News about financial stability, central banking and theory of money
Somewhat old interview (August 1), but still interesting points about central bank lending to CCPs, how to solve the TBTF problem, and the need for more liquidity for trading activities:
Since then, I have wanted trading book positions to incorporate an element of capital against illiquidity risk, because these books get marked to market so even if there is no change in fundamentals but the market suddenly dries up, values will fall as a result and the net worth of the dealer or bank falls sharply.
And also about how to prevent a new “blow-out” of the financial system:
Risk: Do you see any danger in a more prescriptive approach to capital modelling?
PT: This is a genuine consultation by the Basel Committee, but I would point out that there are something like 15 million people unemployed in the western world because finance imploded, and finance imploded because the rules of the game in finance were inadequate. That’s a terrible price to pay. So this business of debating exactly how to calibrate things, this is for grown ups. It’s not about whether we – if the following rich assumptions hold – can optimise capital levels. It’s about whether we can avoid having a financial system that is fragile in ways that have very high social costs.
Agree fully with Tucker!
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.
Gorton and Metric has just submitted a review (for the Journal of Economic Literature) on the essential readings about the financial crisis. They start with this observation:
The first financial crisis of the 21st century has not yet ended, but the wave of research on the crisis has already exceeded any single reader’s capacity, with the pace of new work only making this task harder. Many professional economists now find themselves answering questions from their students, friends, and relatives on topics that did not seem at all central until a few years ago, and we are collectively scrambling to catch up.
Some would argue that these missed topics have been around for years, and that they in fact was the centerpiece of the theories to Keynes and Minsky, just to name two.
For an overview of those that saw the crisis coming, you can read these two short blogs, from Matias Vernengo from Utah University and Gerald Epstein from University of Massachusetts – Amherst. They both give a nice overview and a different perspective.
Epstein reflects on why mainstream goes from crisis to crisis without learning, and notes that
As Economist Phil Mirowski pointed out to me, the problem is that, like the protagonist in the movie Memento , who has no memory but is trying to solve the mystery of his wife’s murder, and has to remind himself every minute about what happened the minute before by writing notes and even tattooing himself , mainstream macro-economists’ write themselves articles and books after every crisis and they then promptly forget what they wrote (no tattoos as far as I know).
A good illustration of this effect is the latest speech (very good one) by deputy governor in Bank of England Paul Tucker, who readily admits that the lessons he and Mario Draghi learned after the Asian crisis (and wrote down in a report then), that balance sheets matters and should be closely monitored, was forgotten and need to be re-learned. At least he is honest enough to admit it.
The banking editor of Financial Times has an interesting piece today about who should be the next Governor of BoE when Mervin King retires in June next year. He quotes rumors that it is time for a private banker to enter the bank, after several periods with internal candidates. Two hot shots are both from HSBC, not surprisingly the late chairman Stephen Green (now trade minister and Lord) and his Douglas Flint, his replacement at the bank. Green should be well qualified after having written the excellent book on “Good Value: Reflections on money, morality and an uncertain world“.
However, the favorite seems still to be the current deputy governor Paul Tucker, who is a formidable internal candidate, with broad experience in both the price stability and financial stability part of the bank. Being an insider could be a handicap, and it is still too early to tell which are the preferences of the current government.
It is a key position, not least due to the intellectual leadership the Bank of England have been able to maintain over the years. By this time next year, we should be able to know more.
Financial Stability News 