Financial Stability: Designing and Implementing Macroprudential Policy

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Monday 12 April 2010

Developments in Theory - Learning from the Crisis

Introductory roundtable discussion
Led by the chairman, E. Philip Davis, Visiting Fellow, National Institute of Economic and Social Research

Delegates will be encouraged to step back and consider what their financial stability work entails and how the transformation in international financial markets continuously changes the nature of their job.

An update on the crisis – where are we now?
Christopher Morris, Senior London representative, Monetary and Capital Markets Department, International Monetary Fund

Central banks’ and governments’ extraordinary stimulus appears to have staved off a second Great Depression. But problems persist. Monetary authorities must grapple with the difficulties of exit strategies, attempting to wean the financial sector of life support without prompting a fresh wave of panic while ensuring inflation and asset prices remain under control. Fiscal deficits further threaten to undermine stability. Using the latest IMF research, the speaker will touch on these and other challenges facing today’s official sector. Group discussion will draw out policy lessons.

How should macroeconomic considerations be incorporated?
Peter Praet, Executive Director, National Bank of Belgium

With the crisis placing systemic risk under the spotlight, the focus of regulation will broaden from the micro to the macroeconomic in the years ahead. The task of translating macroeconomic theory into practice will largely rest with the Basel Committee on Banking Supervision. For this session, a speaker from the committee will discuss its latest efforts to do so.

Developments in the theory of financial stability: lessons from the crisis
David Aikan, Senior Manager, Prudential Policy Division, Bank of England

The crisis has produced a plethora of ideas on how to better safeguard financial stability. “Living wills” and a separation of investment from commercial banking are just two that have been mooted. It has also led to questioning of some of the fundamental tenets of the subject. In this session, the speaker will chart these theoretical developments and offer some insight as to how they can and should be applied in practice.

The role of incentives in the breakdown of financial stability
E. Philip Davis

With their emphasis on short-term gains and scant regard for long term consequences, bonus structures are seen by many as having played a key role in the credit crisis. Evidence from a number of recent episodes of market turmoil would support the view that these structures do often endanger stability by failing to adequately punish imprudent behaviour, and at times even reward it. This session examines how practices have created incentives for destabilising behaviour and considers what policymakers can do.

Handling bank failures: dos and don’ts
Geoffrey Wood, Professor of Economics, Cass Business School

How can one determine whether the collapse of an institution poses a systemic risk to the entire financial system? And, if such a threat exists, how should the authorities intervene? Will living wills help limit the damage caused by the collapse of banks? In this session, the speaker draws on his academic research to establish some key rules in warding off a systemic meltdown in the event of a failure and for winding down insolvent institutions.

Tuesday 13 April 2010

The Regulatory Toolkit

Where next for Basel II?
Patricia Jackson, Partner, Risk Management Practice, Ernst & Young and former Head of Financial Industry and Regulation Division, Bank of England

Long a concern, consensus has now emerged that the Basel II framework has procyclical elements which amplify booms and busts in the business cycle. Moreover, it has been some of the very banks able to construct the complex risk models necessary to take advantage of the framework’s less capital-intensive advanced approaches that have fared the worst of the crisis. Given the events of the past two-and-a-half years, can the framework adapt and – if so – how?

Liquidity policy: recent developments in the UK
Peter Andrews, Head of Economics of Financial Regulation, Financial Services Authority

Debate rages as to whether the crisis was at root caused by a lack of liquidity or insolvent institutions. But there can be little doubt recent events underline the importance of holding liquid assets. Though highly rated, the transparent and complex nature of many of the instruments littering banks’ balance sheets made them nigh-on impossible to sell, or even price, in times of stress. Conversely, demand for homogenous assets such as US Treasuries and gold soared. Regulators are now focusing on liquidity as closely as capital. The Financial Services Authority has been at the forefront of efforts to introduce better standards. This speaker discusses the regulator’s work and how it will be applied in this session.

The shock of the new: handling risks from innovation
Nadège Jassaud, Deputy Head, Markets and Financial Stability Division, Banque de France

Financial innovation can enhance the efficiency of capital. Without new instruments and methods, markets would never progress. But, as the crisis has shown, innovations are not always sufficiently tried and tested, or indeed understood. This session asks how central bankers and regulators can balance the benefits of innovation with the risks presented by new methods and instruments.

A macroprudential approach: where do we stand?
Speaker to be confirmed

A decade ago few specialists even would have used the word macroprudential. Today it is firmly established in the policymaker’s – and politician’s – lexicon. But what does it mean in practice for an institution? This session, led by an expert on the subject, looks at the development of the approach, its intellectual foundations and how it is informing changes in supervisory and regulatory policy designed to tackle the factors that drive financial instability.

Lender of last resort support: time to reassess Bagehot?
E. Philip Davis

Walter Bagehot’s dictum that in a crisis central banks lend to solvent firms against good collateral at a high penalty rate has not always been followed during the crisis. Collateral requirements have been relaxed. Loans offered cheaply. Yet the provision of lender-of-last-resort support played a key role in staving off a financial meltdown. This session looks at whether the traditional principles that underlie the provision of liquidity in times of stress need to be refreshed for the modern age.

Wednesday 14 April 2010

Surveillance Techniques

Data needs for macroprudential surveillance
Mattias Persson, Head, Financial Stability Department, Riksbank

Macroprudential surveillance depends on the ability of policymakers to identify, define, collect and analyse relevant and timely data. Information gaps, which have the potential to mask the build-up of financial sector weakness, can seriously undermine this effort. This session examines the data needed to perform macroprudential surveillance, evaluates the financial soundness indicators now being tracked by multilateral institutions and discusses the lessons learned from the crisis in terms of data needs for financial stability analysis.

Empirical work on financial stability and the use of stress testing
Claus Puhr, Expert, Oesterreichische Nationalbank

The increased frequency of financial crises over the last quarter of a century provides a wealth of empirical evidence regarding the onset, costs and outcomes of such events. This session looks at how one central bank has used this data to gain insights into the potential impact of a destabilising event, such as a sharp decline in asset prices. It will also examine the use of stress tests and asks whether such methods should become compulsory in the wake of the crisis.

The role of the financial stability report
John Fell, Head, Financial Stability Department, European Central Bank (invited)

For many financial stability departments, the research and analysis that goes into financial stability reports, or reviews, provides the major focus for their work. Such reports provide central banks and financial regulators with a chance to highlight risks to the financial system. But avoiding such a warning becoming self-enforcing is no easy task. This session looks at the role of the financial stability report as a means to warn the markets, and the general public of the risks lurking beneath the surface of the financial sector. It will also cover how reports should convey the risks to the system without sparking undue concern or panic.

Developments in early-warning systems and the use of macro-models
Ray Barrell, Director of Macroeconomic Research and Forecasting, NIESR

Post crisis, the theoretical literature on macro-models has been questioned. Charlie Bean, a deputy governor of the Bank of England, has acknowledged that the traditional models failed to account for credit in a meaningful way. The use of early-warning systems, unsurprisingly, has also seen renewed attention, though many remain sceptical on whether such instruments can accurately forecast rises. This speaker, who has written on both topics, will cover recent developments in macro-modelling and early-warning systems.

Thursday 15 April 2010

Structural Challenges

The dangers from non-bank financial institutions
Giles Drury, Senior Manager, Financial Services Advisory, KPMG

Regulators remain divided as to the extent to which the likes of hedge funds and private equity groups need to be brought within the regulated sphere. Some believe that it is impossible to adequately supervise such institutions. Others say that by not doing so, risky elements of banks’ activities will remain and will re-emerge in the shadow banking sector. In this session the speaker, who is a co-author of an authoritative report on hedge funds, will outline what potential dangers non-bank institutions pose to systemic stability and discuss whether regulation could curb such threats.

How should the banking industry be restructured?
Speaker to be confirmed

The scale of the financial crisis has led to officials questioning the foundations upon which the structure of the industry is based. Some observers have called for a return to an era where investment and commercial banking operations were split. Others call for limits on banks’ size. The abstract nature of the financial instruments that sparked the panic has also led some to push for banking activities to be more closely aligned with the needs of the real economy. In this session, the speaker examines these arguments and offers their own conclusions to some of the most pertinent questions of our time.

Designing and implementing macroprudential policy
Wrap-up session, led by the chairman

The course concludes with a discussion led by the chairman drawing together the days’ discussions to identify the key components in taking a macroprudential approach to financial stability policymaking. Discussion will focus on the challenges to implementing this in practice and how these can be met.