Regulatory Ambiguity and Banking Crisis: A 21st Century Perspective

Regulatory Ambiguity Amidst Banking Crisis

Overview:

The recent banking turmoil has stirred regulatory ambiguity surrounding financial regulation, marking its peak within over a year of evaluation. However, the rise in uncertnty doesn't surpass historical benchmarks and falls short of levels observed during the 2007-2008 financial crisis.

Recent bank flures have fueled skepticism towards U.S. financial oversight and regulation. Alongside criticisms of inadequate supervisory measures, regulatory ambiguity has amplified fears about another global financial crisis. In this commentary, we explore how regulatory uncertnty escalated following the collapses of Silicon Valley Bank SVB and Signature Bank, while contrasting these fluctuations agnst historical contexts.

Building upon our previous research conducted in collaboration with Tara Sinclr1, which utilized processing on newspaper articles to measure regulatory ambiguity since 1985, I present an updated analysis as of March 2023. This involves a refined measure focusing solely on finance and banking regulation dynamics over the period January 2022 through March 2023.

Figure 1 visualizes two specific indicators for this evaluation:

1. The monthly regulatory uncertnty index, which is derived from our previous research ;

2. A ratio of news articles expressing ambiguity toward financial regulations to those discussing broader regulatory issues.

In March 2023, these measures reached their highest points over the past yeardemonstrating heightened regulatory ambiguity specifically in finance and banking sectors. The ratio rose to an average of 14, compared to a monthly average of approximately 7 from January 2022 to February 2023.

A word cloud Figure 2 illustrates common themes within the news articles that conveyed financial regulatory ambiguity last month. Key topics highlighted the central roles of SVB and Signature Bank, alongside frequent mentions of federal agencies like the Federal Reserve, Credit Suisse, banking regulators, and deposit insurance. These discussions predominantly centered on attributions for oversight flures and risks in those institutions.

Historically speaking, does this level of financial regulatory ambiguity currently stand out? The answer is no see Figure 3. The monthly regulatory uncertnty index charts show an upward spike at the time of this analysis, though its magnitude doesn't surpass many prior instances. Notably, during the peak period around the implementation of the Dodd-Frank Act in 2010, regulatory ambiguity reached a significantly higher point.

In contrast to the aftermath of the 2007-2008 financial crisis when heightened uncertnty typically occurred post-market collapse due to subsequent policy responses, this banking crisis's situation may differ. If regulators respond with substantial changes to existing finance and banking regulations in light of recent bank flures, we might witness a more pronounced increase in regulatory ambiguity.

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1 Tara Sinclr is currently the Deputy Assistant Secretary for Macroeconomics at the Department of Treasury. The views expressed here are her own and do not necessarily reflect those of the Treasury or the U.S. government. This updated data analysis represents my indepent work, unrelated to the previous collaborative efforts with Ms. Sinclr.

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For related content on sentiment and uncertnty in regulatory dynamics:

Link to relevant article

References:

• Citation 1: Sinclr, T., Author's Name 20XX. A Systematic Approach to Analyzing Regulatory Sentiment through Text Mining Techniques.

• Citation 2: Other Relevant Sources

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