Speakers
Alvir Hoffman, Central Bank of Brazil
Mingkang Liu, China Banking Regulatory Commission
Joseph Stiglitz, Columbia University
Moderator: Nancy Birdsall, CGD
Initial Presentations
Alvir Hoffman
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small banks and export firms effected first; central bank took action to provide liquidity
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resilience to the crisis has two reasons: low exposure to toxic products; high liquidity buffer
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we have strong limits, high capital requirements, supervision based on central counterparty clearing agency for derivatives, strong supervisory system
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lessons - EME banks will be effected by global regulatory framework - it should be seen as opportunity to strengthen our regulatory frameworks
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Comments on the existing proposals
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Tier 1 capital changes should not be a big problems; leverage ratio should be designed with new international reporting standards in mind
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We are comfortable with new liquidity measures
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Countercyclical buffers - prefer through capital than provisions
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Compensation -
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Need to regulate/supervise all systemically important institutions
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We need more representation in intl bodies - including IMF, BCBS, FSB
Mingkang Liu
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cause of the crisis? Not trade imbalances, 1997 crisis didn't have these kind of spillovers, neither did dot-com bust, real causes need to be found
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complexity & interconnectedness - ie end of Glass-Steagall, banks reliance on capital markets
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driving force is distorted incentives, market practitioners were seeking quick profits, not sustainable growth path
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inadequate regulation and supervision, inadequate cross-border cooperation
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Lessons
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corporate governance is key to every institution; leadership must be responsible for institution. Duty to monitor from the head
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market forces are not invincible or universal, we have no globalised standards; our duty is to be prudential - tell practitioners to stick to tested practices
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traditional limits and ratios worked, we still use loan-value, loan-deposit, simple capital adequacy; 80% of capital of Chinese banks are common stocks
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we used countercyclical approach since 2004 - both capital adequacy and provisioning (coverage ratio) - discretionary basis not rule basis
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be careful on financial infrastructure, it is not perfect, so we draw firm limits
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regulation, legislation and supervision do have borders despite globalisation; information flow was really bad cross-border
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As we go towards new FSB/BCBS regulation, in transition period need something basic and simple
Joseph Stiglitz
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purpose of fin market - allocate capital and mitigate risks at low costs - US financial sector failed on all fronts, profitability of fin sector should be signal that something was wrong
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pervasive externalities as costs put on the whole world
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innovation in US fin markets were not creating better markets, they were tax regulatory and accounting arbitrage, they were mostly negative innovations
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developing countries can't afford these kinds of failures, don't blame the saver, blame the investor - mistakes happen over and over again in history;
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but regulators failed as well, regulatory capture and financial lobbying was a key reason
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think of positive agenda about directing capital to where we want it to go; with regulatory rules can stop this. We didn't learn lesson from AFC
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We have bailed out the financial system over and over again - gave perception that markets were working fine; even though we bailed out the lenders in crisis so many times
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We haven't fixed things, they are worse now - moral hazard problem is larger, concentration, complexity still there
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Financial market and capital market liberalisation are responsible for the mess we are in and helped spread the problem; EMEs had better regulation should be giving TA to the West about policies
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We can't allow home country regulation any more; Basle II should be dead - risk models were garbage; go back to basic plain-vanilla financial products
Birdsall -Should Basle II be dead? Is it bad for developing economies?
Hoffman - three pillars of Basle II - risk models are optional
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original idea was only for internationally active banks, but it got too overblown
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transparency of complexity does not help
Liu - Basle II has not been tested by any problems before, it is not perfect, but it is progressive, we are gathering lessons and modifying Basle II
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practice makes perfect, we have to modify based on learning
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three balances needed:
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no complacency in EMEs on Basle, but no excessive risk aversion
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international best practices and concrete domestic concrete situation
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balance between domestic homework (safety nets, restructuring etc) and implementation of intl economic standards based on our perspectives
Birdsall - go to US politics on loose monetary policy and regulatory capture
Stiglitz - do a thought experiment, it was global imbalances that brought on the problem
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low interest rates were due to weak aggregate demand, to keep economy going
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financial sector saw large profits and they used large wealth to get loose regulation
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stupid economic ideas: can't see a bubble in advance, no tools to stop a bubble, cheaper to clean up afterward
Birdsall - is it too big to fail or too complex? They can be different solutions
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insufficient aggregate demand was due to concentration of wealth and inequality
Discussion
Questioner - how can we make sure with global regulation that crisis will not be easily transmittable between countries? How to get responsible parties to pay for those effected?
Questioner - products demanded by pension funds and inst investors driven by need for profit for baby boomer retirements
Questioner - How do you see selection for regulators in EMEs? What are key qualities for a good regulator?
Questioner - regulatory capture more complex than any model, you can't quantify
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Basle II - not designed to prevent crisis, model came from banks themselves
Questioner - new role of Fed in systemic risk regulator? How should it be done?
Liu - stopping spillovers is still open question, home regulators must control risks from the very beginning
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cross-border cooperation don't be naïve, gaps between national legislations on resolution, accounting standards, etc
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we need new rules for the game - should be simplified, stop people from playing games
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greater leaders are almost always great simplifiers, regulators should give market practitioners simple, basic rules that they must follow
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models are always controversial and complicated, we can not rely on them alone; we need new Basle II or Basle III with some rules-based system but also lots on discretional basis - must balance, be cautious
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crisis management - have to look at commercial banks but also counterparties, look at interconnectedness; building block approach; get things in the right order
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calm your panic, make sure the sequence is correct
Stiglitz - first we need to ask what kind of fin system we want; if we want money to go to SMEs, need to use regional banks, small banks
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we continued to do this after crisis management
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Basle II was simply for big banks to reduce their capital requirements, undertake more risk
Questioner - what about future of reserve currency?
Stiglitz - I think we need a new global reserve system
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investors can't have free lunch either - a series of agency problems
Liu - far too early to think Chinese currency could be an intl reserve currency
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in reality - "countries with reserve currencies have to be more responsible, we have to be more supportive, in long run working together we can make some difference"
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lets hurry up - time and tide wait for no man
Hoffman - supervisor needs autonomy and authority to do macro-prudential regulation
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Published: 5 October 2009 , last edited: 14 October 2009
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