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Stephany Griffith Jones - Does new international regulation help crisis prevention
Stephany Griffith Jones - Does new international regulation help crisis prevention
Stephany Griffith Jones - Does new international regulation help crisis prevention
Stephany Griffith Jones - Does new international regulation help crisis prevention
Stephany Griffith Jones - Does new international regulation help crisis prevention
Stephany Griffith Jones - Does new international regulation help crisis prevention
Stephany Griffith Jones - Does new international regulation help crisis prevention
Stephany Griffith Jones - Does new international regulation help crisis prevention
Stephany Griffith Jones - Does new international regulation help crisis prevention
Stephany Griffith Jones - Does new international regulation help crisis prevention
Stephany Griffith Jones - Does new international regulation help crisis prevention
Stephany Griffith Jones - Does new international regulation help crisis prevention
Stephany Griffith Jones - Does new international regulation help crisis prevention
Stephany Griffith Jones - Does new international regulation help crisis prevention
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Stephany Griffith Jones - Does new international regulation help crisis prevention

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Stephany Griffith Jones - Does new international regulation help crisis prevention. Presentation given at conference on 17/18 November in honour of Sir Richard Jolly

Stephany Griffith Jones - Does new international regulation help crisis prevention. Presentation given at conference on 17/18 November in honour of Sir Richard Jolly

Published in: Economy & Finance, Business
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  • 1. Does new international regulation help crisis prevention? Keynote Speech FEPS TASC Annual Conference 2011 Stephany Griffith-Jones, sgj2108@columbia.edu
  • 2. Overall context Aims of the financial system -Managing risk and avoiding crisis -Allocating capital to the real economy efficiently -Financial system did neither Do we need a completely different financial system? -Restricting or isolating speculation -private banks to lend to real economy -Role of public banks to fund real economy
  • 3. Some key problems - One major problem: increased leverage and maturity mismatches which increase systemic risk - Crisis revealed too low core capital, leverage too high and - Both accounting and regulation was pro- cyclical, reinforcing procyclicality of finance
  • 4. Basel 3  Size and quality of core capital improved (but is it enough?)  Simple leverage ratio 1:30 (too generous)  Counter-cyclical regulation  Liquidity coverage ratio positive
  • 5. Higher capital requirements – cost benefit analysis  Benefits: – Stronger Financial System => Lower probability of banking crises => Lower crisis-induced output losses – Reduction of amplitude of output fluctuations  Costs: – Higher lending rates => lower output level (but trend growth rate unaffected)
  • 6. Impact of increasing capital  Increasing capital by 1%: – Increases lending spreads by 0.13% – Decreases output by 0.09%  Therefore, even if temporary crisis-generated output losses are assumed: Net benefits of increasing capital from 7% to 8% = = Benefits – Costs = 0.30% - 0.09% = 0.21% > 0 Source: BIS estimates
  • 7. Countercyclical regulation  Need for countercyclical regulation to compensate for pro-cyclical finance  History; dynamic provisioning  Rules preferable to discretion  The gap between credit-to-GDP ratio from its long-term trend is the benchmark guide for Basle  International coordination
  • 8. Implications for national implementation  Several elements of Basel 3 positive, such as countercyclical buffers and liquidity ratios; increasing quantity and quality of core capital if needed  Too slow and gradual introduction of reforms desirable to accelerate ?
  • 9. Shadow Banking system definition  Buiter definition (2008) :  “The shadow banking sector consists of the many highly leveraged non-deposit-taking institutions that lend long and illiquid and borrow short in markets that are liquid during normal or orderly times but can become very illiquid when markets become disorderly.  They are functionally very similar to banks but :  -are barely supervised or regulated.  -hold very little capital,  -are not subject to any meaningful prudential requirements as regards liquidity, leverage or any other feature of their assets and liabilities.”
  • 10. Challenges of regulating shadow banking - Regulate all financial activity in comprehensive and equivalent manner, for capital adequacy, leverage and liquidity (D’Arista and Griffith-Jones, 2010) - What quacks like a duck should be regulated like a duck! - Put all banking activity on banks balance sheet - Aim: reduce shadow banking scale
  • 11. Dodd-Frank Act  More rigorous than initially expected, but weakened by lobbying, e.g. Volcker rule and derivatives, further diluted in implementation  Positive institutional developments: consumer protection agency (prevents abuse) and systemic risk regulator also in EU (prevents silo-thinking about systemic risk)
  • 12. Policy suggestions for consideration  Key: link financial sector to its main aim, financing the real economy  Counter-cyclical regulations  Increase of quantity and quality of core capital; increase liquidity requirements  Regulate all shadow banking system in equivalent way  Putting all transactions on the balance sheet  Forcing derivatives on exchanges

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