Tuesday, September 29, 2009

Region Focus: On Credit Regulation

The latest issue of Region Focus is available, and mostly covers credit and financial regulation. It is well worth the time for those of us who would like a short primer on the subject. Here is an excerpt from Jeffrey Lacker on "On The (Limited) Role of Credit Ratings in the Financial Crisis":
One plausible reason investors bought these securities involves the incentives built into the capital requirements that financial institutions must observe. Credit ratings issued by the agencies were used to assign “risk weights” to the securities banks held. If the grade was high, banks could hold less capital as a buffer against losses. That gave banks an incentive to hold the highest-yielding (that is, riskiest) securities with any given rating — in short, potentially overrated securities.
There is much more worth reading in the issue: a summary of Milton Friedman's contribution to global economic growth, the economics of speeding tickets, whether or not the line-item veto reduces state spending, what prolonged the Great Depression, and CEO (over?) compensation.

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