Financial sector policies in the crisis World bank Programme of Seminar, Istanbul, 3 October 2009

Speakers

Christine Cummings, US federal Reserve Bank of New York
Sadeq Sayeed, Nomura International (investment bank)
Zeti Aziz, Bank Negara (central bank of Malaysia)
John Laker, Australian Prudential Regulatory Authority
Willem Buiter, London School of Economics
Moderator: Andrew Crockett, JP Morgan

Initial Presentations

Christine Cummings

• US crisis response was necessary and successful; BUT we didnt act early enough and didnt push financial institutions to actearly enough
• Parts of the investment chain are very sensitive to mechanisms of government bailouts
• There is no such thing as too much communication from the central bank or policy makers
• Complexity of securities prevented rebounds in asset values, orderly restructuring

Sadeq Sayeed

• We are grateful for being able to acquire Lehman Bros' Europe and Asia operations
• The causes of the crisis are not just greed, but a set of rules that allowed the bank-non-bank interactions and games
• The rules were changed in Sept 08 - previously there was no fear because of bailout; moral hazard existed and firms were rationale to believe they would be bailed out; then Lehman blew up
• Now we are scrambling to get back to the rule that banking system won't be allowed to fail

Zeti Aziz

• Restructuring failed to produce results; we had to look at the impacts on all sectors, not just banks, and act to help borrowers
• We need institutions for predictability and orderly restructing of bankruptcies, we put these in place to restore confidence in Malaysia
• We need early detections, ways to deal with regulatory capture and better cross border systems

John Laker

• Australia is in a better position than others - this is from Macroeconomic and microeconomic factors; our banks just didnt engage in excessive risk taking, had limited exposure
• However the crisis still spread through the cost of wholesale funding to banks; our small institutions were not hit and we have low levels of NPLs
• We also had good competition policy, banks worked hard to maintain high credit ratings
• We were also "in their faces" much more as a supervisor

Willem Buiter

• Emergency management was good including things like being a lender or market maker of last resort, provision of capital
• But now we have MORE systemic risk because moral hazard is higher; and the possibility for a second round of fiscal response in a new wave of crisis is very limited
• Special resolution regimes are not being used, they are not tested, banks no longer face a hard budget constraint - it has softened because of bailouts
• Management and boards were left in place too long, massive subsidies are creating zombie banks
• Some of the talk was good, but there are not hard enough outcomes
• Now we need new regulation that is global in scope to avoid arbitrage and comprehensive to stop regulatory evasion
• On derivatives we need to limits trades so that one party must be hedging, not speculating, only one party to a trade should be allowed to have greater risk
• We need more capital and less leverage - I would like to see 100% equity banks

Discussion

Crockett - between bailouts and bankruptcies there are only these special resolution regimes, can these work for large institutions?

Cummings - we need to get rid of "too big to fail" perception, so need a credible mechanism to resolve failure. The obstacles are the lack of comprehensive rules and the differing legal systems across borders; need also earlier action to prevent problems including through supervisory stress tests

Laker - we would like to see "orderly exits", not 0 failure rates; you need other strong banks to do the take overs of failing institutions

Zeti - we have enacted new legal frameworks and are using the deposit insurance corporation which was a legacy of the Asian financial crisis

Buiter - there should be no fear of bankruptcy, it is just a legal act to give haircuts to various parties; the problem of regulatory capture looms large, and the quasi fiscal role of central banks means they have question marks on their independence

Sayeed - the failed banks were not actually big mostly (ie Northern Rock); on derivatives it is contractual so a zero-sum game and risk goes both ways - the fundamental flaw was the mark to market accounting rules, accounting just can't handle the contracts! This means we need better information and transparency as the solution, non-arbitrageable rules

Crockett - what about systemic risk regulators? And the transfer of regulation across borders?

Cummings - there is consensus on the need for a systemic risk regulator, but the form is up for debate; we need to pimprove relations between supervisors in "times of peace", need a lead supervisor in the place where banks are chartered

Laker - we are debating the extra tools that will be needed in Basle forums; agree that we need supervisors to play tennis with other supervisors, not the bankerws.

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Published: 8 October 2009 , last edited: 8 October 2009

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