October 15, 2012
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This VOX post by one of the leading authors of this years Global Financial Stability Report Not making the grade: Report card on global financial reform | vox. argues that the pace of reform and restructuring of the financial sector is too slow. Important issues remain unresolved, including
- Financial systems are still overly complex.
- Banking assets are highly concentrated (Figure 3), with strong domestic interlinkages.
- The too-important-to-fail issues are unresolved.
- Banking systems are still over-reliant on wholesale funding (Figure 4)
There is still little progress (or politicla will?) to tackle the TBTF problem, and the financial system remain too complex. Shadow banking continue to be a problem, as well.
Key question is whether “traditional” program of reform, inkl. Basel 3, will deliver the required reforms in time? The lobbying pressure is intense, ref. the latest defeat of the SEC on money market reform. May be we need other approaches, ref. Haldane’s critique of Basel 3?
May 13, 2012
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It looks like Mary Schapiro at SEC will have problems getting her proposals for money market reform through her own board. According to this Reuter report three of five members are currently opposed to new changes to regulation of MMF. This reform package is by many considered the most important remaining element of the changes needed to stabilize the financial system. But the industry is dead against any changes, not surprisingly since they are up against the wall of low returns and high costs. In the meantime MMF continue to provide banks with unstable funding, so we will have to wait for the next big crisis to hit and MMF will withdraw their funding again. Not a terrible stable system this!
For the industry view, see the IOSCO report
April 16, 2012
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This paper by Brad DeLong – This time, it is not different – argues that Bagehot’s book on Lombard Street is still relevant for understanding the current crisis, and that mainstream economics for years have failed to pick up the interesting research topics that Bagehot discussed back in the 1870.
Whereas I agree with deLong’s view that Bagehot is still relevant (for my take on the story, see this paper on “Terms and conditions of central bank liquidity support”, http://works.bepress.com/thorvaldgrung_moe/ ), I think DeLong dismisses a long and relevant theory tradition rather summarily when he in the beginning of his paper dismisses Minsky’s book and articles as irrelevant. This is unfortunate, as Minsky and Keynes (and all the others on which they built, including Henry Simons, Minsky’s teacher at Chicago University) had a pretty good grip on the theory of financial crises.
For more on this and the need for a new understanding of banking in macroeconomics, see my working paper on “Shadow banking and the limits to central bank liquidity support“, where I discuss many of the same issues that DeLong raises.
April 11, 2012
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A new IMF WP by Singh and Stella has already attracted a lot of comments on FT Alphaville and Zero Hedge blogs. They note that thee is a shortage of safe capital instruments out there, and suggest that Governments should issue more Treasuries to accommodate the shadow asking systems demand for safe and liquid assets over and beyond what they can get inguaranteed bank deposit accounts. However, you can as well argue atshe size of he shadow banking should be reduced, for further arguments see my WP on shadow banks and the limits to central bank liquidity support http://www.levyinstitute.org/publications/?doctype=13.
April 10, 2012
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The IMF hosted a one day conference end of March on the structural challenges in banking and on shadow banking. Some of the presentations and papers have now been posted (unfortunately not all). See in particular presentation by Arnoud Boot, which gives an interesting overview of the issues, but provides more questions than answers. Andrei Shleifer et al. have a paper on shadow banking where they show how vulnerable the financial system becomes if tail risk is ignored and securitization allowed. They support some form of regulation, preferably through a leverage ratio.
March 28, 2012
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Shadow banking was the theme of a recent speech by FSA chairman Adair Turner. He noted in the Cass Lecture 2012 that (p. 21)
“the shadow banking system can create forms of ‘private money’ held either by the non-financial real economy or by intermediate financial institutions, in a fashion analogous to the banking system’s own creation of deposit money. And wherever there is maturity transformation and private money creation, there is a potential for runs.
And to … make the banking system safe we will need to control the extent to which banks can provide such liquidity insurance to shadow banks.
A key issue is whether shadow banks should be regulated as ordinary banks, and specifically whether they should have access to central bank liquidity facilities. Here the views are split among academics and policy makers.
The EU has issued its own Green paper of shadow banks and will host a conference on the topic end of April.
The IMF held a conference on the data needs of supervising shadow banks last fall: Casting Light on Shadow Banking: Data Needs for Financial Stability. The video is quite interesting, especially Paul Tucker from BoE, as usual very to the point.
The IMF hosted another regulatory seminar last friday March 23 (same time as the Fed conference, se previous post) on “The Financial System Five Years from Now”. No papers on the web yet, but program is posted here. Seems like an interesting day, with Buiter, Tarullo, Boot and Blanchard.
An interesting paper on Shadow banks posted last fall on the Harvard Law School Forum, called Shadow Banking and Financial Regulation. Short and to the point.
And there will be more coming. G20 and FSB has shadow banking (together with liquidity and trading book) on their agenda this summer, so expect much more on shadow banking in the months ahead.
And, if you want to really know what to do with the shadow banking problem, there will be a good working paper coming up shortly on the Levy Institute’s website. Should be up some time early April. Title: Shadow banking and the limits to central bank liquidity support.