank that pertain to the consumer finance industry.

Among the most important provisions of the Act is the consolidation of consumer regulatory authority in a single agency that has both rulemaking and enforcement authority. This will enable the BCFP to highlight potential consumer issues, issue new rules, and enforce them with minimal complication. The newly streamlined process will likely mean stricter rules on disclosure for retail financial products, including disclosures on product design and a greater chance of regulatory action.

We document and seek to explain the fact that traders that transact with each other in this market have highly correlated returns. While traditional least squares regressions explain less than 1% of the variation in trader-level returns, using the network pattern of trades, our regressions explain more than 70% of the variation in returns. Our approach includes a simple representation of how much a shock is amplified by the network and how widely it is transmitted. It provides a possible short-hand for understanding the consequences of a fat-finger trade, a withdrawing of liquidity, or other market shock. In the S&P 500 and DOW futures markets, we find that shocks can be amplified more than 50 times their original size and spread far across the network. We interpret the link between network patterns and returns as reflecting differences in trading strategies. In the absence of direct knowledge of traders’ particular strategies, the network pattern of trades captures the relationships between behavior in the market and returns. We exploit these methods to conduct a policy experiment on the impact of trading limits.

Our approach is a formal model that provides an intellectual combination of the two by looking at how shocks propagate through a network of interconnected banks. Transmission in our model is not based on default. Instead, we provide a simple microfoundation of banks’ profitability based on classic competition incentives. As competitors lending quantities change, both for closely connected ones and the whole market, banks adjust their own lending decisions as a result, generating a ‘transmission’ of shocks through the system. We provide a unique equilibrium characterization of a static model, and embed this model into a full dynamic model of network formation with n agents. Because we have an explicit characterization of equilibrium behavior, we have a tractable way to bring the model to the data. Indeed, our measures of systemic risk capture the propagation of shocks in a wide variety of contexts; that is, it can explain the pattern of behavior both in good times as well as in crisis.

An FDIC liquidation is analogous to a Chapter 7 bankruptcy and a private-sector reorganization is analogous to a Chapter 11 bankruptcy. Our findings show that private-sector reorganizations do not deliver the expected cost-savings prior to the passage of FDICIA in 1991, a period of industry distress. We obtain this result when we control for the selection bias that arises from the resolution process. In contrast, during the post-FDICIA period, we observe that private-sector reorganizations yield significant cost savings over FDIC liquidations. We also find that the direct costs are lower for private-sector reorganizations over the sample period. When compared to nonfinancial bankruptcy costs, FDIC resolution methods appear to be less costly than Chapter 7 and Chapter 11 bankruptcies.

The rise in spreads attracted attention because it could signal a disruption in financial markets, which has been widely linked to an increased burden on non-financial firms. This paper disentangles the relative contributions of credit and liquidity risk in explaining the widening of commercial paper spreads. In doing so, we find that liquidity risk was isolated to the financial sector throughout the first two major shocks to the system (August 2007 and March 2008). Indeed, controlling for credit risk, non-financial corporations saw little or no change in the cost of funding during this time period. After the bankruptcy of Lehman Brothers, for the first time, liquidity problems in the commercial paper market spilled out of the financial sector into the spreads of low credit quality non-financial firms. This effect had a disproportionately larger impact on those low credit-quality non-financial firms that placed paper exclusively through financial sector dealers. High credit quality firms remained unaffected throughout. Our interpretation of the results is that markets were able to differentiate not only between safe and imperiled firms in the midst of the crisis, but also to isolate where liquidity effects were most likely to be salient.

We find that higher pay-for-performance sensitivity (PPS) leads to value-enhancing acquisitions. Banks whose CEOs have higher PPS have significantly better abnormal stock returns around the acquisition announcements. On average, acquirers in the High-PPS group outperform their counterparts in the Low-PPS group by 1:4% in a three-day window around the announcement. Ex ante, higher PPS helps to prevent value-destroying acquisitions, while at the same time promote value-enhancing acquisitions. The positive market reaction can be rationalized by post-merger performance. Following acquisitions, banks with higher PPS experience greater improvement in their operating performance.

Both sets of changes are at odds with an anti-inflationary stance of monetary policy; indeed, as the crisis began in August 2007 inflation expectations were high and rising, particularly in the United States. We have two additions to the literature. One, we present a model economy with a leveraged and regulated financial sector. Two, we find optimal Taylor rules for our economy that are consistent with a strong pro-inflationary reaction during financial crisis while maintaining a standard output-inflation mandate. We have three interpretations of our results. One, because the Federal Reserve has partial control over bank regulation it can exercise regulatory lenience. Two, the Fed’s stronger output orientation means that it will potentially respond more quickly when faced with constrained banks. Three, our results support procyclical capital regulation.

Our findings show that private-sector resolutions do not deliver the expected cost-savings prior to the passage of the Federal Deposit Insurance Corporation Improvement Act (FDICIA) of 1991. We obtain this result when we control for the selection bias that arises from the resolution process. In contrast, during the post- FDICIA period, we observe that private-sector resolutions yield significant cost savings over FDIC liquidations. We also find that the direct costs are lower for private-sector resolutions over the sample period. We derive these results from a sample that spans all failures between 1986 and 2007.

While the popular press and some recent literature have suggested that this choice may emerge from steep declines in housing prices, we find evidence that individual-level liquidity concerns are more important in this decision. That is, choosing credit cards over housing suggests a precautionary liquidity preference. By linking the mortgage delinquency decisions to individual-level credit conditions, we are able to assess the compound impact of reductions in housing prices and retrenchment in the credit markets. Indeed, we find the availability of cash-equivalent credit to be a key component of the delinquency decision. We find that a one standard deviation reduction in available credit elicits a change in the predicted probability of mortgage delinquency that is similar in both direction and nearly double in magnitude to a one standard deviation reduction in housing price changes (the values are -25% and -13% respectively). Our findings are consistent with consumer finance literature that finds individuals have a preference for preserving liquidity - even at significant cost.

Using data from one of the largest credit bureaus in the US, this paper makes three contributions. First, we show that individuals who file for bankruptcy are indeed penalized with limited credit access post bankruptcy, but we find that this consequence is very short lived. Ninety percent of individuals have access to some sort of credit within the 18 months after filing for bankruptcy, and 75% are given unsecured credit. Second, we show that those individuals who have the easiest access to credit after bankruptcy tend to be the ones who have shown previously the least ability and least propensity to repay their debt. In fact, a significant fraction of individuals at the bottom of the credit quality spectrum seem to receive more credit after filing. We interpret the widespread post-bankruptcy credit access and the differential credit provision across borrower types as evidence that lenders target riskier borrowers. Employing a simple theoretical framework we show that this interpretation is consistent with a profit maximizing lender whose optimal strategy involves segmenting borrowers by observable credit quality and bankruptcy status. This interpretation is also in line with survey evidence that shows lenders repeatedly solicit debtors to borrow after bankruptcy, especially with offers of revolving credit. Finally, we show that our findings depend heavily on the aggregate credit environment: the ease of credit and limited bankruptcy credit cost observed in the initial period of our data (2003-2004) become much less significant when we repeat the analyses in 2007, as the recent credit downturn began.

They examine four common claims about the impact of financial sector phenomena on the economy and conclude that all four claims are myths. We argue that to evaluate these popular claims, one needs to look at the underlying composition of financial aggregates. Our findings show that most of the commonly argued facts are indeed supported by disaggregated data.

Such a premium system naturally exceeds the actuarily fair value and leads to a growth in the insurance fund over time. The proposed system builds in a swap in premia that reduces premia when fund size exceeds a threshold. In addition, we build in a swap contract that trades premia in good times for relief in bad times.