Research Notes and News
Research Notes and News highlights recently published research as well as other news from the Federal Reserve Bank of Atlanta.
Fed economists point to financial system risks from housing GSEs
The two largest portfolios of residential mortgage debt in the United States are held by Fannie Mae and Freddie Mac, which are government-sponsored enterprises (GSEs). Together, their portfolios account for about 20 percent of a $7.7 trillion market.
Operating with unique congressional charters, which have created a perception in financial markets that their obligations are guaranteed by the federal government, these two entities maintain investment portfolios that have become increasingly controversial because of their size, their management, and the systemic risks they pose to the financial system, according to three Atlanta Fed research economists.
A recent working paper by Robert Eisenbeis, Scott Frame, and Larry Wall discusses these large investment portfolios’ risk. They note that the Fannie Mae and Freddie Mac mortgage portfolios have become the central policy issue in the congressional debate in terms of the GSEs’ overall safety and soundness and an appropriate approach to supervising and regulating them.
The authors provide a historic framework regarding Fannie Mae (formerly known as the Federal National Mortgage Association), created in 1938, and Freddie Mac (also known as the Federal Home Loan Mortgage Corp.), an entity created by Congress in 1970. They also describe the dramatic growth of the GSEs, noting that Fannie Mae (with more than $1 trillion in assets in 2003) and Freddie Mac ($803 billion in assets in 2003) are the second- and third-largest U.S. companies in terms of asset size.
The authors evaluate a number of policy options for reducing Fannie Mae’s and Freddie Mac’s enormous mortgage-related investment portfolios. They conclude that limits on the portfolio sizes—either assets or liabilities—would be the most effective approach to mitigating their inherent systemic risk.
Working Paper 2006-2
April 2006
Peering inside the “Black Box” of credit and debit card transactions
Each year, hundreds of millions of credit and debit cardholders make billions of transactions worth trillions of dollars. Yet few consumers are aware that such transactions travel through, and are made possible by, a highly evolved group of intermediaries that sign up merchants to accept cards, handle card transactions, manage the dispute-resolution process, and, along with regulatory agencies, set rules that govern card transactions.
A recent article by Ramon P. DeGennaro demystifies the “Black Box” of the transactions process for payment cards. After describing a simple transaction with a private-label card, the author then considers the complications introduced by general-purpose cards, such as Visa and MasterCard, emphasizing the key roles of merchant acquirers and card processors.
Merchant acquirers, who sign up merchants to accept cards and who provide or arrange for processing, bear most of the risk of loss if merchants fail to make good on credit transactions disputed by customers. To guard against such losses, acquirers carefully evaluate the credit quality of merchants seeking or using the acquirers’ services.
The article delineates some of the risk factors associated with specific industries, merchant types, and transactions that influence the price merchants pay for acquirers’ services. Finally, the article discusses some ways that merchant acquirers manage risk, especially the risk of fraud.
Economic Review
First Quarter 2006
Examining the changes in female labor force participation
For policymakers, identifying the factors contributing to changes in labor force participation over time is important for setting appropriate policy regarding the nation’s productivity. Although the factors contributing to such changes over the past six decades have been well documented, more recent trends in women’s labor force participation beg further scrutiny.
In a recent article, Julie Hotchkiss dissects the changes in the labor force participation rate over the past 30 years among women aged 25 to 54. Using Current Population Survey data from the Bureau of Labor Statistics, the author focuses especially on the unprecedented 2.7 percentage point decline in women’s participation rate between 2000 and 2005. While changes in the observed behavior of educated women and in characteristics such as the number of young children have contributed to the decline, the results suggest that the largest contributors have been unobserved changes.
From a policy perspective, the presence of unobservables is not very satisfying or informative. Nonetheless, the large role of unobservables in determining labor force participation rates suggests that a rebound to participation rates seen in 2000 is not obviously forthcoming or likely to be easily predictable.
The next step in studying these trends, the author believes, is further investigation of how labor force participation decisions are made in a family context and how these decisions have changed over time.
Economic Review
Second Quarter 2006