RD News 1March12

• Paul Tucker: National balance sheets and macro policy: lessons from the past 
• We must not rely entirely on central banks ‘mopping up’ after financial crises. Not only does it strain our capabilities ex post, it is counterproductive ex ante. If central banks are perceived as writing deep-out-of-the-money put options, then the market, believing it is protected by those tail-risk puts, will itself take more risks than otherwise. We need overall macro regimes that aim to make chronic imbalances and over-indebtedness less likely and less threatening.
• We must try to identify and remove microeconomic incentives that distort risk-taking behaviour into dangerous channels. And given the interconnectedness of global finance, we –especially in the UK – must be alert even to such distortions elsewhere. US housing finance was a domestic system whose structure led to problems with global spillovers.

• Lord May: Banking ecosystems interview
• Simplifying the system will help but banking also needs extra precautions against the ’super-spreaders’ of infection in the network. For example, during the SARS epidemic, certain individuals infected dozens of others while some infected very few. Applied to the banking system, problems at a major bank would infect many other institutions, while the closure of a small building society may have limited impact.
• “Excessively complicated ecosystems will be destabilised by their complexity,” he says. “There are more and more complicated products with faster and faster trading. I accept my financial knowledge is limited, but if I were supreme dictator I would ask whether we should be putting a limit on how fast you can trade.”

• Andrew Sheng: Greening urban growth: green grids of life, not gridlock
• System-wide problems cannot be solved partially. We need a systemic and systematic way of thinking and acting on the interactive and interconnected way the world evolves. Systems thinker Frithof Capra has argued that the "Development process is not purely an economic process. It is also a social, ecological, and ethical process - a multi-dimensional and systemic process".

 

• BoE: Martin Weale: From retailers’ paradise to shoppers’ strike: what lies behind the weakness in consumption?
• A tightening of the conditions on which credit is available and a fear that people will not be able to obtain credit in the event of an adverse shock to their income, will lead to an increase in saving.
• Tight credit has the effect of making consumption more sensitive to income and less sensitive to interest rates than it might otherwise be.

• IOSCO: Final recommendations on OTC derivative mandatory clearing
• Reuters report
• Recommends that the derivatives market and regulators should work together to decide which contracts should be centrally cleared.
• However, it also suggests that there should be a “top-down” approach, whereby supervisors have authority to instruct banks and clearing houses to clear certain broad classes of products even if a clearing house has yet to be licensed to do so.
• Exemptions from mandatory clearing should be narrowly defined and limited.

• IMF: Systemic Real and Financial Risks: Measurement, Forecasting, and Stress Testing
• Model for identifying real time systemic risks in the financial sector.
• The model provides forecasts of indicators of systemic real risk and systemic financial risk based on density forecasts of indicators of real activity and financial health.
• It includes stress-tests as measures of the dynamics of responses of systemic risk indicators to structural shocks identified by standard macroeconomic and banking theory.