RD News 2May12

• Speech by Andrew Haldane: Financial arms race
• A financial ‘arms race’ led banks to pursue excessive leverage in the decades before the financial crisis, fuelling extreme increases in returns on equity and remuneration.
• He uses an evolutionary analogy, pointing to animals such as elephant seals and peacocks, which pursue advantages to the cost of other members of their species, and ultimately to themselves as their former sources of advantage become sources of vulnerability.

• European Commission Conference “Towards better regulation of the shadow banking system”
• ICFR Regulatory Briefing on Shadow Banking
• Richard Reid: Clarity needed on definition of Shadow Banking; but non-bank lending increasingly important to the economy
• Speech by Vítor Constâncio: Shadow banking – the ECB perspective
• Including a discussion of the relevance of shadow banking for European financial stability.
• Speech by Paul Tucker: Shadow banking – thoughts for a possible policy agenda
• He emphasised that shadow banking is “not the same as the non-bank financial sector.”
• He concluded by saying that the policy framework would need to be adaptive, and that “it would be foolhardy to imagine that we can frame policies today that will stand the test of time” with an evolving, innovating financial system.

• Speech by Hector Sants (his last as CEO, FSA): Delivering effective corporate governance: the financial regulators role
• The “underlying problem” of failures in “behaviour, attitude, and in some cases, competence” remains unsolved by new financial regulations.
• “Insufficient progress” has been made towards effective corporate governance of firms.
• He highlighted the FSA’s regime for  vetting potential senior appointees, noting that “too frequently” applicants for such roles had not done sufficient due diligence on the firm or role for which they were applying, and further suggesting that some still view senior positions as entitlements “regardless of their skills and experience.”
• Markets’ “remorseless focus” on upcoming earnings announcements was exacerbating short-termism and excessive risk taking.
• “A successful regulatory regime will not be sufficient to ensure good outcomes” without changes to culture, which should be rooted in “strong ethical frameworks”.
• A relationship of “constructive tension” should prevail between regulators and the regulated, joined by a “common purpose”, in which individuals do not work solely for personal gain.

• Speech by Andrea Enria (Chairperson, ECB): Developing a Single Rulebook in banking

• IMF Staff discussion note: From Bail-out to Bail-in: Mandatory Debt Restructuring of Systemic Financial Institutions
• Discussion of a regime for bailing-in creditors of distressed banks, the construction of which raises a whole host of seemingly intractable policy problems.
• The note covers its rationale, and a range of principles which a bail-in regime would need to have regard to.
• Difficult issues include the level at which a bail-in process is triggered, the range of instruments which would be subject to bail-in, the impact of bail-in on the creditor hierarchy, cross holdings of bail-in-able debt, and bail-in for cross-border banks.
• Says it may be necessary to “carve out” some types of senior unsecured debt, such as inter-bank deposits, which “may be of systemic or strategic importance”.
• Recognises that bail-in will not of itself solve the problem of ‘too big to fail’ banks, and that official liquidity assistance and even government financing may be needed during debt restructurings to prevent outflows of capital. Perhaps the most difficult of issues is bail-in for a cross-border bank.

• IMF working paper: Central Bank Independence and Macroprudential Regulation
• Examines the conditions under which the institutional structure for macroprudential supervision leads to suboptimal social outcomes.

• Speech by Governor Daniel Tarullo (Federal Reserve): Regulatory Reform since the Financial Crisis
• Expressed support for the Securities and Exchange Commission (SEC) to adopt further reforms to money market funds (MMFs). 
• Said there was a “compelling” case for reform because despite the introduction in 2010 by the SEC of an increased liquidity buffer to be maintained by MMFs, the “combination of fixed net asset value, the lack of loss absorption capacity, and the demonstrated propensity for institutional investors to run together” made it clear the risks of a run on MMFs could not be discounted, such that additional measures expected to be shortly introduced by the SEC (including requiring MMFs to maintain capital buffers) is needed to mitigate any possible systemic risk posed by this section of the shadow banking system. 

 

• Andrew Sheng & Ajit Singh (Emeritus Prof of Economics at Cambridge Uni): The Challenge of Islamic Finance
• Islamic finance, already a $3 trillion sector, has an important role to play in improving the ethical framework of western-style finance.

• Andrew Sheng: A Berlin Consensus
• Using a “macro-historical framework, we can see Japanese deflation, European debt, and even the Arab Spring as phases of systemic changes within complex structures that are interacting with one another in a new, multipolar global system. We are witnessing simultaneous global convergence and local divergence.”
• “The INET conference in Berlin showed the need for a new [consensus of free-market reforms] – a consensus that supports sacrifice in the interest of unity. Europe could use it.”