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Tuesday 6 December 2016

Brexit and the Future of European Integration: A Trans-Atlantic Perspective


Ivaylo Iaydjiev (St Antony’s College, Oxford)

Speaker: Russell Kincaid (former IMF director)
Chair: Charles Enoch (St Antony’s College, Oxford)

Since the June referendum a lot of ink has been spilled on the causes and consequences of Brexit for the UK and for the future of European integration. Given the rather inward focus of much of the discussions so far, experts with more distance from the immediate issues can sometimes shed more light. This is exactly what Dr. Russell Kincaid offered to participants in this PEFM seminar by presenting a transatlantic perspective on Brexit and the EU.

Dr. Kincaid argued that the key issue from the US perspective is what Brexit tells us about the future of European integration. Overall, US policymakers see a number of structural problems that plague the EU and believed that they have a better chance to be addressed with the UK inside rather than outside the Union. Indeed, Brexit will not provide solutions to any of the EU and euro problems and instead the resulting complex negotiations risk turning into a powerful distraction for EU policymakers.

More fundamentally, Kincaid identified the source of many of the EU problems as the lack of a clear vision about the ultimate ambition. He recognized that the incremental approach was fundamental to the process of European integration, but noted that it has mostly been an elite-led project suffering from a democratic deficit. Until now, a permissive consensus has allowed integration to proceed, but today these elites find themselves instead constrained by distrust among European publics. 

Monday 5 December 2016

Book launch: Governance of the European Monetary Union

Blogpost: Alexandra Zeitz, St. Antony’s College, University of Oxford

Speaker: Francisco Torres, LSE
Chair: Charles Enoch, St. Antony’s College, University of Oxford

The edited volume Governance of the European Monetary Union, published by Routledge in 2016, is dedicated to the memory of Max Watson, honouring his scholarship, policy-making and commitment to interdisciplinary research and cross-disciplinary conversation. That commitment to reaching across disciplines and forging common understanding seems particularly necessary in these fraught and challenging times for Europe. 

Francisco Torres (LSE) introduced the book to an Oxford audience at a PEFM seminar in December. In his presentation, he outlined the contributing authors’ case for urgent institutional reforms in the European monetary union. Torres said the book, which he edited together with Erik Jones (Johns Hopkins University), is based on a broadly consensual narrative of the Eurozone crisis.

In this narrative the crisis is understood to have emerged from pervasive economic imbalances among Eurozone members, with flows primarily going from Germany, Netherlands, and France to Spain, Italy, Greece, and Ireland. Excessive public and private debt, which mostly took the form of foreign borrowing, left economies vulnerable to a “sudden stop” in credit. Torres explained that these imbalances arose out of EU countries’ failure to internalize the common objectives agreed upon in the Lisbon Treaty or the Stability and Growth Pact, with necessary reforms delayed in the absence of market pressure or binding and enforceable rules. 

Friday 2 December 2016

Brexit – what are the options?

Ivaylo Iaydjiev (St Antony’s College, Oxford)

Speaker: Anatole Kaletsky (Gavekal, Reuters, International Herald Tribune)
Chair: Adam Bennett (St Antony’s College, Oxford)

Since the referendum, the options facing Britain have been debated extensively (except by the government which remains tight-lipped), and the discussion is only likely to intensify further as the prospect of invoking Article 50 looms. Anatole Kaletsky, who last appeared before PEFM in January 2016 to discuss the evolution of capitalism in light of the global financial crisis in 2008, returned to PEFM eleven months later to divulge his thinking on the implications of the shock Brexit referendum of 2016, a political and economic event that has finally eclipsed the events of 2008 as the inexorable topic of everyone’s conversation (at least in the UK). Kaletsky’s overarching thesis was that there was still a real possibility that Brexit might not actually take place.

Kaletsky began by deciphering the underlying reasons for the Brexit vote. In light of the US presidential election, it is arguable that the referendum had less to do with particular European issues but is rather symptomatic of a global phenomenon sweeping across the West, driven by demographics, educational attainment and regional disparities. However, Kaletsky sees limited evidence in globalization driving the voting patterns, noting that supporters of Brexit usually had slightly higher incomes than average and were to a large extent outside the labour force (chiefly older retired voters and non-working women). Indeed, those potentially most affected in terms of the impact of immigration on jobs – those just entering the labour market, see freedom of movement not as a threat, but as a benefit of the EU.

Friday 18 November 2016

Bank resolution in the European financial architecture

Ivaylo Iaydjiev (St Antony’s College, Oxford)

Speakers: Joanne Kellerman, Single Resolution Board
Chair: Charles Enoch, St Antony’s College, Oxford

The euro area crisis is often described as ‘vicious circle’ between sovereigns and banks. At its core, this is generated by a dilemma regulators face when a bank is likely to fail – should they leave the bank to go bust and face the consequences or should they use public money to provide a bailout? As Joanne Kellerman argued in her talk, at its core is a question of whether there is a trade-off between financial stability and market discipline. In response, Kellerman analyzed the role of the Single Resolution Board (SRB), the new European agency charged with taking decisions on resolution, of which she had been a member since its inception in 2015.

Kellerman began by reviewing briefly the crisis experience and the regulatory response. Given the lack of centralized supervision and resolution, when the crisis hit states intervened through the ring-fencing of assets and the provision of taxpayer lifelines to banks. This in turn transformed a banking crisis into a sovereign debt crisis and unleashed the ‘vicious circle’. The EU, after taking a set of emergency measures, sought to overhaul the structure of financial supervision by the creation of set of new bodies. Meanwhile, the problem of ‘too big to fail’ received increasing attention in global forums such as the FSB, which were in the process of being translated into European legislation.

Tuesday 15 November 2016

Brexit and its impact on the Western Balkans

Ivaylo Iaydjiev (St Antony’s College)

Speaker: Peter Sanfey, European Bank for Reconstruction and Development
Chair: Jonathan Scheele. St Antony’s College, Oxford
Discussant: Adis Merdzanovic, St Antony’s College, Oxford

The impact of Brexit on the UK, Europe, and the world are discussed almost daily in the press and much uncertainty remains. Yet, often lacking from such discussions are its indirect impacts on third countries, such as those in the Western Balkans. In his talk, Peter Sanfey presented new research carried out by the European Bank for Reconstruction and Development on the impact of Brexit on Serbia, Montenegro, Bosnia, Albania, FYROM and Kosovo. His remarks were followed with a brief analysis of the political implications by Adis Merdzanovic from St Antony’s College.

The Western Balkans face an important convergence challenge. Currently, their income is around half of that of other Eastern European countries, and only a quarter of that of Western European countries. Yet, there have been some positive developments, with growth projected to average 3% in 2017, a stable macroeconomic situation, and declining non-performing loans. Over the medium term a set of factors enhance their attractiveness to investors: the prospect of EU membership, good relations with the IMF, a geographic location at a crucial point of China’s New Silk Road, the diverse range of economic activities, and favourable tax and labour costs.  

Friday 11 November 2016

European Banking Union: The unfinished agenda for a changing Europe


Ivaylo Iaydjiev (St Antony’s College, Oxford)

Speaker: Christos Gortsos, Law School of the National and Kapodistrian University of Athens

Chair: Adam Bennett, St Antony’s College, Oxford

The decision on 29 June 2012 to go ahead with the creation of the European Banking Union (EBU) is often seen as a key turning point in the euro area crisis. The stated goal was, boldly, to “break the vicious circle between banks and sovereigns”. In his talk four years later Prof. Christos Gortsos took stock of how far this has been accomplished and what remains unfinished. In particular, he focused on the key asymmetries in the three main pillars of the EBU: the Single Supervisory Mechanism (SSM), the Single Resolution Mechanism (SRM), and the prospective European Deposit Insurance Scheme (EDIS).

Prof. Gortsos began by drawing an important distinction between rules and institutions. According to him, the harmonized rules that form the Single Rulebook are a byproduct of the Global Financial Crisis and are based on global rules such as Basel III or FSB recommendations. However, the EBU represents an evolution in the institutions that implement such rules. Thus, by addressing the asymmetry between increasingly Europeanized rules and their enforcement by national authorities, the EBU should be regarded as a specific consequence of the euro area crisis.

Friday 4 November 2016

Restoring trust in finance: Competition or moral motivation?


Blogpost: Alexandra Zeitz, St. Antony’s College, University of Oxford

Speaker: Gordon Menzies, University of Technology, Sydney (with Donald Hay and Thomas Simpson)

Chair: David Vines, Balliol College, University of Oxford

Banking suffers from a trust problem. A post-crisis YouGov study found over 70% of respondents agreeing that “Banks aren’t doing enough to get us out of this economic crisis which they helped cause”. In his PEFM seminar in Michaelmas term, Gordon Menzies (University of Technology, Sydney) presented research on the means of restoring trust in banking, arguing that greater competition alone cannot increase public trust in banks. Instead, Menzies argued that bankers’ motivations must be addressed; in order for banks to earn stakeholders’ trust, they must invest in ethics education and professionalization as measures to encourage moral motivation.

Banking did not always have the distrusted reputation it has today. Menzies began his presentation with a history of late 19th to mid-20th century “gentlemen bankers” in Britain. These bankers enjoyed a well-respected reputation for conservative and reliable banking based on personal relationships and close knowledge of their customers. Bankers’ pay was moderate, and the business was not characterized by the cross-selling and conflicts of interest that are now pervasive. 

This all changed with “Big Bang” deregulations in the late 1980s. Menzies pinpointed these reforms in financial markets as leading to changes in British banks’ motivations and behavior. Risk-taking increased rapidly, as did bankers’ remuneration. This risk-taking on its own is not morally objectionable, as Menzies pointed out. Bankers’ behavior can be thought of as a “right to be rogue,” a right purchased with the high returns acquired through risky investments. Investors and customers may countenance rogue behavior as long as it yields them substantial returns. 

Friday 28 October 2016

The future of banking and the role of challenger banks


Blogpost: Alexandra Zeitz, St. Antony’s College, University of Oxford

Speaker: Cyrus Ardalan, Chairman, OakNorth Bank
Chair: Alexandra Zeitz, St. Antony’s College, University of Oxford

The banking sector in the UK is undergoing a transformation. In 2010, the Bank of England issued the first new banking license in one hundred years to Aldermore. From 2013 to 2016, 14 new banks have received licenses, and there were reports in mid 2016 that a further 20 new banks had applied for licenses. This proliferation of new “challenger banks” is reshaping the financial landscape in Britain.

Cyrus Ardalan, formerly Barclays Vice Chairman (Investment Banking), is the new Independent Chairman of OakNorth Bank, a challenger bank specializing in financing to small and medium-sized enterprises (SMEs). In his presentation at PEFM this term, Ardalan gave an insider’s perspective on the changes in the British banking sector and gave his explanation for the rise in challenger banks, which he chalked up to regulatory changes and technology shifts. 

The British banking sector remains highly concentrated. The “Big Five” banks (HSBC, RBS, Barclays, Santander, Lloyds) control 90% of the market in personal banking, corporate financing and SME lending. Nevertheless, challenger banks are reshaping the landscape. These include larger challengers such as Clydesdale and Yorkshire, TSB, and Handelsbanken, which in many cases are longer established and have relatively large portfolios of loans. Smaller challengers such as OakNorth, Metro, Aldermore and Shawbrook received their licenses in the more recent profusion of banks. Retailers offering financial services, such as ASDA, M&S or Tesco, are also challenging the dominance of the Big Five, but are not “challengers” in reshaping the model of banking, according to Ardalan. 

Friday 21 October 2016

A pragmatic approach to reform of banking governance and culture


Blogpost: Alexandra Zeitz, St. Antony’s College, University of Oxford

Speaker: John Mellor, University of Leicester
Chair: Adam Bennett, St. Antony’s College, University of Oxford

What does it take for a bank to be well governed? In Michaelmas term, PEFM hosted John Mellor of the University of Leicester for a seminar on reforming banking governance and culture. Mellor’s headline argument was that the quality of bank governance is directly shaped by a bank’s culture, which in turn is defined by the purpose or objective that the bank sets itself. He used case studies of three well-known banks, Nationwide, Rothschild, and Barclays, to illustrate the determinants of high and poor quality bank governance.

While it is oft discussed, Mellor suggested that bank governance is in fact poorly understood. He argued that analysis of bank governance must begin with the bank’s board of directors, since the directors hold ultimate responsibility for the bank’s conduct. Governance, from the bank’s board downward, is influenced by both internal and external factors. Internally, bank governance is shaped by the ownership of the bank, its business model and history, while important external circumstances are the competitive and political environment and the structure of regulation. 

Friday 14 October 2016

Ethics and cultural assimilation in financial services

Ivaylo Iaydjiev (St Antony’s College, Oxford)

Speakers: Alan Morrison, Saïd Business School, and John Thanassoulis, Oxford-Man Institute, University of Oxford

Chair: Natalie Gold, King's College London

With a string of scandals in finance in the last few years, it is not rare to hear people lamenting the decline of ethical behavior in the industry, including the Archbishop of Canterbury and Pope Francis. In their new paper, Alan Morrison and John Thanassoulis want to go further and understand the causes behind the many failures.[1] Drawing on the use of contracts of finance and their role in incentivizing certain behavior and fostering a culture, they present an elaborate model of cultural assimilation in a professional services firm.

The starting point for their argument is the moral dilemma that bankers face in acting on behalf of their clients. In considering the trade-offs of actions that are simultaneously harmful to the client and profitable to the company, traders are likely to be affected by cultural standards and the tone from the top. The question then becomes how performance pay affects such decisions and why a principal might decide to create a less ethical culture. Their model includes two versions of the actors, one based on a utilitarian Benthamite conception that focuses on increasing the aggregate welfare surplus, and the other based on Kantian duty ethics that consider actions separately from their context. 

Friday 27 May 2016

Managing Complexity—Economic Policy Cooperation After the Crisis

G. Russell Kincaid (St. Antony’s College, Oxford)

Speakers: Tamim Bayoumi, Deputy Director, International Monetary Fund (IMF); Fred Bergsten, Senior Fellow and Director Emeritus, Peterson Institute for International Economics; Heidi Crebo-Rediker, Senior Fellow, Council on Foreign Relations; and Vitor Gaspar, Director Fiscal Affairs Department, IMF

Moderator: Kemal Dervis, Vice President and Director, Global Economy and Development, The Brookings Institution

According to Mr. Bayoumi, this new book adopts a Cubist Approach to analyzing economic policy cooperation. Like the art school, the 12 chapters in Managing Complexity—authored by various academics and practitioners, including two current PEFM Associates—do not depict the subject from a single vantage point, but provides multitude perspectives to picture all the intricacies. This event, was held at the Brookings Institution in Washington DC on May 16, followed similar presentations earlier in 2016 at Chatham House and in Shenzhen, China at a conference on global financial governance. The book’s main thesis rebuffs the “benign neglect” approach to policy cooperation owing to new challenges posed by interlinked financial stability and the “new normal” economic environment.

Fred Bergsten endorsed strongly the message that the benefits from policy cooperation are far greater in tough times—a point made in the chapter by David Vines—seeing a need to ensure that cooperation frameworks are in place and ready to respond promptly—like fire fighters. He added that having more policy issues on the table helps by opening up more trade-offs and allowing more avenues to a successful conclusion. He stressed the importance of inclusiveness—having all the policy actors at the table, in particular emerging market economies such as China. 

Continuing the latter point, Ms. Crebo-Rediker emphasized the complex interactions from spillovers and spillbacks especially from capital flows, resulting from our ever more multi-polar global economy. In this connection, she recommended the four chapters on policy responses to the crisis. She highlighted the important cautionary lessons in the chapter on the euro-area responses, which was accurately subtitled “A Case of Too Little, Too Late” written by an insider, Fabrizio Saccomanni.

Friday 13 May 2016

What they do with your money: Does the finance industry do its job well?


Ivaylo Iaydjiev (D.Phil. Candidate, St Antony’s College, Oxford)

Speaker: David Pitt-Watson, London Business School
Chair: David Vines, Balliol College, Oxford

What does the financial industry do with your money? That is the misleadingly simple question that motivates David Pitt-Watson’s new book (co-authored with Stephen Davis and Jon Lukomnik). Given the large amounts of fees we pay in transparent or often less so ways to financial professionals, this is a particularly pertinent question. More broadly, it invites us to step back from the complex and technical details that dominate everyday financial news and revisit how we think about the role of the financial system and its contribution to society. 

Mr. Pitt-Watson examines in his talk whether the financial industry does its job well, and his conclusions are not particularly optimistic. Intriguingly, he decides to tackle the question by first reconnecting financial activity with its initial purpose. As he aptly points out, there is a voluminous literature on what financial institutions exist, but it tends to proceed by assuming that the existence of such institutions must serve a purpose, and then deducing what that purpose might be. Instead, it is necessary to be clear on what the original purpose is and work out the institutions from there.

For Mr. Pitt-Watson finance serves four key purposes, largely in line with the academic literature. The first key function is the safekeeping of assets, especially money. In turn, this is central to the second function – transaction-processing, or reducing the costs of financial exchange. The third function is the sharing of risk through the provision of insurance, which however does not reduce the aggregate amount of risk. Finally, the financial system’s most important purpose is to intermediate funds from savings to investment. 

These four functions demonstrate that finance does indeed have a socially beneficial purpose. However, he is careful to point out that this purpose relies on technical knowledge as much as on trust in the institutions and financiers themselves. When knowledge and trust are combined with a sense of purpose, the results can be transformative. Therefore, finance is key to our economies, to opportunities for social mobility and development, and to addressing our current challenges.

Friday 6 May 2016

Financial Reform in Turkey: Responses to Past and Current Crises

Alexandra Zeitz (St Antony’s College, University of Oxford)

Speaker: Gazi Ercel, Former Governor of the Central Bank of Turkey
Chair: Nicholas Morris, St. Antony’s College, University of Oxford

How to prevent cycles of financial crises in emerging market economies? What interventions and reforms can stabilize and strengthen these economies in the aftermath of a financial crisis? Drawing on his extensive experience in Turkey, Gazi Ercel, former Governor of the Central Bank of Turkey, shared his insights on financial crises and reform in a PEFM seminar in late April, stressing the importance of reducing political uncertainties and ensuring post-crisis reforms are carried through once economic conditions improve.

Examining the record of financial crises in Turkey in the last four decades, Ercel identified common causes. In almost all crises the country has faced in recent history, public sector deficits had expanded, which provoked investors to withdraw short-term capital and in turn plunged the economy into crisis. For instance, Ercel attributed the inflows of large volumes of short-term capital in the lead up to the 1978-1979 crisis to a positive World Bank report. When these investors abruptly and rapidly withdrew in light of worsening public sector imbalances, the country experienced its worst foreign exchange crisis in three decades.

Domestic political economy, especially the pressure for a rising public sector wage bill, is at the root of the persistent public deficits that prompt financial crises, argued Ercel. The instability of Turkish politics exacerbates this problem, disincentivizing fiscal discipline as governments seek to maintain their hold on power.

In addition to identifying these Turkish political dynamics, Ercel argued that the particular causes of financial crises in emerging economies are distinct from those in developed economies. While industrialized economies are more likely to experience crises in their capital markets, emerging economies are frequently hit by debt crises. Emerging markets are likely to have weak and unsophisticated banking sectors, which may cause fragility, while instability in developed economies stems from the complexity and lack of transparency in banking sectors.

Monday 22 February 2016

A code of ethics for bankers – Challenges and opportunities

Alexandra Zeitz (St Antony’s College, Oxford)

Speaker: Robert Mass, Head of International Compliance, Goldman Sachs
Chair: David Vines, Balliol College, Oxford

The financial services sector continues to grapple with a string of headline-grabbing scandals. One interpretation of this has been that the industry suffers from a serious shortfall in ethical standards. Various solutions have been offered for the apparent “culture problem”. High profile commentators have argued, for instance, that managers should set a “tone from the top,” correcting for deficits in ethical standards by modelling conscientious behaviour towards clients, competitors and co-workers and expecting the same from those further down the ladder.

One popular response to the seeming problem of values has been to set out ethics codes that explicitly commit bankers to clear normative standards. Barclays, for instance, unveiled a code of conduct in 2013 as part of its efforts to address the cultural deficits that underlay the foreign exchange-fixing and personal protection insurance scandals. In 2015, the G20 released a set of Principle of Corporate Governance. What can such codes achieve, and what should they include?

In February, PEFM hosted Robert Mass, Head of International Compliance at Goldman Sachs, to discuss his proposals for a code of ethics for bankers. Mass’ engagement with codes of ethics was incredibly wide-ranging, spanning both the philosophical and pragmatic.

In order to be effective, says Mass, codes of ethics must be rooted in existing social practice, in the day-to-day lives and expectations of those they hope to influence. Drawing on moral philosophers including Hume and Smith, Mass argues that ethical standards cannot be given a priori; instead, cultural norms arise out of particular cultural milieus and conventions. The challenge of an ethics code is to set out the principles contained in existing practice, to codify them, in order to encourage socially appropriate behaviour.

Monday 1 February 2016

The Eurozone crisis and South East Europe: Recovery or illusion?

Alexandra Zeitz (St Antony's College, Oxford)

Speakers: Adam Bennett, St. Antony’s College, Oxford; and Peter Sanfey, European Bank for Reconstruction and Development 
Chair: Jonathan Scheele, St. Antony’s College, Oxford

In late January, the PEFM seminar series was treated to a data-rich and fascinating account of the crisis experience of South East European states.  Adam Bennett of St. Antony’s College and Peter Sanfey of the European Bank for Reconstruction and Development (EBRD) presented the book they co-authored with Russell Kincaid, formerly of the IMF and the late Max Watson, also formerly of the IMF and founding director of PEFM.

Economic and Policy Foundations for Growth in South East Europe (Palgrave, 2015) reviews the experience of crisis in the ten South East European economies and argues for renewed commitment to reform to ensure sustained prosperity.

The South East European (SEE) states comprise Albania, Bulgaria, Romania and the seven successor states of former Yugoslavia. Bennett outlined three distinct phases of development in this region since the onset of “transition” in 1990. The first ten years he characterized as the “valley of tears”, as countries variously underwent the dismantlement of economic systems and then rebuilt them, or were ripped apart by conflict. The second phase comprised the boom years of the first part of this century through the onset of the global economic crisis at the end of 2008, when all countries managed to achieve remarkable (and too good to be true) growth rates—the “sunlit uplands” of peace and fruition of reform. The final phase, where SEE arguably remains today, was characterized as the “wilderness years” of post crisis recession followed by stagnation.

Though there were of course idiosyncrasies in their economic trajectories in the build up to the crisis and stagnation of 2009-2014, the trends across the region are instructive. On the basis of detailed country-level data, Bennett described the emergence of a massive savings gap in these economies during a boom period that stretched from 2000 to 2008.

Friday 29 January 2016

Was the global financial crisis really a “debt crisis”?

Alexandra Zeitz (St Antony’s College, Oxford)

Speaker: Anatole Kaletsky, Gavekal Consultancy
Chair: Adam Bennett, St. Antony’s College, Oxford

We are accustomed to analyses of the 2008-9 financial crisis that point to and dissect particular causes of the crisis, using these to call for post-crisis reform, regulation and rethinking. In a presentation at the PEFM seminar on January 25, Anatole Kaletsky instead gave a much wider-ranging and sweeping account of the causes of global financial crisis, and outlined the fundamental shifts in the relationship between governments and markets that he believes it has unleashed.

In 2010, Kaletsky published Capitalism 4.0: The Birth of a New Economy in the Aftermath of the Financial Crisis (Bloomsbury). In his presentation in early 2016, he argued that many of the false diagnoses of the crisis that he wrote the book to challenge continue to dominate post-crisis conversations. Rather than placing blame on individual bankers or on high pre-crisis debt levels, Kaletsky sees the global financial crisis as the demise of an entire theoretical and ideological view of the economy, collapsing in on itself as economic rules came to be applied dogmatically. 

Blind faith in the efficient market hypothesis led both regulators and market participants to make bad decisions – foremost among them the Henry Paulson’s decision to allow Lehman Brothers to fail – bringing down the intellectual consensus that had supported the previous structure of capitalism.

In Kaletsky’s view, the rupture the crisis provoked in both economic theory and practice will lead to a new practice and understanding of capitalism. In fact, he argues this reinvention of capitalism is just the latest in an ongoing process of evolution and adaptation. Kaletsky’s historical narrative begins with “Capitalism 1.0,” emerging in 1776 with the independence of the United States, and coincidentally also the publication of Adam Smith’s Wealth of Nations.