Raheem Kassam’s Anti-Semitic Claim that Jews Funding Cadwalladr’s Investigation of ‘Leave’ Campaign

After the anti-Semitism lies and smears against the Labour party and decent, anti-racist people like Mike, Tony Greenstein, Jackie Walker, Martin Odoni and so many, many others, here’s what looks very much like the real thing. Yesterday Mike put up a piece about a smear made on Patreon by Raheem Kassam against the journalist Carole Cadwalladr. Kassam’s a staunch supporter of Brexit, but many of the ‘Leave’ organisations are now being investigated for breaches of electoral law and funding irregularities. Much of this is the result of Cadwalladr’s investigations into these bodies. Kassam couldn’t tolerate this, and so issued a Tweet claiming that because Cadwalladr’s investigations were published on the Open Democracy website, which is partly funded by George Soros and his Open Society Foundation, she’s being backed by ‘Globalist shills’. Mike explains that this is apparently an anti-Semitic dog-whistle.

Kassam stated

“Cadwalladr has attempted to cover such tracks by issuing a series of tweets alleging that any critique of the billionaire, fund manager Soros is ‘racist’ against Jews. This is despite Soros’s rejection of his Jewish identity, and in spite of the fact that he has openly admitted to assisting in the confiscation of Jewish property during the Holocaust”.

The Liberal Jewish organization, Zelo Street, responded by issuing a firm refutation of Kassam’s claims.

“George Soros did not assist in confiscation of Jewish property” – and this certainly seems unlikely as he would have been only 15 at the end of World War II. “And whether he “rejects his Jewish identity” is irrelevant. Calling “Soros” is code for “the Jews”. Like gratuitously pitching terms like “globalists”, “global bankers”, and “Goldman Sachs”.”

Mike in his article wonders if the Leave response to these breaches of electoral law is simply anti-Semitism, and asks if many Leave supporters will disassociate from Kassam, or whether they will simply double down and renew their calls for Remainers to get over it.


I really don’t think there can be much doubt that Kassam’s tweet was full of coded anti-Semitic terms. The American Right, and particularly Fundamentalist Evangelical Christians, have been afraid of the creation of a ‘One World’ dictatorial state for a very long time. In modern Millennialist Christian theology, this will be the beginnings of the End Times, with the Anti-Christ as the dictator of this new global state. Which will, of course, begin the persecution of Christians. See the ‘Left Behind’ series of Christian novels by Tim LaHaye. I don’t doubt that most of the people, who hold these views aren’t anti-Semites. But it can shade into the real anti-Semitic conspiracy theories about the Jews secretly running the world, manipulating capitalism and Communism to enslave gentiles and destroy the White race through immigration and racial intermixing. The literature for this conspiracy theory sees the United Nations as the seed from which the One World dictatorship will develop, as well as the Trilateral Commission in the US and the Bilderberg group. The last is a regular meeting of major political and business figures from around the world, and is the centre of much conspiracist speculation.

The literature also discusses the major roles of the Jewish financiers in the creation of these bodies, through the Rothschild banking family and Bernard Baruch. Some of this literature will try to distance itself from overt anti-Semitism by drawing a distinction between ‘good’ and ‘bad’ Jews. The good Jews are the millions of ordinary Jewish peeps not involved in the conspiracy, and who may themselves be the victims of it. The material taking this line will point out that Rothschilds continuing giving credit and financing the Nazi regime even when it began openly persecuting the Jews. The bad Jews are, of course, Rothschilds and the other immensely wealth Jewish banking families. These last are described as ‘Zionists’, but the term isn’t used according to its normal meaning. When the people promoting this conspiracy talk about ‘Zionists’, they really mean the Jewish global banking conspiracy. They definitely don’t mean in its proper sense of supporters of the state of Israel. Hence the Nazis and anti-Semites in America refer to their government as ZOG, or Zionist Occupation Government.

George Soros has now entered the demonology of paranoid anti-Semites because he is an immensely wealthy Jewish financier, who funds a variety of groups promoting human rights, democracy and liberal society, as well as being on opponent of Brexit. Thus, he’s been bitterly attacked and vilified by Viktor Orban and his far-right Fidesz party, which now forms the Hungarian government. At the same time, the real Zionists and Netanyahu’s government in Israel despise him because Soros is an anti-Zionist. He’s despised the Zionist movement because of the way they made deals, under the leadership of Kasztner, with the Nazis to allow the deportation of many Jewish Hungarians on the condition that a certain number should be allowed to emigrate to Israel.

Tony Greenstein has today put up a piece about how George Soros thus provides a unifying connection between modern Nazis and anti-Semites, and Netanyahu and the Israel lobby. He also reproduces with his own article a couple of pieces from other journalists, which support his point. One is by Dove Kent of Jewish Currents, and Adele M. Stan of the American Prospect. These articles are also worth reading, as they show very clearly how Trump is using dog-whistle anti-Semitic codewords to weaken the Left. The women protesting against Judge Kavanaugh, who has been accused of sexual assault but is nevertheless trying to become a member of the Supreme Court, are accused of being funded by Soros. As is the Black Lives Matter movement and Trans Rights campaigners. Anti-Semitic tropes were also used to attack the Left during McCarthyism, and were particularly effective because Jews were over-represented in Communist and Left-wing groups. Greenstein in his piece also describes how Netanyahu and the Israeli lobby have also deployed anti-Semitic stereotypes and rhetoric to demonise Soros.

Greenstein also describes how right-wing broadcaster and polemicist, Glenn Beck has also attacked Soros using the rhetoric and ideology of anti-Semitic conspiracy theory. He described Soros as a ‘puppetmaster’, a Jewish financier with no ties to any country – which conforms to the anti-Semitic stereotype of Jews as ‘rootless cosmopolitan’ in Nazi ideology – who wanted to create a ‘one world government’. He also claimed that Soros came from an anti-Semitic family, and participated in the Holocaust against the Jews when he was 14. Beck isn’t a peripheral figure. He’s been a fixture of the American right-wing broadcasting scene for decades. But he is bonkers. Many of his broadcasts and talks are simply rants in which he predicts that America will suffer some kind of totalitarian Nazi-Communist-Socialist-Atheist dictatorship, and that ‘They’ will come for him. And his performance, already bizarre, often ends with him in tears. The online humour magazine, Cracked, a few years ago, covered one of his talks in California, which hilariously described how nonsensical and mad it all was. Apparently it feature someone in pseudo-Nazi costume representing tyranny, while a woman dressed as the Statue of Liberty represented freedom. Oh yes, and I think there was someone who was supposed to represent anarchy as well.


This is the paranoid, anti-Semitic worldview that is deliberately evoked by the attacks on Soros, although I don’t doubt that many of those, who are taken in by it probably aren’t anti-Semites and don’t realise the very definite anti-Semitic background behind it.

As for Raheem Kassam, if I recall correctly he’s another member of Breitbart, who also promotes Islamophobia. I also seem to remember that a few years ago he was also connected to UKIP and perhaps some other extreme right-wing parties in Britain.

Which also shows what a number of anti-racist campaigners have pointed out: the racism may start out by attacking other groups, like Muslims and Blacks, but ultimately it returns to the Jews.

Book on How to Resist and Campaign for Change

Matthew Bolton, How To Resist: Turn Protest to Power (London: Bloomsbury 2017)

About this time last week, hundreds of thousands of people were out on the streets marching to demand a second referendum on Brexit. It was the biggest demonstration since 2 million or so people marched against Blair’s invasion of Iraq. And as Mike commented in his blog post about it, as likely to do as much good. Blair and his corrupt gang ignored the manifest will of the people, and went ahead anyway, determined to prosecute a war whose real reasons were western imperialism and multinational corporate greed. The march failed to stop the war and the chaos it caused is still ongoing. Just as last week’s march will also fail to prevent the Tories doing whatever they want.

It’s a disgusting situation, and this book is addressed to everyone who’s fed up with it. The author, Matthew Bolton, is an organizer with the campaigning group Citizens UK and their Living Wage campaign. And the book is addressed to people, who have been on the march, and are sick and tired of being ignored. Right at the very beginning of the book, he writes

This book is for people who are angry with the way things are and want to do something about it; for people who are frustrated with the system, or worried about the direction the country is going in. For people who are upset about a particular issue, or want a greater say in the changes happening in their neighbourhood. They’ve posted their opinions on social media and they’ve shouted at something they’ve seen on the news. They’ve been on the big march and they’ve been to the ballot box, but what more can be done? This is for people who want to make a change, but they’re not sure how. (p.1)

A few pages later he describes the dangers to democracy and the increasing sense of powerlessness people now feel when decisions are taken out of their hands by politicians.

What’s at stake here is more important than simply helping people who care about particular issues to run effective campaigns. It’s about democracy. In the past, people who wanted to make a difference, and believed in change fought for democracy with sweat, blood and courage. The Chartists, the Suffragettes and other endured prison and faced death in their struggle for the chance to have a say in the governance of the country. They organized and campaigned to force the ruling elites to open up our political system to influence by the majority of the people. It is a great misunderstanding to think that they were fighting for the chance to put a cross in a box once every few years. They were fighting – week in, week out – for power. Fighting for more people to have more influence.

Over time, we have become confused. Now we have the vote, we have mistaken politics for Parliament and have come to see democracy as something to watch on television or follow on Twitter, like spectators at a football game – or worse, to switch off from it completely, losing trust in politicians, losing trust in the media, losing trust in the system. Democracy doesn’t just mean ‘to vote’, it means people power. It means embedding political action into our day-to-day lives, in our communities and workplaces. It is a vision of a society where power is distributed amongst the people, not concentrated in the hands of the few. It’s not an end state, but a constant struggle for people to fight for a seat around the decision-making table.

But it doesn’t feel like we are at the table. It feels like we are on the menu. Power is being concentrated in the hands of an increasingly small circle of people. We have a revolving door of Cabinet ministers becoming bankers, becoming newspaper editors, becoming chief executives. We have been lulled into a false sense of security, thinking that our democratic system would create a better future for us all. But it doesn’t look that way. By lunchtime on the first Wednesday in January, after just two-and-a-half days’ work, FTSE 100 bosses will have earned more than the average person will earn that entire year. The generation now in their twenties will be the first in modern times to be worse off than their parents. What we want for ourselves and our children – a decent job, a home, a health service, a community – is under threat. (pp. 4-5).

He then discusses how the political terrain has shifted immensely recently, with people demanding change, giving as examples the vote to Leave in the Brexit referendum and the election of Jeremy Corbyn. But he also makes the point that you need a strategy and that winning campaigns are very well planned and organized. And he gives two examples: Rosa Parks and Abdul Durrant. While the action that sparked off the bus boycott that began the Civil Rights movement in earnest was presented as spontaneous in Dr. Who, in reality it was very carefully planned. The Montgomery chapter of the NAACP had been planning a boycott for a year before she refused to give up her seat. They had already tried this with three other Black passengers, but had failed to light the fuse of public indignation. This time, they found the right person with Rosa. Durrant was a leader in the East London Communities Organisation, part of Citizens UK, who worked nights as a cleaner in HSBC in Canary Wharf. He led a campaign to get better pay for workers like him, and then organized a media and mass protest to get it.

As for Bolton himself, he comes from a working/ middle class family. His father’s family were working class, his mother’s solidly middle class. He attended Cambridge university, but went to the state primary in his part of London. The local area was very rough, and his mother wanted him privately educated, and he was lucky enough to get a scholarship to a private school in Dulwich. He says that it was at this time that the stark difference between conditions in south London and the bubble of privilege in Dulwich began to grate on him. He was mugged twice in his neighbourhood, once at the point of a knife, punched several times in the face, and violently carjacked. After private secondary school, he went to sixth form at a state school that also had its fair share of problems. He describes how some of his friends from private school went on to work with a family friend in the City, which he describes as a conveyor belt to a decent university and a great career. Others had to avoid gang trouble on their way home, looked after their young siblings in the evening because their mother was working nights, scrimped and saved to pay the gas meter, and then tried to do their homework. He continues

It wasn’t just the unfairness that made me angry: it was the fact that as a society we say success is determined by how clever you are and how hard you work. If you fail, it’s your fault. That convenient lie made me angry then and it makes me angry now. (p. 21).

The book describes the strategy he has devised over years of campaigning to affect change. It starts off by identifying the issue you are particularly angry about – it could be anything – and identifying the people in authority who may be able to do something about it. He rejects the idea that powerlessness is somehow noble, and recommends instead that protestors concentrate on developing their power, as well as appealing to those that already have it to help them through their self-interest. The book also talks about the correct strategy to adopt in meetings and talks with those in authority and so on. It is all about mobilizing popular protest for peaceful change. After the introduction, pieces of which I’ve quoted above, it has the following chapters:

1. If You Want Change, You Need Power

2. Appreciating Self-Interest

3. Practical Tools to Build Power

4. Turning Problems Into Issues

5. The Action is in the Reaction

6. Practical Tools to Build a Campaign

7. Unusual Allies and Creative Tactics

8. Finding the Time.

9. The Iron Rule.

I’m afraid I didn’t finish reading the book, and have no experience of campaigning myself, so I can’t really judge how useful and applicable it is. But just reading it, it seems to be a very useful guide with sensible, badly needed advice for people wanting to mount effective campaigns on the issues that matter to them. And Bolton is absolutely right about the rising, obscene inequalities in our society and the crisis of democracy that has developed through the emergence of a corrupt, self-interest and interlinked media-political-banking complex.

Novara Media on Counterdemonstration against Islamophobic DFLA

Published by Anonymous (not verified) on Wed, 17/10/2018 - 6:23am in

This is a very short video from Novara media of the anti-racist counterdemonstration against the march through central London by the Democratic Football Lad’s Alliance, presented by Ash Sarkar. The DFLA claim that it’s just an organization of normal male football fans, but it’s really the usual collection of far-right football hooligans. They’ve appeared on demonstrations organized by the English Defence League, and it appears that this was another demonstration against Islam.

It looks like the DFLA were shouting once again about Muslim gangs raping White girls. Sarkar points out that the counterdemonstration was led by women and ‘non-binary people’ – meaning, presumably, LGBTQ, in order to take the issue out of their hands. The counterdemonstrators are shown holding a banner ‘No Rape, No Racism’, and chanting ‘White Supremacy is the enemy’. The Guardian’s Sarkar states that the DFLA aren’t really interested in rape as an issue; they’re only interested in attacking Islam. Owen Jones is also there marching, and states that Fascists have been emboldened all over the western world ever since the bankers plunged us into crisis, He predicts that there will be increasingly bigger Fascist demonstrations ahead and so it’s important to organize against them.

The video shows that the DFLA were making Fascist salutes, but also reports that despite abuse and threats of violence on social media, there were no significant injuries reported.

The Real News on Labour’s Plan For Nationalisation and Workplace Democracy

In this 15 minute video from the Baltimore-based The Real News network, host Aaron Mate talks to Leon Panitch, professor of political science at York University about the proposals announced at the Labour party’s conference last month that Labour intended to renationalize some of the privatized utilities, introduce profit-sharing schemes and workplace democracy in firms with over 250 members, in which 1/3 of the board would be elected by the workers.

The video includes a clip of John McDonnell announcing these policies, declaring that they are the greatest extension of economic democratic rights that this country has ever seen. He states that it starts in the workplace, and that it is undeniable that the balance of power is tipped against the worker. The result is long hours, low productivity, low pay and the insecurity of zero hours contracts. He goes on to say that Labour will redress this balance. They will honour the promise of the late Labour leader, John Smith, that workers will have full union rights from day one whether in full time, part time or temporary work. They will lift people out of poverty by setting a real living wage of ten pounds an hour.

McDonnell also says that they believe that workers, who create the wealth of a company, should share in its ownership and the returns that it makes. Employee ownership increases productivity and improves long-term decision making. Legislation will be passed, therefore, for large firms to transfer shares into an inclusive ownership fund. The shares will be held and managed collectively by the workers. The shareholders will give the workers the same rights as other shareholders to have a say over the direction of their company. And dividend payments will be made directly to the workers from the fund.

Commenting on these proposals, Panitch says that in some ways they’re not surprising. McDonnell stated that Labour would inherit a mess. But his remarks were different in that usually governments use the fact that they will inherit a mess not to go through with radical policies. Panitch then talks about Labour’s commitment to bring the public utilities – rail, water, electricity, the post office – public ownership, pointing out that these used to be publicly owned before Thatcher privatized them. McDonnell particularly focused on water, before going beyond it, citing the 1918 Labour party constitution’s Clause IV, which Blair had removed. This is the clause committing the Labour party to the common ownership of the means of production, distribution and exchange, under the best form of popular administration. And unlike previous nationalized industries, these will be as democratically-run as possible. Councils would be set up in the water sector made up of representatives of the local community and workers’ representatives to be a supervisory council over the managers in the nationalized water industry.

They then go to a clip of McDonnell talking about the nationalization of the utilities. McDonnell states that the renationalization of the utilities will be another extension of economic democracy. He states that this has proved its popularity in opinion poll after opinion poll. And it’s not surprising. Water privatization is a scandal. Water bills have risen by 40 per cent in real terms since privatization. 18 billion pounds has been paid out in dividends. Water companies receive more in tax credits than they pay in tax. And each day enough water to meet the needs of 20 million people is lost due to leaks. ‘With figures like that’, he concludes, ‘we cannot afford not to take it back into popular ownership’.

Mate and Panitch then move on to discussing the obstacles Labour could face in putting these policies into practice, most particularly from the City of London, which Panitch describes as ‘the Wall Street of Britain’, but goes on to say that in some ways its even more central to financialized global capitalism. However, Panitch says that ‘one gets the sense’ that the British and foreign bourgeoisie have resigned themselves to these industries being brought back into public ownership. And in so far as bonds will be issued to compensate for their nationalization, McDonnell has got the commitment from them to float and sell them. He therefore believes that there won’t be much opposition on this front, even from capital. He believes that there will be more resistance to Labour trying to get finance to move from investing in property to productive industry.

He then moves on to talk about Labour’s plans for ten per cent of the stock of firms employing 250 or more people to go into a common fund, the dividends from which would passed on to the workers up to 500 pounds a year. Anything above that would be paid to the treasury as a social fund for meeting the needs of British people and communities more generally. Panitch states that this has already produced a lot of squawking from the Confederation of British Industry. Going to giving workers a third of the seats on the boards, Panitch states that it has already been said that it will lead to a flight of capital out of Britain. He discusses how this proposal can be radical but also may not be. It could lead to the workers’ representatives on these boards making alliances with the managers which are narrow and particular to that firm. The workers get caught up in the competitiveness of that firm, it stock prices and so on. He makes the point that it’s hardly the same thing as the common ownership of the means of production to have workers’ sitting on the boards of private companies, or even from workers’ funds to be owning shares and getting dividends from them. Nevertheless, it is a step in the right direction of socializing the economy more generally, and giving workers the capacity and encouraging them to decide what can be produced, where it’s produced, and what can be invested. And if it really scares British and foreign capital, this raises the question of whether they will have to introduce capital controls. Ultimately, would they have to bring the capital sector into the public sphere as a public utility, as finance is literally the water that forms the basis of the economy?

Mate then asks him about Labour’s refusal to hold a second referendum on Brexit, which angered some activists at the conference. Labour said that any second referendum could only be about the terms of the exit. Panitch states that people wanting Britain to remain in a capitalist Europe try to spin this as the main priority of the party’s members, even Momentum. He states that this is not the case at all, and that if you asked most delegates at the conference, most Labour members and members of Momentum, which they would prefer, a socialist Britain or a capitalist Europe, they would prefer a socialist Britain. The people leading the Remain campaign on the other hand aren’t remotely interested in a socialist Britain, and think it’s romantic nonsense at best. He states that the Corbyn leadership has said that they want a general election as they could secure an arrangement with Europe that would be progressive without necessarily being in Europe. They would accept the single market and a progressive stand on immigration rather than a reactionary one. They did not wish to endorse a referendum, which the Tories would have the power to frame the question. And this is particularly because of the xenophobic and racist atmosphere one which the initial Brexit vote was based. Panitch states that he is a great critic of the European Union, but he would have voted to remain because the debate was being led by the xenophobic right. He ends by saying that capital is afraid of the Trumps of this world, and it is because of the mess the right has made of things here in Britain with the Brexit campaign that capital might give a little bit more space for a period at least to a Corbyn government.

This latter section on Brexit is now largely obsolete because Labour has said it will support a second referendum. However, it does a good job of explaining why many Labour supporters did vote for Brexit. The editor of Lobster, Robin Ramsay, is also extremely critical of the European Union because of the way neoliberalism and a concern for capital and privatization is so much a part of its constitution.

Otherwise, these are very, very strong policies, and if they are implemented, will be a very positive step to raising people out of poverty and improving the economy. Regarding the possibility that the representatives of the workers on the company boards would ally themselves with capital against the workers, who put them there, has long been recognized by scholars discussing the issue of workers’ control of industry. It was to stop this happening that the government of the former Yugoslavia insisted that regular elections should be held with limited periods of service so that the worker-directors would rotate. Ha-Joon Chan in his books criticizing neoliberal economics also makes the points that in countries like France and Germany, where the state owns a larger proportion of firms and workers are involved in their companies through workers’ control, there is far more long-term planning and concern for the companies success. The state and the workers have a continuing, abiding interest in these firms success, which is not the case with ordinary investors, who will remove their money if they think they can get a better return elsewhere.

My concern is that these policies will be undermined by a concentrated, protracted economic warfare carried out against the Labour party and the success of these policies by capital, the CBI and the Tories, just as the Tories tried to encourage their friends in industry to do in speeches from Tweezer’s chancellors. These policies are desperately needed, but the Tory party and the CBI are eager to keep British workers, the unemployed and disabled in poverty and misery, in order to maintain their control over them and maximise profits.

Did Banks Subject to LCR Reduce Liquidity Creation?

Published by Anonymous (not verified) on Mon, 15/10/2018 - 10:00pm in

Daniel Roberts, Asani Sarkar, and Or Shachar

LSE_2018_Did Banks Subject to LCR Reduce Liquidity Creation?

Banks traditionally provide loans that are funded mostly by deposits and thereby create liquidity, which benefits the economy. However, since the loans are typically long-term and illiquid, whereas the deposits are short-term and liquid, this creation of liquidity entails risk for the bank because of the possibility that depositors may “run” (that is, withdraw their deposits on short notice). To mitigate this risk, regulators implemented the liquidity coverage ratio (LCR) following the financial crisis of 2007-08, mandating banks to hold a buffer of liquid assets. A side effect of the regulation, however, is a reduction in liquidity creation by banks subject to LCR, as we find in our recent paper.

What is the Liquidity Coverage Ratio?

A lesson from the financial crisis is that banks need a liquidity cushion to cover unexpected cash outflows. The LCR requires bank holding companies (banks) with consolidated assets exceeding $50 billion to hold enough high quality liquid assets (HQLA) to meet their net cash outflow for thirty days during a period of stress.

The HQLA portfolio comprises assets divided into three liquidity levels. Banks must have a minimum amount of Level 1 assets (such as excess reserves and Treasury securities), the most liquid category. Less liquid assets (such as investment-grade corporate bonds) constitute the other two levels, are subject to haircuts, and their amounts are capped. The most illiquid assets (such as risky corporate bonds) are ineligible to be counted as HQLA.

The LCR also restricts the amount of liquid, “runnable” liabilities—such as overnight debt, trading liabilities, and transactions deposits—since these funding sources quickly disappear in a crisis. As of the end of the second quarter of 2018, U.S. global systemically important banks (G-SIBs) maintained an LCR at least 20 percent above the regulatory minimum of 100 percent (see chart below).

Did Banks Subject to LCR Reduce Liquidity Creation?

The overall effect of LCR is to reduce the incentive of banks to hold illiquid assets and liquid liabilities, which may potentially limit liquidity creation. The actual effect on liquidity creation depends on how banks respond to LCR. For example, banks might increase their holdings of illiquid assets outside of HQLA (since this is not restricted) enabling them to create more liquidity, all else equal. However, the Fed’s liquidity stress tests limit banks’ ability to take on excessive liquidity risk. Also, banks not subject to LCR might increase liquidity creation, offsetting any adverse effects from affected banks.

How is Liquidity Creation Measured?

Based on Bai et al (2017), the Liquidity Mismatch Index (LMI) assigns liquidity weights to each asset and liability item on bank balance sheets; assets and liabilities with greater liquidity are assigned higher weights. The LMI is then defined as liquidity-weighted liabilities minus liquidity-weighted assets. For example, suppose the bank takes in $20 of deposits and provides $100 of highly illiquid loans. If we assign a weight of 1 to deposits and 0.1 to the loans, then liquidity creation is (1*$20 – 0.1*$100), or $10. In practice, the LMI liquidity weights are derived from market prices.

Of note, our definition of LMI is the negative of that in prior work because it allows us to interpret a higher LMI as more liquidity creation.

Did Banks Subject to LCR Reduce Liquidity Creation?

In our sample, liquidity creation is negative, which means that bank liabilities are less liquid than bank assets, on average, based on market prices. However, our focus is on the change in liquidity creation from the LCR. To identify this change, we examine the change in liquidity creation before and since 2013, when the LCR rule was proposed. Further, we compare banks subject to LCR (LCR banks) with midsized banks that have assets less than $50 billion, but more than $3 billion, and therefore are not subject to LCR. Small banks with less than $3 billion in assets are omitted as they differ from larger banks in many ways.

To compare across banks of different sizes, liquidity creation is expressed as a percentage of the bank’s total assets. We find that LCR banks reduced liquidity creation (blue line), as compared to midsized banks (gold line) since 2013 (see chart below).

Did Banks Subject to LCR Reduce Liquidity Creation?

Among LCR banks, banks with assets more than $250 billion (full LCR banks) had to implement the rule in 2015, one year earlier than banks with assets between $50 billion and $250 billion (modified LCR banks). Modified LCR banks and midsized banks created liquidity in parallel until 2013 but, between 2013 and 2015, liquidity creation by modified LCR banks was lower while that of midsized banks was higher (see chart below). Full-LCR-bank liquidity creation declined from 2009, but the decline accelerated since 2013 (as verified by regression results).

Did Banks Subject to LCR Reduce Liquidity Creation?

How Did Banks Reduce Liquidity Creation?

Since banks can reduce their liquidity creation in various ways, we examine book value changes of liquid and illiquid balance sheet items. On the asset side, LCR banks increased the share of HQLA in their balance sheets from the pre-LCR levels while midsized banks did the opposite, as we show in our recent paper. In addition, the total amount of loans provided by LCR banks (for example, real estate loans) since 2013 was lower compared to the pre-LCR period while midsized banks increased loan provision as a share of their assets (see chart below).

Did Banks Subject to LCR Reduce Liquidity Creation?

On the liability side, full LCR banks relied less on liquid, high-runoff liabilities (such as short-term debt and trading liabilities) from 2010 but this decline accelerated since 2013, as seen in the chart below. By comparison, high-runoff liabilities of modified LCR banks and midsized bank were unaffected by LCR.

Did Banks Subject to LCR Reduce Liquidity Creation?

What Happens to Liquidity Creation When Banks Change LCR Status?

If a bank’s size changes over time, its LCR status might change as well. CIT Group was below the LCR size threshold until 2015, at which time CIT Group bought OneWest, pushing them above the LCR threshold (see chart below). Alongside, liquidity creation (shown in dollars, since only one bank is shown) dropped. Subsequently, in 2017, the size of the firm dropped below the LCR size threshold and liquidity creation increased. This case study supports our statistical evidence of the effects of LCR on bank liquidity creation.

Did Banks Subject to LCR Reduce Liquidity Creation?

What are the Net Benefits of Liquidity Regulation?

Although banks not subject to LCR increased liquidity provision as a share of assets, this did not offset the decrease in liquidity creation by LCR banks in dollar terms due to the larger size of LCR banks. As we show in our paper, total liquidity creation in the banking sector in dollars decreased between 2013 and 2015 by 0.51 percent. Whether this reduction in liquidity creation is socially harmful is unclear given that researchers have argued that there was too much liquidity creation before the 2007-08 crisis. In addition, while we focus on the cost of liquidity regulation (that is, reduced liquidity creation) a complete evaluation of LCR should take into account the benefits of enhanced liquidity buffers in making the financial system safer and more stable (for example, by reducing the likelihood of fire sales in a crisis).


The views expressed in this post are those of the authors and do not necessarily reflect the position of the Federal Reserve Bank of New York or the Federal Reserve System. Any errors or omissions are the responsibility of the authors.

Daniel Roberts is a former senior research analyst in the Federal Reserve Bank of New York’s Research and Statistics Group.

Asani Sarkar
Asani Sarkar is an assistant vice president in the Bank’s Research and Statistics Group.

Or Shachar
Or Shachar is an economist in the Bank’s Research and Statistics Group.

How to cite this blog post:

Daniel Roberts, Asani Sarkar, and Or Shachar, “Did Banks Subject to LCR Reduce Liquidity Creation?,” Federal Reserve Bank of New York Liberty Street Economics (blog), October 15, 2018,

RT: Corbyn Challenges Government Claim Austerity’s Over as ‘Great Big Con’

Tweezer at the Tory conference last week announced that austerity is over. However, as Mike reported over at Vox Political, this doesn’t mean that the government is going to reverse their policy of cutting benefits and services. From from it. Further cuts are on their way.

In this video from RT of Prime Minister’s Question Time, Jeremy Corbyn asks if Tweezer’s announcement isn’t ‘one great big con’.

He says

Eight years of painful austerity, poverty is up, homelessness and deaths on our streets is up, living standards down, public services slashed and a million elderly are not getting the care they need, wages have been eroded, and all the while, Mr. Speaker, all the while billions were found for tax giveaways for big corporations and the super rich. The Prime Minister, Mr. Speaker, the Prime Minister declared she is ending austerity but unless the budged halts the cuts, increases funding to public services, gives our public servants a decent pay rise then isn’t the claim that austerity’s over a great big Conservative con?

He’s absolutely right. And as Mike has also pointed out, we’ve heard these lies before. They were said a few years ago, when the Tories were also in trouble. It’s just another version of the tactic every Tory government makes when an election’s coming: they immediate claim they’re going to cut taxes, or do something else to make it seem that ordinary people will be less poor. Then, once they’ve been re-elected, all this is reversed and its back to taxing and cutting services for ordinary working people for the benefit of the rich.

As for austerity, when it comes to this government the word is a misnomer. Austerity is what our parents and grandparents went through in order to pay for the NHS. It meant rationing continued long after the end of the War, but it was ultimately worth it. The NHS has proved its worth millions of times over in the countless lives it has saved, as well as the ordinary process of saving limbs and organs and preventing and curing ordinary disease. And everybody has benefited from it.

This austerity, however, was brought about because the banks over the other side of the Atlantic crashed due to colossal mismanagement. Brown bailed them out in order to stop a global collapse of finance capitalism. All this was partly due not only to the banks themselves, but to the insistence of consequetive neoliberal governments from Reagan onwards, including Bill Clinton’s, that the banks should be regulated with a ‘light touch’. That meant repealing the legislation protecting the country and its investors from the antics that caused the crash. And Brown was fully behind the same policy over here, which resulted in the failure of the Bank of Scotland.

The austerity Cameron embarked upon is unnecessary, as Barry and Savile Kushner have shown in ther book, Who Needs the Cuts. If you invest in the economy so that it expands, tax receipts will increase as well. But the establishment in industry, politics and the media all heartily support cutting benefits and the welfare state. Those that dare to challenge this consensus, like poverty campaigners and trade unions, are ignored. If they appear on radio or TV, they will be shouted down.

And despite Cameron’s lie that ‘We’re all in it together’, it’s the poor that are most affected. People are being pushed further into poverty, spiralling debt and starvation. Nearly half a million people are now only able to keep body and soul together thanks to food banks. The Tories are going ahead with their privatisation of the NHS.

And while the poor are being forced further into misery and despair, Cameron, Tweezer and the rest are making the rich even richer through massive tax cuts.

Austerity is indeed a massive lie, and it’s high time the Tories – the party of liars – suffered for it at the polling station.

Leverage Rule Arbitrage

Published by Anonymous (not verified) on Sat, 13/10/2018 - 2:05am in



Dong Beom Choi, Michael Holcomb, and Donald P. Morgan

LSE_Leverage Rule Arbitrage

Classic arbitrage involves the same asset selling at different prices; the leverage rule arbitrage we study here involves assets of different risk levels requiring the same amount of capital. The supplementary leverage ratio (SLR) rule, finalized by U.S. regulators in September 2014, requires a minimum ratio of capital to assets at the largest U.S. banks. The floor is higher for more systemically important banks, but not for banks with riskier assets. That non-risk-based aspect of SLR was intentional, since the leverage limit was meant to backstop (“supplement”) risk-based capital rules in case banks underestimate their asset risk and overstate their capital strength. As policymakers have noted and bankers have warned, if the leverage rule is the binding capital requirement, banks can “arbitrage” the rule by selling safer assets and replacing them with riskier, higher-yielding ones. The findings of our recent staff report are consistent with those concerns.

The Supplementary Leverage Rule

The SLR rule covers only the fifteen largest banks in the United States—those using the “advanced approach” (internal models) for estimating asset risk for setting risk-based capital requirements. When finalized, the rule required a minimum ratio of tier 1 capital to total leverage exposure of 5 percent for globally systemically important banks (G-SIBs, subject to an “enhanced SLR,” or eSLR) and 3 percent for other covered banks.

While U.S. banks already faced a leverage limit, the SLR limit is potentially much more binding than the existing limit because the SLR denominator includes off-balance sheet assets and derivative exposures. For some banks, the SLR limit was also more binding than their risk-based capital requirement; the typical (median) bank in 2013 had less than 1 percentage point of slack relative to the leverage limit, versus 6 percentage points relative to its risk-based capital requirement.

Banks bound by the SLR limit have two options for maintaining compliance: raise capital or shed assets. If a bank chooses to raise capital, it can offset any increase in funding costs by shifting from safer, lower-yielding assets to riskier, higher-yielding ones. If it chooses to reduce assets, the least costly option is to shed low-yielding assets, such as reserves. In either case, that “reach for yield” arbitrage should register as higher security yields or riskier holdings.

Identifying the SLR Effect

We use difference-in-difference (diff-in-diff) analysis to identify potential causal effects of the leverage rule. Essentially, we compare the change in various risk measures at the fifteen banks covered by the rule (SLR banks) before and after September 2014 to the change at the next largest eighteen banks (non-SLR banks), institutions with assets of at least $50 billion. The two sets of banks faced similar (though not identical) post-crisis reforms apart from the SLR rule, so any differential risk change can, given sufficient controls, be attributed to the SLR rule. We studied multiple risk measures, including security yields, riskier (risk-weighted) asset holdings, and overall bank risk measures including leverage.

Reach for Yield?

The chart below suggests a shift toward higher-yielding securities by SLR banks in response to the new leverage rule. Average yields on securities held by SLR and non-SLR banks trended downward roughly in parallel until 2014, with SLR yields being consistently lower. Their paths started to diverge in the third quarter of 2014, with security yields at SLR banks rising, narrowing the gap with those at non-SLR banks.

Leverage Rule Arbitrage

Our formal diff-in-diff estimates confirm that impression. Given bank size, risk-based capital, and other controls, we estimate that mean security yields at SLR banks were 34 basis points (bp) higher relative to those at non-SLR banks after the third quarter of 2014. Reinforcing the causal connection, the effects are larger for SLR banks with less leverage slack (42 bp) than for those with more leverage slack (26 bp).

We find some evidence that this reach reflects active risk-shifting—banks actually adding riskier securities to their portfolio, not merely shedding safer ones. The distinction matters since active risk-shifting, as an act of commission, reveals something about bank behavior or culture and informs the design of incentive-compatible regulation.

Riskier Asset Holdings

Using alternative data, we find consistent evidence that SLR banks increased their holdings of riskier (risk-weighted) security and trading assets relative to non-SLR banks after the leverage rule was finalized. We find some evidence that total assets at SLR banks become riskier, implying that the rule might, perversely, have increased overall bank risk.

Riskier Assets Offset by Deleveraging?

Despite the evident asset shift, we find virtually no change in overall bank risk, not even at the more constrained SLR banks. These overall measures reflect asset risk and leverage, however, and we find that the more constrained SLR banks deleveraged post-SLR (as reflected in the chart below). That reduced leverage may have offset riskier assets, leaving overall risk unchanged.

Leverage Rule Arbitrage

No Arbitrage Opportunities

Our evidence suggests that banks were arbitraging the SLR (and eSLR) rule by shifting from safer assets toward riskier, higher-yielding ones. Evidence from other studies we discuss point to the same behavior by banks or dealers with portfolios heavily weighted toward safe, low-yield assets as part of their business models. Policymakers are aware of this regulatory arbitrage and are addressing it.


The views expressed in this post are those of the authors and do not necessarily reflect the position of the Federal Reserve Bank of New York or the Federal Reserve System. Any errors or omissions are the responsibility of the authors.

Choi_dongbeomDong Beom Choi is an economist in the Federal Reserve Bank of New York’s Research and Statistics Group.

Michael HolcombMichael Holcomb is a senior research analyst in the Bank’s Research and Statistics Group.

Morgan_donaldDonald P. Morgan is an assistant vice president in the Bank’s Research and Statistics Group.

How to cite this blog post:

Dong Beom Choi, Michael Holcomb, and Donald P. Morgan, “Leverage Rule Arbitrage,” Federal Reserve Bank of New York Liberty Street Economics (blog), October 12, 2018,

What Happens When Regulatory Capital Is Marked to Market?

Published by Anonymous (not verified) on Thu, 11/10/2018 - 10:00pm in


banks, Regulation

Andreas Fuster and James Vickery

LSE_What Happens When Regulatory Capital Is Marked to Market?

Minimum equity capital requirements are a key part of bank regulation. But there is little agreement about the right way to measure regulatory capital. One of the key debates is the extent to which capital ratios should be based on current market values rather than historical “accrual” values of assets and liabilities. In a new research paper, we investigate the effects of a recent regulatory change that ties regulatory capital directly to the market value of the securities portfolio for some banks.

Securities Accounting and the “AOCI Filter"

Securities make up roughly one-quarter of banking system assets. These securities fall into one of three categories: “trading” assets, which are bought and held for the purpose of selling in the near term; debt securities that are intended to be “held to maturity;” or assets that are “available for sale,” an intermediate category.

From an accounting point of view, unrealized changes in the market value of available for sale (AFS) securities don’t affect a bank’s net income. However, they do affect the level of equity on the bank’s balance sheet. This is because the net difference between market and book value for these securities is tracked in a balance sheet item known as “accumulated other comprehensive income” (AOCI).

AOCI can be very sensitive to movements in asset prices, particularly bond yields, given that bank AFS portfolios are mainly comprised of fixed-income securities like mortgage backed securities (MBS), Treasury bonds, and municipal bonds. For example, rising interest rates in the first quarter of 2018 led to a $26 billion decline in AOCI for commercial banks, equivalent to nearly half the net income earned by commercial banks that quarter.

Reflecting this volatility, AOCI has not historically been counted when measuring regulatory capital for banks—a treatment known as the “AOCI filter.” However, as part of the implementation of Basel III in the United States, the AOCI filter has been removed for all large banks subject to the “Advanced Approaches” capital framework, as well as for any non-Advanced Approaches banks that elected to drop the filter. For these banks, the AOCI filter has been removed progressively over time. In 2014, 20 percent of AOCI was counted toward regulatory capital. This increased to 40 percent in 2015, and by another 20 percent each year thereafter until full phase-in of the new rule in 2018.

Bank Responses to Market-Value Based Capital Regulation

If banks are averse to volatility in regulatory capital, affected banking organizations are likely to take steps to mitigate the impact of the removal of the AOCI filter.

First, banks may reduce the risk in their securities portfolio (for example, by selling high-risk securities, or by hedging their risk exposure). Such de-risking would help reduce the volatility of a bank’s regulatory capital by making the value of its securities portfolio less sensitive to movements in the yield curve and other asset prices.

Second, banks may reclassify assets to “shield” themselves from the removal of the AOCI filter. In particular, they may classify more securities as “held to maturity” (HTM), since, unlike AFS, unrealized gains and losses on HTM securities do not flow through to AOCI or bank equity. Such reclassification would reduce the volatility of measured regulatory capital, even if it doesn’t reduce the fundamental risks of the securities in the bank’s portfolio.

We estimate the effects associated with the removal of the AOCI filter by comparing large banking organizations that are subject to the new rule with other large banks that are not. Our sample consists of forty-two bank holding companies (BHCs), of which nineteen are subject to the removal of the AOCI filter.

Our analysis is primarily based on quarterly security-level information submitted by BHCs in support of the Fed’s supervisory stress tests from 2011 to 2017. Crucially, these data allow us to study how portfolio risks have evolved even within a certain security class, such as Treasuries or agency mortgage backed securities (MBS), or how a particular bond is classified for accounting purposes at various banks. We supplement these security-level data with aggregate data on security holdings from BHC regulatory filings.

Effects on Risk-Taking

A large portion of the investment securities held by banks are agency MBS or U.S. Treasury securities. These securities are guaranteed (explicitly or implicitly) by the U.S. government, and thus have little credit risk. Instead, the key risk associated with these fixed income securities is “interest rate risk”—meaning the risk that rising market interest rates lowers the securities’ fair value. This risk is generally measured in terms of “duration”—higher duration means increased sensitivity to interest rate changes, and thus more risk.

We find little clear evidence that banking firms subject to the removal of the AOCI filter have responded by holding less risky (shorter duration) securities. For instance, the average duration of these BHCs’ MBS and Treasury portfolios did not fall significantly relative to those of other banking organizations, and the total risk exposure (measured as duration times the value of the exposure, relative to assets) has, if anything, tended to increase. We also find no evidence of a decline in the average book yield on investment securities among these banking firms.

We do find some evidence that the removal of the AOCI filter may have led BHCs to engage in additional hedging (through derivatives) of the risks underlying the securities. Hedging remains relatively modest overall, however.

Effects on Risk Shuffling

Since the start of 2014, when AOCI first started being included in regulatory capital, affected banking firms have classified a substantially larger share of securities as HTM, both in absolute terms and relative to other large BHCs that are not subject to the removal of the AOCI filter. In other words, banks began classifying securities differently so as to mitigate volatility in regulatory capital.

What Happens When Regulatory Capital Is Marked to Market?

Could these trends be an artifact of differences in the types of securities held by different types of banks? Our analysis suggests the answer is no. Conducting statistical analysis using our granular security-level data, we find that the increasing tendency to classify bonds as HTM as the AOCI filter is removed holds even for a specific security (as identified by its “CUSIP”).

We estimate that the full removal of the AOCI filter induces a 15 percent increase in the likelihood of classifying a security as HTM for affected banks. This estimate is based on a statistical model which compares a given security held by different BHCs, and controls for time trends or fixed differences in classification across banks. Results are even stronger when we restrict the analysis to comparing the classification of the same bond held by different banks in the same quarter. We find that most of the effect comes from the way new securities being added to the portfolio are classified, rather than a reclassification of existing bonds from AFS to HTM.

Notably, we find that the tendency to label more bonds as HTM is particularly strong for riskier (higher duration) securities. BHCs counting AOCI toward regulatory capital are more likely to classify bonds as HTM, regardless of the security’s duration (see chart below). But this effect is most pronounced for long-duration securities exposed to the largest amount of interest rate risk—in other words, the difference in height between the two bars in the figure is most pronounced for the quintile of securities with longest duration.

What Happens When Regulatory Capital Is Marked to Market?2

Bottom Line

Our results, as well as those of recent related research, suggest that banks are averse to volatility in regulatory capital, and have changed their accounting treatment of risky securities in order to mitigate this volatility. Notably, classifying securities as HTM makes them less liquid from a bank’s point of view, since that limits its ability to sell those securities in the future. This could limit banks’ options during a period of market stress or deleveraging. It could also reduce the overall secondary market liquidity for some bonds, given that banks are such important fixed-income investors.


The views expressed in this post are those of the authors and do not necessarily reflect the position of the Federal Reserve Bank of New York or the Federal Reserve System. Any errors or omissions are the responsibility of the authors.

Andreas Fuster is an economic advisor in the financial stability department at the Swiss National Bank.

James VickeryJames Vickery is an assistant vice president in the Federal Reserve Bank of New York’s Research and Statistics Group.

How to cite this blog post:

Andreas Fuster and James Vickery, “What Happens When Regulatory Capital Is Marked to Market?,” Federal Reserve Bank of New York Liberty Street Economics (blog), October 11, 2018,

Why Do Banks Target ROE?

Published by Anonymous (not verified) on Wed, 10/10/2018 - 10:00pm in



George Pennacchi and João A.C. Santos

LSE_Why Do Banks Target ROE?

Nonfinancial corporations focus on the growth in earnings per share (EPS) to benchmark their performance. Banks used to follow a similar practice, but starting in the late 1970s they began to emphasize return on equity (ROE) instead. In this blog post, we outline findings from our recent staff report, which argues that banks had an incentive to make this change when their charter values eroded owing to increased competition, and the incentive to change was magnified by risk-insensitive deposit insurance.

Did Banks Always Use Return on Equity to Measure Performance?

Traditionally, nonfinancial corporations emphasized performance targets linked to their EPS. For example, in its 1940 annual report, Black and Decker noted that “the net earnings for the year available for dividends amounted to $1,064,095.29 or earnings of approximately $2.82 per share, as compared with net earnings of $595,851.34 or $1.60 per share for the previous year.” As of 2000, the company was still using remarkably similar language when describing its financial performance.

Banks also appear to have favored metrics linked to EPS up until the late 1970s, but since then their preference has shifted toward ROE. For example, the Bank of Boston noted in its 1979 report that “The Corporation earned its highest return on your invested capital in more than a decade. Our return on stockholders’ equity, which dipped as low as 8.4 percent for 1976, climbed to a healthy 13.7 percent for 1979.” Since then, the Bank of Boston has emphasized ROE every year.

In our staff report, we document that stock market investors recognize this difference between banks and nonfinancial firms. Using a constant sample of U.S. banks and nonfinancial corporations since the early 1970s, we show that the market-to-book values of banks’ stocks react more to ROE announcements than EPS announcements while the reverse occurs for nonfinancial firms. In addition, we find that banks’ market-to-book equity became relatively insensitive to EPS only after the 1980s. Thus, firms’ choice of performance metrics matters to stock investors.

Why Do Banks Use Return on Equity to Measure Performance?

We explain banks’ preference for ROE using a theoretical model of a bank that maximizes its shareholders’ value in excess of the shareholders’ contributed capital. The model has two key elements: First, the bank’s deposits are insured by the government; second, the bank has “charter” or “franchise” value that derives from its ability to pay interest on insured deposits that is below a competitive risk-free rate. Using the model, we show that when banks respond to greater competition and have fixed-rate deposit insurance, then ROE makes banks appear more financially healthy than EPS growth does.

When more competition erodes banks’ charter values, they rationally reduce the amount of their equity capital relative to deposits, and the decline is greater when banks are subject to fixed-rate, rather than fair-value, deposit insurance. While lower charter value reduces their net interest margin and EPS growth, the decrease in equity capital causes a further worsening of EPS growth.

What happens to the ROE measure when a bank reduces its initial capital in response to greater competition? Surprisingly, the effect is a rise in ROE growth that can easily offset the mechanical decline from a lower net interest margin. Moreover, banks reduce capital more when deposit insurance is risk-insensitive, which makes ROE look even better than it would if deposit insurance were fairly priced. In summary, responding to greater competition by lowering capital makes a bank’s ROE measure look better and its EPS growth look worse.

Can the Model Explain Banks’ Recent Preference for the Return on Equity Measure?

Having fixed-rate deposit insurance increases banks’ preference for holding lower levels of equity capital and, in turn, for targeting ROE. Historically, the Federal Deposit Insurance Corporation’s (FDIC) insurance premiums have been assessed without regard to bank risk. It was only in 1991 that the FDIC changed this flat-rate assessment system to one based on each bank’s level of risk. However, effective insurance premiums in the following years remained only mildly linked to bank risk.

Increased competition that reduces charter values also gives banks a preference for holding lower levels of equity capital and, thus, using ROE as a performance metric. Starting in the late 1970s, U.S. banks were exposed to increasing competition from nonbank financial institutions. In particular, money market funds competed directly for bank deposits, as shown in the chart below. Competition in the banking sector further intensified in the 1980s following states’ decisions to lift restrictions on branching within their borders and to permit out-of-state institutions to acquire their banks.

Why Do Banks Target ROE?

Implications of Post-Crisis Bank Regulations for Banks’ Use of ROE Measure

Our model predicts that banks would be especially resistant to any post-financial crisis regulation, such as Basel III, that requires them to increase their equity capital. After Basel III, a typical bank’s performance is worse on an ROE basis than on an EPS basis, and if minimum capital standards continue to rise, we could see banks de-emphasize ROE in favor of EPS, reversing the recent historical trend.


The views expressed in this post are those of the authors and do not necessarily reflect the position of the Federal Reserve Bank of New York or the Federal Reserve System. Any errors or omissions are the responsibility of the authors.

George Pennacchi is a professor of finance at the University of Illinois.

João A.C. SantosJoão A.C. Santos is a senior vice president in the Federal Reserve Bank of New York’s Research and Statistics Group.

How to cite this blog post:

George Pennacchi and João A.C. Santos, “Why Do Banks Target ROE?,” Federal Reserve Bank of New York Liberty Street Economics (blog), October 9, 2018,

Analyzing the Effects of CFPB Oversight

Published by Anonymous (not verified) on Tue, 09/10/2018 - 10:00pm in

Andreas Fuster, Matthew Plosser, and James Vickery

LSE_Analyzing the Effects of CFPB Oversight

The Consumer Financial Protection Bureau (CFPB), created in 2011, is a key element of post-crisis U.S. financial regulation, as well as the subject of intense debate. While some have praised the agency, citing the benefits of consumer financial protection, others argue that its activities involve high compliance costs, increase uncertainty and legal risk, and ultimately reduce the availability of financial services for consumers. We present new evidence on whether the CFPB’s supervisory and enforcement activities have significantly affected the supply of mortgage credit, or had other effects on bank risk-taking and profitability.

CFPB Supervision and Enforcement

The CFPB, established as part of the Dodd-Frank Act, opened its doors in July 2011 with a consumer financial protection mandate and with broad authority over both banks and nonbanks. In addition to rule-making authority, the CFPB has the power to supervise and conduct examinations of financial firms and pursue enforcement actions for breaches of federal consumer financial protection law. Since its founding, the CFPB has actively exercised its supervisory and enforcement authority—conducting examinations on a wide range of topics, undertaking more than 200 public enforcement actions, and recovering more than $12 billion in relief to consumers.

Supporters argue that robust supervision and enforcement are critical for ensuring compliance with consumer financial protection laws. Critics have argued that the CFPB’s approach amounts to “regulation by enforcement,” creating legal uncertainty among firms and reducing the availability of financial services. They also argue that CFPB supervision is burdensome and diverts firms’ resources, particularly for smaller financial institutions.

Measuring the Effects of CFPB Oversight

In a recent research paper, we aim to measure the effects on banks of CFPB supervision and enforcement activities, which we refer to as CFPB “oversight.” We make use of the fact that small depository institutions with $10 billion or less in total assets are generally exempt from direct CFPB examinations and enforcement actions. Instead, compliance with consumer financial protection laws is primarily overseen by the firms’ prudential supervisor (for example, the Office of the Comptroller of the Currency in the case of national banks and national savings associations). Unlike the CFPB, these prudential supervisors generally focus on overall issues of safety and soundness rather than consumer financial protection alone.

We examine outcomes before and after July 2011, when the CFPB begins operations, and compare commercial banks and savings banks on either side of the $10 billion asset threshold for CFPB oversight. (Our empirical approach takes into account the fact that some firms with $10 billion or less in assets are still subject to CFPB oversight, in particular small banks that have larger affiliates.)

There are other regulatory implications for banks crossing the $10 billion mark, related to caps on debit interchange fees and the requirement to conduct company-run stress tests. To isolate the effects of the CFPB, we focus on consumer lending outcomes, and exploit differences in the timing of the creation of the CFPB relative to the implementation of stress tests. But to the extent that we can’t fully disentangle the effects of these different regulations, our estimates should be interpreted as an upper bound on the effect of CFPB oversight.

Our empirical strategy does not shed light on the effects of new regulations issued by the CFPB under its rule-writing authority, such as the “know before you owe” rule. That is because these rules generally apply to all banks, even those that are exempt from direct CFPB supervision and enforcement. We also note that our results don’t represent an overall assessment of the welfare effects of the CFPB—in part because we cannot easily measure the possible benefits of enhanced consumer protection.

Effects on Total Mortgage Lending—Much Ado about Nothing?

Does CFPB oversight reduce overall lending? We take commercial banks and savings banks with total assets between $1 billion and $25 billion as of June 30, 2011, and sort them into two groups: those that became subject to CFPB oversight when the Bureau started operating in mid-2011 and those that did not. The figure below plots mortgage lending volumes for these two groups, using Home Mortgage Disclosure Act data.

The volume of mortgage lending for both groups fluctuates substantially over time, reflecting movements in long-term interest rates and other factors. However, there are no obvious differential trends—lending volumes move very closely together for the two groups. In other words, there is no evidence that being subject to CFPB supervision and enforcement has led to lower mortgage lending for affected banks.

Analyzing the Effects of CFPB Oversight

In our research paper, we also estimate the lending effects of CFPB oversight using a loan-level statistical model that accounts for the location of the mortgaged property and other loan characteristics. The results of this more detailed analysis back up the story shown in the chart above. The estimated effect of CFPB oversight on mortgage origination volume is economically small and generally not statistically different from zero. We also find that banks subject to CFPB oversight are no more likely to reject mortgage applications than other banks.

Our empirical estimates also allow us to put a statistical “upper bound” on the average effect of being subject to CFPB supervision and enforcement on mortgage lending. We find that CFPB oversight reduces affected lenders’ share of mortgage originations by at most 1.6 percentage points, a small decline relative to the overall 38 percent market share of these lenders in our sample.

Effects on the Composition of Mortgage Lending

Although CFPB oversight has not led to an overall decline in mortgage lending, we do find effects with respect to the composition of lending. Most notably, we find a 6 percent drop in the market share of CFPB-supervised banks for mortgages insured by the Federal Housing Administration (FHA). These loans tend to be riskier since they are made to lower-income borrowers and generally involve a small down payment. There is also some evidence of a drop in lending to borrowers with higher credit risk. Offsetting these declines, CFPB-supervised banks substitute toward large loans in the “jumbo” segment of the mortgage market, where borrowers tend to have higher incomes.

These results are notable in light of the fact that many lenders, particularly banks, have exited FHA lending in recent years, sometimes citing legal and regulatory risks associated with this segment of the mortgage market. Our results are consistent with the view that these risks have indeed contributed to lower FHA lending and risky mortgage lending in general.

Other Effects

We also investigate the effects of being subject to CFPB supervision and enforcement activities on a number of bank-level outcomes, including asset growth and noninterest expenses. We don’t find any evidence that banks just below $10 billion in size grow more slowly to avoid crossing that regulatory threshold. If anything, these banks grow slightly faster on average. (As a robustness check, we also confirm that our results on mortgage lending look similar even when we exclude banks with assets very close to $10 billion from our analysis.) We don’t find any effects of CFPB bank oversight on noninterest expenses, although our statistical approach is unlikely to detect moderate increases in overheads due to regulatory compliance costs.

Implications for Policy

Our results provide some support for the view that heightened supervisory scrutiny related to consumer financial protection has led to some “de-risking” of bank activities and, in particular, has affected bank lending to FHA borrowers. However, claims that CFPB supervision and enforcement activities have induced a collapse in consumer lending do not seem to be correct, at least for mortgage lending and for the set of banks studied in our paper.

Our results may be of use to policymakers, particularly in light of efforts to raise the asset size threshold for CFPB oversight, which would exempt more depository institutions from the Bureau’s supervision. However, our results do not speak directly to the overall net welfare costs and benefits of the CFPB’s activities, given that we analyze only a small subset of their effects.


The views expressed in this post are those of the authors and do not necessarily reflect the position of the Federal Reserve Bank of New York or the Federal Reserve System. Any errors or omissions are the responsibility of the authors.

Andreas Fuster is an economic advisor in the financial stability department at the Swiss National Bank.

Matthew Plosser
Matthew Plosser is a senior financial economist in the Federal Reserve Bank of New York’s Research and Statistics Group.

James VickeryJames Vickery is an assistant vice president in the Bank’s Research and Statistics Group.

How to cite this blog post:

Andreas Fuster, Matthew Plosser, and James Vickery, “Analyzing the Effects of CFPB Oversight,” Federal Reserve Bank of New York Liberty Street Economics (blog), October 9, 2018,