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Friday, 13 October 2017

Real estate and the great crisis: Lessons for macro-prudential policy



John Duca, Deputy President of the Dallas Fed, spoke to PEFM in Balliol College on October 9 on macroprudential policy and the financial crisis. In his presentation Duca challenged the Rogov and Reinhart thesis that crises are caused by excessive build-ups of debt, arguing that crises are much more related to real estate booms and busts. These in turn were generated by massive relaxation of regulatory requirements in the period up to the crisis.

Duca argued that price trends in the US commercial and residential real estate markets are usually distinct, but unusually they were both booming in the run up to the crisis. He ascribed this to not only the well-known pervasiveness of low interest rates but, as importantly, the marked reduction in prudential requirements, as enforced through the risk-weighting on capital requirements, and the regulatory environment more generally. There was an underappreciation of the risks, particularly the tail risks, with no recognition of inter-connectedness. There was an illusion that mortgage-backed securities (MBS) were safe.

Until around 2000, the US financial system was regulated through a series of provisions largely enacted after the Great Depression. In 2000 it became possible to protect MBS through credit-default swaps; the market took when, under the Commodities Futures Modernization Act, derivatives contracts were to be honored before regular contracts in bankruptcy. As regards sub-prime mortgages, investors thought they were getting short term investment grade assets, when in fact they were getting junk. In 2004 capital requirements on banks were 8%, but risk-weights on bank holdings of MBS were slashed, so that the effective rate became just 1.6%. Issuances of MBS soared into the stratosphere. 

Monday, 2 October 2017

Journal of Financial Regulation and Compliance: Policy responses to the Great Financial Crisis



Journal launch: Journal of Financial Regulation and Compliance: Policy responses to the Great Financial Crisis: edited by Charles Enoch (PEFM, St Antony’s, Oxford), Tom Huertas (Ernst and Young), David Llewellyn (Loughborough) and Maria Nieto (Bank of Spain)

On 29 September, 2017 PEFM hosted a conference to mark the launching of a double-number special edition of the Journal of Financial Regulation and Compliance (JFRC), looking at policy responses to the global financial crisis (GFC)—see programme attached. The event was co-sponsored by Ernst and Young and the JFRC, together with PEFM. Speakers were largely contributors to the special edition.

Tom Huertas, introducing the conference, noted that the volumes were divided into sections on firefighting, macro policy and micro responses. As to the first, the US and UK had provided solvency support. Through the G20 a comprehensive reform agenda was agreed at the Pittsburgh summit, and the Financial Stability Board (FSB) was enhanced as the overall coordinating body. As regards recovering the public costs incurred, in the US over $300 billion of restitution fees have been levied over the past five years. 

On the other hand, Fannie Mae and Freddie Mac continue to operate. There was limited interest in Congress to reform the housing market, leaving a high share of financial risk unaddressed. Also, the valuation of euro area bonds remains hanging. There also remains the issue that policy makers feel that they can model monetary policy without looking at financial issues. And now there are moves to repeal elements of Dodd Frank, in particular title 2, under which there is a division between a parent bank holding company and its bank subsidiary so that the holding company can go into bankruptcy while the subsidiary continues: there is no idea what the replacement to this structure would be. Also, the Fed is now much more constrained than earlier: it no longer would have the power to give credit to AIG. And there remains serious concern at valuation effects in the event of fire sales: this would have implications for collateral valuation, and could lead to downward price spiral. This shows why provision of liquidity is so important: liquidity from central banks may be the only game in town. If for instance Citibank is in trouble, it will need to have liquidity in Tokyo when Tokyo opens; otherwise it will not survive half an hour. This implies liquidity availability much greater than that presently envisaged. And, that said, the Chinese banking system, at 37 trillion dollars is now twice the size of that of the US. 

Wednesday, 21 June 2017

Bilateral and regional trade agreements: A case for economic reform?

Speaker: Paul Gretton, Australian National University

Chair: David Vines, Balliol College, Oxford

In this PEFM seminar, Paul Gretton tackled one of the thorniest questions plaguing trade policy today –the implications of the shift from a multilateral system to a proliferation of bilateral and regional trade agreements (BTAs and RTAs). As global action through the Doha round has stalled and trade growth has significantly slowed down, countries have sought other instruments to advance trade liberalization. By far the most common approach has been to rely on preferential agreements, either of ‘hub-and-spoke’ nature such as the EU, or on a bilateral basis.

However, such preferential deals that liberalize trade between participants but not externally have created a phenomenon known as a ‘noodle bowl’ of agreements. Their proliferation has led to complexity through associated rafts of regulations necessary to enforce them and has eroded productivity by diverting trade from lowest cost suppliers. Thus, such BTAs and RTAs are increasingly viewed not as a stepping-stone to a global agreement, but as impeding trade liberalization.

Monday, 12 June 2017

Economic and Financial Challenges in South East Europe


Speaker: Gent Sejko, Governor, Bank of Albania
Chair: Othon Anastasakis, St Antony’s College, Oxford

Building on its long association with the Bank of Albania, PEFM was delighted to welcome its Governor, Mr. Gent Sejko, for a discussion on the role of central banks as guardians of price and financial stability. In his talk, he presented Albania’s experience in addressing the global financial crisis and its aftermath and highlighted some of the lessons learned from the perspective of a small South East European economy.

Governor Sejko began by presenting the general regional dynamics. Initially, strong financial integration with the EU benefited South East Europe, particularly through rapid credit growth. However, integration turned into a shock propagator in the aftermath of the global financial crisis. Inflation, previously a significant concern, fell across the Western Balkans. In addition, an increase in NPLs also contributed to lower growth, particularly in Albania and Serbia, while unemployment and emigration remain a challenge for the whole region. Finally, the crisis has had a structural impact on South East European economies, halving growth to 3.5% annually, and leading to declining productivity and investment rates.

Tuesday, 6 June 2017

An exposé of the Asset Management industry


Speaker: Ron Bird, University of Technology, Sydney

Chair: David Vines, Balliol College, Oxford

How can we explain the existence of a multi-trillion dollar industry that consistently underperforms? This is the provocative question that Prof. Bird addressed in his seminar talk for PEFM. In particular, he focused on asset managers, that is, those that invest other people’s funds. In this arrangement, risk stays with the fund owners who get the investment returns net of all costs, while managers charge an asset-based fee and may charge a performance fee.

The size of the industry is impressive – over 71 trillion USD worth of assets under management, with profits of 102 billion USD. The biggest division within is between active and passive management. Active managers seek to pick stocks that outperform relative to a benchmark index by overweighting better performing stocks. This is opposed to passive management, which is becoming more and more popular in recent years, accounting for up to one-third of US mutual funds.