IDEAS home Printed from https://ideas.repec.org/p/red/sed019/1465.html
   My bibliography  Save this paper

On the Political Economy of Financial Regulation

Author

Listed:
  • Igor Livshits

    (Federal Reserve Bank of Philadelphia)

  • Youngmin Park

    (Bank of Canada)

Abstract

Loose financial regulation encourages some banks to adopt a risky strategy of specializing in residential mortgages. In the event of an adverse aggregate housing shock, these banks fail. When banks do not fully internalize the losses from such failure (due to limited liability or deposit insurance), they offer mortgages at less than actuarially fair interest rates. This opens a door to home-ownership for some young low net-worth individuals. In turn, the additional demand from these new home-buyers drives up house prices. All of this leads to non-trivial distribution of gains and losses from lax regulation amongst the households. Renters and individuals with large non-housing wealth suffer from the fragility of the banking system induced by the lax regulation. On the other hand, some young middle-income households are able to get a mortgage and buy a house, thus benefiting from the lax regulation. Furthermore, the current (old) homeowners benefit from the increase in the price of their houses. If the latter two groups constitute a majority of the population, then regulatory failure can be an outcome of a democratic political process.

Suggested Citation

  • Igor Livshits & Youngmin Park, 2019. "On the Political Economy of Financial Regulation," 2019 Meeting Papers 1465, Society for Economic Dynamics.
    • Handle: RePEc:red:sed019:1465
    as

    Download full text from publisher

    File URL: https://red-files-public.s3.amazonaws.com/meetpapers/2019/paper_1465.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Atif Mian & Amir Sufi, 2009. "The Consequences of Mortgage Credit Expansion: Evidence from the U.S. Mortgage Default Crisis," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 124(4), pages 1449-1496.
    2. Markus K. Brunnermeier, 2009. "Deciphering the Liquidity and Credit Crunch 2007-2008," Journal of Economic Perspectives, American Economic Association, vol. 23(1), pages 77-100, Winter.
    3. Raghuram G. Rajan, 2010. "Fault Lines: How Hidden Fractures Still Threaten the World Economy," Economics Books, Princeton University Press, edition 1, number 9111.
    4. Ben S. Bernanke, 2010. "Monetary policy and the housing bubble: a speech at the Annual Meeting of the American Economic Association, Atlanta, Georgia, January 3, 2010," Speech 499, Board of Governors of the Federal Reserve System (U.S.).
    5. Deeksha Gupta, 2018. "Too Much Skin-in-the-Game? The Effect of Mortgage Market Concentration on Credit and House Prices," 2018 Meeting Papers 512, Society for Economic Dynamics.
    6. repec:fip:fedgsq:y:2010:x:4 is not listed on IDEAS
    7. Viral V. Acharya & Matthew Richardson & Stijn Van Nieuwerburgh & Lawrence J. White, 2011. "Guaranteed to Fail: Fannie Mae, Freddie Mac, and the Debacle of Mortgage Finance," Economics Books, Princeton University Press, edition 1, number 9400.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Jens Dick-Nielsen & Jacob Gyntelberg, 2019. "Highly Liquid Mortgage Bonds Using the Match Funding Principle," Quarterly Journal of Finance (QJF), World Scientific Publishing Co. Pte. Ltd., vol. 10(01), pages 1-37, December.
    2. Leu, Shawn C.-Y. & Robertson, Mari L., 2021. "Mortgage credit volumes and monetary policy after the Great Recession," Economic Modelling, Elsevier, vol. 94(C), pages 483-500.
    3. Ozlem Akin & José M Marín & José-Luis Peydró, 2020. "Anticipating the financial crisis: evidence from insider trading in banks," Economic Policy, CEPR, CESifo, Sciences Po;CES;MSH, vol. 35(102), pages 213-267.
    4. Drechsler, Itamar & Savov, Alexi & Schnabl, Philipp, 2022. "How monetary policy shaped the housing boom," Journal of Financial Economics, Elsevier, vol. 144(3), pages 992-1021.
    5. Igor Livshits & Youngmin Park, 2021. "Democratic Political Economy of Financial Regulation," Staff Working Papers 21-59, Bank of Canada.
    6. Anjan V. Thakor, 2015. "The Financial Crisis of 2007–2009: Why Did It Happen and What Did We Learn?," The Review of Corporate Finance Studies, Society for Financial Studies, vol. 4(2), pages 155-205.
    7. King, Timothy & Srivastav, Abhishek & Williams, Jonathan, 2016. "What's in an education? Implications of CEO education for bank performance," Journal of Corporate Finance, Elsevier, vol. 37(C), pages 287-308.
    8. Antoniades, Adonis, 2015. "Commercial bank failures during the Great Recession: the real (estate) story," Working Paper Series 1779, European Central Bank.
    9. Mardi Dungey & Gerald Dwyer & Thomas Flavin, 2013. "Systematic and Liquidity Risk in Subprime-Mortgage Backed Securities," Open Economies Review, Springer, vol. 24(1), pages 5-32, February.
    10. Deeksha Gupta, 2018. "Too Much Skin-in-the-Game? The Effect of Mortgage Market Concentration on Credit and House Prices," 2018 Meeting Papers 512, Society for Economic Dynamics.
    11. Mikkel Hermansen & Oliver Röhn, 2017. "Economic resilience: The usefulness of early warning indicators in OECD countries," OECD Journal: Economic Studies, OECD Publishing, vol. 2016(1), pages 9-35.
    12. Coibion, Olivier & Gorodnichenko, Yuriy & Kudlyak, Marianna & Mondragon, John, 2014. "Does Greater Inequality Lead to More Household Borrowing? New Evidence from Household Data," IZA Discussion Papers 7910, Institute of Labor Economics (IZA).
    13. Christian A Belabed & Thomas Theobald & Till van Treeck, 2018. "Income distribution and current account imbalances [Notes on capacity utilisation, distribution and accumulation]," Cambridge Journal of Economics, Cambridge Political Economy Society, vol. 42(1), pages 47-94.
    14. Alejandro Justiniano & Giorgio E. Primiceri & Andrea Tambalotti, 2013. "The Effects of the Saving and Banking Glut on the U.S. Economy," NBER Chapters, in: NBER International Seminar on Macroeconomics 2013, pages 52-67, National Bureau of Economic Research, Inc.
    15. Greg Buchak & Gregor Matvos & Tomasz Piskorski & Amit Seru, 2024. "Beyond the Balance Sheet Model of Banking: Implications for Bank Regulation and Monetary Policy," Journal of Political Economy, University of Chicago Press, vol. 132(2), pages 616-693.
    16. John Y. Campbell, 2013. "Mortgage Market Design," Review of Finance, European Finance Association, vol. 17(1), pages 1-33.
    17. Zagonov, Maxim, 2011. "Securitization and bank intermediation function," MPRA Paper 34961, University Library of Munich, Germany, revised Sep 2011.
    18. Botta, Alberto & Caverzasi, Eugenio & Russo, Alberto, 2024. "Same old song: On the macroeconomic and distributional effects of leaving a Low Interest Rate Environment," Structural Change and Economic Dynamics, Elsevier, vol. 69(C), pages 552-570.
    19. Harold M. Hastings & Tai Young-Taft & Chih-Jui Tsen, 2020. "Ecology, Economics, and Network Dynamics," Economics Working Paper Archive wp_971, Levy Economics Institute.
    20. Stockhammer, Engelbert & Wildauer, Rafael, 2018. "Expenditure Cascades, Low Interest Rates or Property Booms? Determinants of Household Debt in OECD Countries," Review of Behavioral Economics, now publishers, vol. 5(2), pages 85-121, September.

    More about this item

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:red:sed019:1465. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Christian Zimmermann (email available below). General contact details of provider: https://edirc.repec.org/data/sedddea.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.