Transcript Slide 1

Central Banking, Financial
System Stability and Growth
Presented by
Piero Ugolini
May 6, 2009
Errare Humanum Est!!!
• Seneca the Younger Year 4 BC !!!
• And he added:
“ Sed Perseverare est Diabolicum”
Are we learning from past
mistakes?
• Debt crisis 1986– Brazil and others
• University books : MBA – a country never
defaults !!!
Was it true?
What did we learn from the 80’s
debt crisis?
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International Cooperation
Exchange of information
Transparence
Creation of Paris and London Clubs
Better management and corporate governance
Risk management
Stress test
Off-balance sheet items – Contingent liabilities
Supervision
Asian crisis- What Happened?
• Until 1997 Asia attracted almost half of the
total capital inflow from developing
countries
• Paul Krugman “ Asian economic Miracle”
• Thailand, Indonesia, and S. Korea exports
dropped, capital outflows, devaluations,
etc…
What did we learn?
• Among other things --- it became clear that the world
needed international standards:
• BCP
• IAIS
• IOSCO
• CPSS
• Transparency
• AML
Overall better supervision and reduction of Government
interference with the financial sector
Crisis of 2007-8
• Excess liquidity and low interest rates in
the US
• Financial innovation and products
disseminated w/o duly supervision
• Housing bubble in the US and
expectations of increasing values in the
housing market
• Poor supervision in the mortgage markets
• Unsatisfactory market risk assessment
Crisis of 2007-8-cont.
• Unregulated market for derivatives
• Lack of transparency in key segments of
financial markets –minimal information on
pricing, trading volume, and others
• Credit rating agencies did not do their job
• Weaknesses in resolution procedures
• Accounting practices: amplify business
cycles- credit expansion/contraction
Crisis of 2007-8 cont.
• Poor corporate governance
• Weaknesses in Disclosure- risk associated
• Supervisory and regulatory policies not
adequate to capture the problems
• Multilateral surveillance? US had no
FSAP!
Are we ready for the future?
• Let’s look at 3 actions on the crisis:
• G-20 April 3, 2009
• US Government
• De Larosiere report for the EU-February
25, 2009
G20 – London, April 2,2009
The main objectives of the G-20 was
summarized in their Communiqué’:
• Restore confidence, growth, and jobs
• Repair the financial system to restore
lending
• Strengthen financial regulations to rebuild
trust
G20 – London, April 2,2009 cont.
• Fund and reform international institutions
• Promote global trade and investment and
reject protectionism
• Build an inclusive, green, and sustainable
recovery
Strengthening financial supervision
and regulations
• Establishment of a new Financial Stability
Board (FSB) as a successor to FSF
• FSB to work closely with IMF
• Reshape regulatory system to take
account of macro-prudential risks
Strengthening financial supervision
and regulations cont.
• Extend regulation and oversight to include
hedge funds
• Address tax havens
• Improve accounting standards
• Extend oversight to CRA and address
conflict of interest
US Government
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To cope with the crisis : four phases
First :intervention to contain the contagion
and restore confidence in the financial
system
Second: restore economic growth
Third: introduce changes to minimize risk
and prevent future crises
Fourth: deal with the political, social
effects of the financial crisis
US Government cont.
Contain contagion
----Macro-level :
• Lowering interest rates
• Expanding money supply
• Monetary easing
• Restore confidence in the financial sector
US Government cont.
---Micro-level:
• Financial rescue packages for firms in difficulty
• Guaranteeing deposit at banks
• Injections of capital
• Disposing of toxic assets
• Restructuring mortgages
• Dealing with foreclosures
• Addressing unemployment benefits
US Government cont.
Restore economic growth
• The impact of the US crisis has had a
world impact on country economies,
enterprises, financial institutions and
investors, and households—response:
monetary and fiscal stimulus packages
US Government cont.
• Introduce changes to prevent future crises
• G-20 leaders’ Summit on Financial
Markets and the World EconomyWashington DC November 15, 2008
• G 20 leaders’ Summit -London- April 2,
2009
• G20 leaders’ Summit – November 2009
US Government cont.
Dealing with Political, Social and security effectsThe role of the US on the world stage and its
impact on :
• Political leadership
• Ideologies and state capitalism
• International leadership
• Supranational political and economic
organizations
• Poverty and flow of resources
U.S.Banking Regulators
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Office of the Comptroller of the Currency
Federal reserve System
Federal Deposit Insurance Corporation
State banking Authority
Office of Thrift Supervision
State Thrift Supervision
The U.S. System
U.S. Banking Regulators
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- OCC issues licenses & supervises national banks
- 50 states have agencies to issue state licenses and supervise their banks,
as well as branches from banks domiciled in other states
- OTS issues licenses for federal thrifts and their holding companies &
supervises both
- FDIC insures deposits of all national banks, some state banks and all
federal thrifts, some state thrifts
- 50 states have agencies to issue state licenses for thrifts and supervise
them
- National Credit Union Administration issues federal credit union licenses,
supervises & insures them and insures some state credit unions
- 48 states have agencies to issue credit union licenses and supervise,
some states may still have insurance funds for state credit unions
-50 states have agencies to issue insurance licenses & supervise insurance
companies, agents, brokers,etc.
…In addition to for the Financial
Sector
• Securities Exchange Commission
• Commodity futures Trading Commission
• Federal Housing Finance Agency ( Fannie
Mae/Freddie Mac)
The High Level Group on Financial
Supervision in EU
The Group proposes 31 recommendations
• A new regulatory agenda
• Stronger coordinated supervision
• Effective crisis management procedures
The High Level Group on Financial
Supervision in EU cont.
Disclaimer
• “ The views expressed in this report are
those of the High-level Group on
supervision.
• The members of the Group support all the
recommendations.
• However, they do not necessarily agree on
all the detailed points made in the report”.
The High Level Group on Financial
Supervision in EU cont.
• Some of the main points in the report
• Revision of Basel II: minimum capital,
reduce pro-cycliclity,off-balance sheet
items,banks’internal control-fit and proper
• Regulation of Credit rating Agencies
• Accounting: mark-to-market
• Corporate governance: bonuses
The High Level Group on Financial
Supervision in EU cont.
• Risk management: internal systems
• Crisis management : appropriate and equivalent
crisis prevention policy
• Harmonization of Deposit guarantee scheme
• Supervision: creation of a European System of
Financial Supervisors ( ESFS)
• Creation of an European Systemic Risk Council
( ESRC) to be chaired by ECB President
The High Level Group on Financial
Supervision in EU cont.
• Early warning financial stability : IMF, FSF,
BIS, and ESRC
• Macro-prudential oversight : ESRC linked
to the ECB /ESCB to bridge between
macro- and micro- oversight
• Greater role for the IMF in multilateral
financial sector surveillance
• FSAPs should be compulsory
What Kind of Reforms are needed
for the Global Financial System?
By summarizing the previous slides :
• Macroeconomic Surveillance: need for
some authorities to alert about housing
bubbles and too low interest rates that
may fuel investments in high risk assets
• Multilateral financial sector surveillance :
to set up an early warning system ?
• Early remedial-crisis management
resolution
What Kind of Reforms are needed
for the Global Financial System?
• Bilateral surveillance : FSAPs mandatory
• Improved supervision: Basel II needs to be
revisited and corrected: gradual increase in
capital requirements, elimination of procyclicality, stricter rules for off-balance sheet
items, and tighter rules on liquidity management
• Supervision extended to all institutions of
systemic importance- information on hedge
funds, off-balance sheet items, investment
funds, all institutions operating as a “parallel
banking system”– see US experience-
What Kind of Reforms are needed
for the Global Financial System?
• Accounting : Improvements in the
principles- mark to market- IASB to be
strengthened
• Credit Rating Agencies : need to separate
rating and advisory functions and to be
supervised
A Single Regulator?
Advantages:
• To respond to the changing structure of
the financial services sector
• To realize economies of scale
• To deliver economies of scope
A Single Regulator?
• Economies of scope
• As a result of deregulation, innovation,
competition, and proliferation of financial
products : risks and products traditionally
typical of one sector are now spread
across sectors
• Conglomerates make difficult for sectorbased regulators to supervise and assess
their risk management and operations
A Single Regulator?
A world Bank survey of 15 countries ( 2002)
Found that the main reasons for adopting a
single regulator were to supervise better a
financial system moving towards universal
banking, solve communication problems
among multiple regulators, and to
maximize economies of scale
A Single Regulator?
• The 2008 edition of “ How Countries
Supervise their Banks, Insurers and
Securities Market” lists 40 countries that
had single regulator in 2007 compared
with 10 in 1990.
• How about the internal structure?
Sector Silos or Integrated
Structure?
• The benefits of an integrated structure :
• Economies of scale : common approaches
and procedures for regulatory functions
• Facilitate response to changes in financial
market structures and products
• Exploit economies of scope : common
framework for risk-based supervision and
consistent policy across sectors
Sector Silos or Integrated
Structure?
• Facilitate cooperation, coordination, and
information sharing arrangements
• Reinforce different cultures and
approaches within the regulator
• Facilitate the creation of an effective and
efficient “ one-stop shop” to stakeholders,
applicants for licensing, regulated firms,
and overseas regulators
Integrated
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Licensing
Supervision
Policy decision
Legal/Enforcement
Markets/Listing
Company registry
Support operations
Others
Silos
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Banking
Insurances
Securities
Company
compliances
• Pensions
• Trust Funds
• Others
Countries with Single Regulator
and Integrated Internal Structure
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Australia
Canada
Denmark
Estonia
Finland
Hungary
Ireland
Isle of Man
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Japan
Latvia
Mexico
Norway
Qatar
Singapore
Sweden
UK
TWO QUESTIONS?
• Are Governments going back as influential
shareholders in the banking business?
• “ Too big to fail” but “Not too big to save”?
As the World Turns
• In Florence, in the fourteenth century, two banks
“ Bardi and Peruzzi”, were the giants of the
industry! (The Medici Bank took over from them)
• Both banks collapsed because they failed to
collect loans from two special clients:
---“ Edward III, King of England and --Robert the
Angevin, King of Naples.
• In 2008 we have a financial collapse because
we could not collect loans from poor people!!!!!
Many Thanks!!!
For the invitation to this Celebration
All my best wishes to the
Central Bank of Nigeria!