Transcript Macroprudential_Bailey_Presentation

Comments on “Financial Regulation in a
Changing World: Lessons from the
Recent Crisis”
What Sort of Regulatory Reform?
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More regulators?
More dynamic regulators?
More forward-looking regulators?
A different organisation of regulation?
More transparency and accountability in
regulation?
• A clearer understanding of the line of
accountability?
There may be good reasons why one size
does not fit all
• The experience of the crisis does not prove
that one form of regulatory architecture
dominates all others.
• The UK reforms are not about making that
assertion, but rather about creating a system
in which risks to the financial system are at
the forefront of supervisory action.
The Absence of Effective Market
Discipline is a Major Issue
• Key issue here is the absence of effective
resolution tools for all banks.
• Without that we don’t get away from Too Big
To Fail.
• And this must influence the form of regulation
because of the public money dependency.
More Root Cause Assessment
• There is a danger that we miss an important
part of the diagnosis by focusing too narrowly
on the immediate causes of the crisis.
• One of the neglected areas is the conflict of
public policy objectives.
US Homeownership
(Homeownership rate as a percentage of total occupied housing
units)
70
68
66
64
62
60
1965
1969
1974
1978
1983
1987
1992
1996
2001
2005
2010
The Focus of Financial Regulation should
be on the Stability of the Financial System
• With monetary policy, low inflation is
recognised as the pre-requisite of stable
growth (established in the statutory objective
in the UK)
• But that emphasis was not always present.
Getting a Proper Focus on Financial Stability
(the example of monetary policy)
• “The underlying trend of costs and prices thus is still clearly
upward, and inflation must remain a major consideration in
formulating public policy. “ (Arthur Burns)
• “It had been our report to this committee that with the strategic
policies being put into place involving fiscal discipline, involving
incomes policy, involving dollar and international account policies,
involving energy policies, and involving monetary policies we would
wring out inflation over 5, 6, or 7 years. “ (William Miller)
• “As part of the process of restoring price stability, as I see it, this
continuing effort reflects not simply a concern about the need for
greater monetary and price stability for its own sake critical as
that is. The experience of the Seventies strongly suggests that the
inflationary process undercuts efforts to achieve and maintain other
goals, expressed in the Humphrey-Hawkins Act, of growth and
employment.” (Paul Volcker)
Financial Stability isn’t easy
• “There is a sort of paradox where, on the one hand, we want
people to have access to credit. Credit allows you to buy a home
much earlier than you otherwise could, for example.” (Ben
Bernanke)
• “Thirty years ago was the creation of the Community Reinvestment
Act, the premise of which was to address the fact that banks were
not lending in certain neighborhoods, there was red lining and that
it was important to extend credit to low and moderate income
people. The development of the sub-prime lending market made
that feasible to a significant extent. And I agree with you that
legitimate, well underwritten, well managed sub-prime lending has
been constructive. It does give people better access to credit and
better access to home ownership.” (Ben Bernanke)
The role of Financial Stability
• Establishing the need for greater financial
stability for its own sake critical as that is.
• But:
– Competing public policy objectives; and
– Understanding the transmission mechanism of
macro-prudential policy.