Atlanta Fed's Financial Markets Conference Explores Future Regulation

Atlanta Fed's Financial Markets Conference Explores Future Regulation

FMC 2012Central bankers, finance professionals, and academics gathered on April 9–11 for the Federal Reserve Bank of Atlanta's annual Financial Markets Conference (FMC) at Stone Mountain, Ga.

Pondering regulation's effects
Following the theme of this year's conference—"The Devil's in the Details"—attendees considered issues such as the government's future role in mortgage finance and the potential for another shadow banking system to develop in response to new financial regulations. The shadow banking system refers to the largely unregulated activities that happen outside of the traditional banking system. Presentations also focused on the role of regulated intermediaries in providing maturity transformation—i.e., creating liquidity—and the creation of "systemically responsible" money market funds.

Each year, the FMC explores topical issues affecting financial markets and the broader economy. This year's event featured presentations by Federal Reserve Chairman Ben Bernanke, Sheila Bair (the former Federal Deposit Insurance Corporation chairman, now with the Pew Charitable Trust), and notables from the European Central Bank, International Monetary Fund, and other institutions.

Atlanta Fed paper explores mortgage policy
Atlanta Fed financial economist and policy adviser Scott Frame presented a paper examining various proposals to reform the federal government's involvement in the nation's housing finance system. The paper, written by Frame, Atlanta Fed financial economist and senior policy adviser Larry Wall, and Lawrence White of New York University, traces the history of residential mortgage finance in the United States and recent policy proposals to reform the system. The authors pay particular attention to the government-sponsored enterprises that back a huge share of home mortgage credit.

The paper concludes that policymakers broadly agree on a couple of points. One is to reduce the expected cost of federal government involvement in residential mortgage finance; another is to maintain explicit government guarantees for certain narrowly defined borrower populations.

Regarding the question of whether a new shadow banking system will emerge in response to new regulation, there is really no question at all, said Boston College professor of finance Edward J. Kane. In his conference presentation, he said the nation's largest banks will inevitably carve out niches outside the regulatory framework and will also enjoy an implicit taxpayer-funded safety net.

April 23, 2012