Economics Working Groups and Active Output

Nonperforming Loans (NPL)

This working group will provide immediate knowledge about how the COVID-19 pandemic is affecting the banking system, build a new in-house capability for forecasting NPLs, create opportunities for publishing in professional journals, and develop knowledge enabling the OCC to assist member banks with CECL compliance.

CRA Regulation

The OCC recently has undertaken reforms in the measurement of compliance with the Community Reinvestment Act (CRA). There is already a collaborative group across the OCC involved in discussing and assessing the new CRA regulatory scoring framework and considering how best to implement it. The new CRA rule will also create new data, which OCC economists expect will help them better model the supply of credit to various communities. This data may also allow the economists to further improve the existing rule to make it more effective, transparent, and consistent in its treatment of banks and their communities.

Bundling, Unbundling, Value Creation in Banking; Fintech Chartering and Its Regulation

This is a working group divided into two sub-groups—one on bundling, unbundling, and bank valuation analysis; and another on the fintech future of banking services and the chartering of novel banks. Initially, it makes sense to combine these sub-groups into one large group because there are conceptual synergies between the two sets of questions they address (which require knowledge of issues revolving around corporate structure, valuation, and industrial organization, as well as the economics of network structure and stability). The current OCC initiatives in chartering novel banks and considering the advantages of allowing banks to unbundle financial services are closely aligned with this working group's focus.

Fintech and Financial Inclusion

This working group examines the potential role of new technologies in promoting greater financial inclusion. This working group will also be closely linked to the ongoing support for the OCC's Project REACh (Roundtable for Economic Access and Change) initiative.

Stress Tests 2.0

Stress tests are a recent invention (the stress tests that the OCC implements were mandated by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010). This is an aspect of prudential regulation that is likely to see major improvement over the next decade. Stress testing currently focuses on the effects of shocks on tangible assets and assesses the performance of the stressed bank on the basis of its exit ratio of tangible net worth to tangible assets. But banks are service companies, and intangible assets (which measure the discounted value of current and anticipated cash flows that are unrelated to tangible assets on the balance sheet) are a major driver of banks' enterprise values. Stress is properly defined as a sudden change in the value of the whole banking enterprise, and a successful exit from a stress test is properly defined as its ability to exit with a sufficiently high ratio of enterprise equity value relative to total assets. The frontier of stress testing is to find ways to provide measures of bank enterprise value and stress that reflect this understanding.

Restarting a Private Mortgage Market

Private label mortgage-backed securities (MBS) have shrunken dramatically since 2008. What can be done (consistent with safe and sound banking practice) to restore the private sector's role in the secondary mortgage market? The answer is not obvious. It could be that the exemption from the Qualified Mortgage (QM) and Qualified Residential Mortgage (QRM) rules given to Fannie Mae and Freddie Mac, combined with the Federal Housing Finance Authority's willingness to permit high-risk mortgages (i.e., those that violate the QM/QRM standard) provide an unbreachable competitive advantage to Fannie Mae and Freddie Mac. On the other hand, it may be that legal reforms or innovative technologies could change the private MBS landscape. This working group would take a close look at competition in the MBS market and consider regulatory or policy changes that might be able to restore a greater private role.

How Will Commercial Real Estate Recover from COVID-19?

The COVID-19 pandemic not only caused short-term disruption to the economy and the commercial real estate market, it also accelerated behavioral changes in the way people work and live, with potentially wide-ranging impacts on the values of different types of commercial property. This working group tracks those changes closely, by location and property type, connecting real estate property changes to local changes in economic fundamentals, and investigating the implications of those changes for banks.