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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.