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Thursday, 18 December 2014

Coordinating macroprudential and macroeconomic policies: Issues facing Europe in the decade ahead

Democritus writes:

Financial stability is a critical new policy objective for the European Union, especially the euro area, requiring a careful rethink of policy assignments and institutional arrangements. This proposition was put forward by Russell Kincaid (Senior Member, St Antony’s College) and Valerie Herzberg (Member, Cabinet of Vice President Kataninen, EC) and debated at Chatham House on November 5, 2014.

Their presentations summarized two separate, but complementary, PEFM discussion drafts (see that were both coauthored with Max Watson.

Structural macroprudential measures (e.g., capital/liquidity buffers, SIFI surcharges) were viewed as new instruments to be assigned unambiguously to the objective of financial stability. Meanwhile time-varying macroprudential tools (e.g., counter cyclical capital buffers/risk weights, loan-to-value/debt-to-income limits) at the national level would seek to avoid boom/bust cycles as witnessed in Ireland and Spain for example. Such time-varying macroprudential policy by tailoring the ‘one-size-fits-all’ common monetary policy of the euro area to fit national conditions would thus also tackle the Walters critique—the inability of the common monetary policy to tackle country-specific shocks. This objective/policy tasking would accord with the well-established principles for policy assignments laid down by Tinbergen and Mundell and the prevailing frameworks for monetary and fiscal policies.

Wednesday, 17 December 2014

Public and private ethics at a time of crisis – the Irish experience

Robin McConnachie (Former Senior Adviser, Bank of England)

Members of the PEFM Group ended the term at St Antony's in fine style with a presentation and roundtable discussion led by Kevin Cardiff, a senior official in the Irish Finance Ministry at the time of the 2008/9 financial crisis. Currently member of the European Court of Auditors for Ireland he led the response to the crisis from 2010 to 2012 as Secretary General of the Irish MOF; and impressed all present with the perceptive frankness of his post crisis reflections. Kevin emphasised that he was talking about personal behaviour in a time of crisis, not giving a retrospective assessment of the economic and financial rights and wrongs of the eventual resolution.

Kevin's analogy was with the wartime situation. There were heroes and villains in both public and private sectors but fortunately more of the former, many of whom shouldered their added responsibilities at considerable personal cost. One abiding difficulty was of the uninvited third party – perhaps a big hedge fund – who periodically attempted to insert themselves into the crisis in order to make money. There were two business models here – one manipulative, the other more transparent – and much time was wasted in seeing them off; as officials handling the crisis were public servants they had to behave with visible equity. Obviously what is needed for the future are better detection and regulatory systems for earlier anticipation of future financial crises but so too are more robust processes for selecting and training those with public and private responsibility for the big financial decisions. Of course well intentioned people may make the wrong decision and the less principled may happen upon the right one. But Plato's essential question remains: what is it in a person's character and training that will influence him or her to take the best decision in a time of crisis? And can you ever guarantee that this will be the morally correct choice, either short term or longer term?

Can the tightening of financial regulation be made consistent with a resumption in sustainable growth?

Alexandra Zeitz (Global Economic Governance Programme, University of Oxford)

A recurring theme in PEFM’s seminars over the last term has been the notion that regulatory responses to the financial crisis of 2008 have not been tied into a coherent, overarching framework. So too in Cyrus Ardalan’s presentation on December 1, when the Barclay's Vice Chairman and Head for UK and EU Public Policy and Government Relations gave a vast and informative overview of financial regulation since the crisis, analyzing the consequences of this regulation for sustainable growth.

In the absence of a coherent framework that adequately emphasizes sustainable growth, Ardalan suggested, regulation could have adverse consequences. He argued that new regulation was urgently needed in the aftermath of a crisis that revealed widespread weaknesses, especially in flawed risk models and exceptionally high leverage. However, he also contended that the spate of post-crisis regulation, particularly capitalization and liquidity requirements, placed burdens on banks that make it increasingly difficult for them to play their critically important inter-mediation role.

What challenges do the spillovers from EU Banking Union pose for emerging economies in Europe?

Alexandra Zeitz (Global Economic Governance Programme, University of Oxford)

What will the recent bold shift in European financial regulation mean for Emerging Europe? In early November, Europe took the first steps towards a new level of integration with the launch of the Banking Union. The first stage of this overarching concept was the introduction of the Single Supervisory Mechanism on November 4, under which the European Central Bank took over direct supervision of the largest banks in the Eurozone, which together hold 82% of the area’s bank assets.

In a PEFM seminar on November 24, Piroska Nagy, Director for Country Strategy and Policy at the European Bank for Reconstruction and Development (EBRD), argued that for the Central and Eastern European states, which are deeply integrated with the European financial system, the European Banking Union holds much promise. Whether that promise will be fulfilled has yet to be seen. 

Contrary to popular expectations about ‘emerging’ or ‘transition’ Europe being at the periphery of European finance, Nagy demonstrated on Monday that these states are in fact tightly financially integrated with ‘advanced’ Europe. In particular, the process of bank privatization in post-Soviet states led to incredibly high foreign bank ownership. In some states (e.g. Serbia or Croatia), Eurozone banks make up almost 100% of the banking sector.

Thursday, 4 December 2014

A corporate balance sheet with a little added love


A corporate balance sheet with a little added love

Financial globalization—where next?

Alexandra Zeitz (Global Economic Governance Programme, University of Oxford)

PEFM hosts Charles Collyns, Managing Director and Chief Economist, Institute of International Finance

Could financial globalization be heading into reverse? Before the 2008 financial crisis, financial integration was steadily and rapidly advancing, drawing emerging markets more tightly into a network of cross-border financial flows. In the aftermath of the crisis, flows have reduced and dramatically changed their composition.

How much is a natural reaction to the crisis? And how much an unintended consequence of increasing financial regulation? What are the consequences for emerging markets? In a PEFM seminar on Monday, November 17 Charles Collyns, Managing Director and Chief Economist at the Institute of International Finance (IIF), offered his views from within the financial industry on the prospects for financial globalization.

The striking cutback in cross-border financial flows (from approximately $9 trillion in 2007 to about $2.5 trillion in 2013) mostly reflects the steep decline in international bank flows. Much of this is due to a collapse in short-term inter-bank lending, which had built up excessively in the lead-up to the crisis. By contrast, foreign direct investment and portfolio flows have remained largely steady globally.

Thursday, 6 November 2014

Rebuilding trust in financial services

Alexandra Zeitz (Global Economic Governance Programme, University of Oxford)

PEFM hosts Nicholas Morris and David Vines, introducing their 2014 book Capital Failure

Has finance has lost its sense of moral opprobrium, the ethical compass of the profession? So argued Nicholas Morris and David Vines in their October 27 PEFM presentation introducing their 2014 book Capital Failure: Rebuilding Trust in Financial Services, also offering proposals of how to encourage trustworthy behaviour.

Analyses of the 2008 financial crisis, whether by regulators or industry insiders, have predominantly treated the crisis as a consequence of market failures. Morris and Vines, however, argue that at the root of these market failures are problems of trust. Crucially, they claim that regulations alone will not be sufficient to restrict risky behaviour, since imbalances in information and expertise mean regulators will be repeatedly outwitted and outstripped.

Monday, 27 October 2014

Sustainable finance: Restoring confidence and stability in the financial system

Alexandra Zeitz (Global Economic Governance Programme, University of Oxford)

The corporation, as an institution, is in crisis. So argued Colin Mayer, Peter Moores Professor of Management and the Saïd Business School, in his October 20 presentation at the PEFM seminar.

Mayer attributed the crisis of the corporation to its governance structure. He argued against the prevailing view that the greatest concern with respect to corporate governance is the ‘agency problem,’ i.e. the fact that shareholders exercise insufficient control over corporations.

Instead, argued Mayer, the problem of the corporation lies precisely in the fact that short-term shareholders are able to hijack the corporation, distracting from the commitments the corporation might have to other stakeholders, including consumers and employees. Shareholders might even reward the corporation for infractions where these seem to provide short-term benefits that outweigh reputational costs or fines; Mayer cited the case of Barclay's share price increasing by 60% during the six months after the LIBOR scandal broke.

Wednesday, 25 June 2014

Banking Union: Will the ECB’s assessment do the trick?

Jack Seddon (St John's College, Oxford)

It is often noted that Europe's banking union is incomplete, involving a single supervisor but without an adequate single resolution mechanism or central deposit insurance arrangement. However, what, exactly, that “half union” is and how, precisely, the union is taking shape is usually described only in the vaguest terms. This was not the case in Nicolas Veron's (Senior Fellow at Bruegel; Visiting Fellow at the Peterson Institute, Washington DC) exploration of the question Max Watson invited him to PEFM to explore: namely, "Banking Union: Will the ECB's Assessment do the trick?" It is difficult in this short blog to give expression to the mastery with which Veron talked through the complex details of the banking union, its strengths and weaknesses, its present scope and the likely developments downstream. However, it would be an abdication of responsibility not to attempt to give some sense of the fundamental and fascinating trends Veron observed.

Monday, 19 May 2014

Governing global risks: The evolution of policy capacity in the financial sector

Jack Seddon (St John's College, Oxford)

Professor Louis Pauly gave a presentation to PEFM based on a paper entitled, “Governing Global Risks: The Evolution of Policy Capacity the Financial Sector.” He challenged his audience to think about the emergence of a "transnational prevention state" (transnational prevention arrangements across borders that translate into effective policy capacity). The paper is part of a work in progress for a book with Edgar Grande.

Professor Pauly argued that this policy capacity is already emerging and developing to deal with global risks and uncertainties. It involves three sets of objectives and three arenas of risk politics. The first arena is the technocratic one focused on risk measurement, assessment, and monitoring. The locus of action here may be seen as shifting from formal international organizations to "clubs", like those now engaged in the so-called Basel Process (Basel Committee, IOSCO, IAIS, and FSB). The second arena involves compensation and crisis prevention, where inter-state collaboration and public-private partnerships are most evident. The third arena involves emergency management and resolution, where ad hoc collaboration (at most) among key finance ministries and central banks is at the moment the dominant trend.

Monday, 12 May 2014

IMF and bank creditors: Who's in charge when a country can't pay?" and "Stabilising an unstable world: Is there a better future for international finance?

Jack Seddon (St John's College, Oxford)

Dr. James Boughton, the former official historian of the International Monetary Fund and current CIGI Senior Fellow, shared his experience with PEFM through two presentations addressing the following topics: first, "IMF and bank creditors: Who's in charge when a country can't pay?"; and, second, "Stabilising an unstable world: Is there a better future for international finance?"

Addressing the question of who's in charge, Dr. Boughton provided a fascinating account of an "un-holy" trinity – to paraphrase Cohen's apt portrayal of the Mundell-Flemming trilemma – that have competed to shape the international community's responses to countries facing payments problems. The trinity comprises the IMF, the US Treasury and other bilateral official bodies and international banks and bond holders. While these players share a common interest in wanting to see the country in trouble recover and repay its debts, Dr. Boughton eruditely showed how their particular preferences will differ. In particular, he showed how bilateral creditors must respond to strategic and political considerations that will not concern the private sector, while the IMF is beholden to its mission and various stakeholders in sometimes unobvious ways.

Sunday, 23 March 2014

EMU Governance: An interdisciplinary perspective

Jack Seddon (St John's College, Oxford)

The EMU project may still be riddled with uncertainty, but some of the fog is lifting. Today, only the most uncritical Europhiles would dare to think that enough has been done to ensure prosperity and economic security going-forward, while only those rhetorically trapped by prior-grave-predictions continue to write-off the prospect that this aspiration may yet become reality. The increasingly open space in between means there is work to be done. On 11th and 12th March 2014, the Political Economy of Financial Markets (PEFM) programme, in collaboration with the Santander Fellowship at the European Studies Centre, rolled up its sleeves in response to this emergent space for debate and sponsored a unique seminar on the future of EMU governance. The seminar was entitled: 'The Governance of EMU: Recasting Political, Fiscal and Financial Integration'. The broad aim was to graft scholarly content into the on-going EMU governance debates and to add new systematic analysis that might better explain the emergent trajectories. This academic seminar, conducted as a roundtable under the Chatham House Rule, brought together economists, economic historians, political scientists and international relations experts - as well as some officials and market participants - from several European countries and the United States.

Sunday, 2 March 2014

Global Monetary and Regulatory Spillovers

Heraclitus writes:

Since the onset of the global and euro area crises, advanced economy governments have introduced new policy approaches that have changed the monetary and regulatory landscape – including unconventional monetary policies in major economies and the agreement by bank regulators on Basel III. In today’s interdependent economy, such policies spill across borders: these changes have indeed had a substantial effect on emerging and developing countries in all regions. On 12th February, 2012, the Global Economic Governance (GEG) Programme and the Blavatnik School of Government, in association with the Political Economy of Financial Markets (PEFM) programme, hosted a high-level international roundtable on how monetary and regulatory spillovers are affecting emerging and developing countries, and what policy responses are called for.

Saturday, 8 February 2014

The Eurozone crisis: An insider’s view from Cyprus

Androulla Kaminara (Academic Visitor, St Antony's College, Oxford)

On the 27th of January Dr Michael Sarris[1] gave a very lucid account into the functioning of the Eurogroup, as was experienced by the Cypriot delegation during the two meetings of March 2013. The first meeting resulted in a decision for a bail-in of Cypriot banks by all depositors and the second decision of bail-in from depositors with deposits of over 100,000 euro.

He highlighted that the current narrative is based on looking only at some of the symptoms of what is wrong with the European construction and not at the underlying problems. He believes that many Member States took seriously the benefits of the Eurozone and less seriously the obligations emanating from being a member. However the Eurozone architectural construction had shortcomings that were not addressed, as for example, the lack of a mechanism to control imbalances, in both surplus and deficit countries. “When we realised that they were a lot of fires burning – we concentrated on rules to avoid new fires from developing, rather than to put out existing fires.” Crisis mismanagement and a faulty decision making process are at the heart of the Eurozone’s continuing troubles.

Sunday, 19 January 2014

A Schuman Compact for the Euro Area

Heraclitus writes:

Europe needs to go back to its political roots, and these roots remain predominantly national. The challenge of improving the robustness of the euro area, in the wake of the crisis, cannot overturn this basic political reality. Forcing the pace on fiscal union, directly or through a mutually-supported banking union, would outrun popular support for the European project. For the foreseeable future, therefore, centralisation and fiscal union do not represent a viable way ahead for strengthening the euro area. As this becomes clear, the present tactic of 'muddling through' will simply become a muddle. These were among the tough messages of Ashoka Mody (Visiting Professor, Princeton; formerly IMF), in his seminar on EMU for the Political Economy of Financial Markets Programme.