central banking, financial system stability and growth
TRANSCRIPT
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Central Banking, Financial System Stability and Growth
Presented by
Piero Ugolini
May 6, 2009
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Errare Humanum Est!!!
• Seneca the Younger Year 4 BC !!!
• And he added:
“ Sed Perseverare est Diabolicum”
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Are we learning from past mistakes?
• Debt crisis 1986– Brazil and others
• University books : MBA – a country never defaults !!!
Was it true?
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What did we learn from the 80’s debt crisis?
• 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
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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…
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What did we learn?
• Among other things --- it became clear that the world needed international standards:
• BCP• IAIS• IOSCO• CPSS• Transparency• AMLOverall better supervision and reduction of Government
interference with the financial sector
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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
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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
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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!
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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
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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
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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
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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
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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
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US Government
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
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US Government cont.
Contain contagion
----Macro-level :
• Lowering interest rates
• Expanding money supply
• Monetary easing
• Restore confidence in the financial sector
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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
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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
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US Government cont.
• Introduce changes to prevent future crises
• G-20 leaders’ Summit on Financial Markets and the World Economy- Washington DC November 15, 2008
• G 20 leaders’ Summit -London- April 2, 2009
• G20 leaders’ Summit – November 2009
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US Government cont.
Dealing with Political, Social and security effects-
The 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
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U.S.Banking Regulators
• Office of the Comptroller of the Currency
• Federal reserve System
• Federal Deposit Insurance Corporation
• State banking Authority
• Office of Thrift Supervision
• State Thrift Supervision
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The U.S. System
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U.S. Banking Regulators
• - 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.
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…In addition to for the Financial Sector
• Securities Exchange Commission
• Commodity futures Trading Commission
• Federal Housing Finance Agency ( Fannie Mae/Freddie Mac)
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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
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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”.
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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
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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
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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
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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
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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 pro-cyclicality, 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-
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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
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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
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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 sector-based regulators to supervise and assess their risk management and operations
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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
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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?
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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
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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
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Integrated Silos
• Licensing• Supervision• Policy decision• Legal/Enforcement• Markets/Listing• Company registry• Support operations• Others
• Banking• Insurances• Securities• Company
compliances• Pensions• Trust Funds• Others
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Countries with Single Regulator and Integrated Internal Structure
• Australia• Canada• Denmark• Estonia• Finland• Hungary• Ireland• Isle of Man
• Japan• Latvia• Mexico• Norway• Qatar• Singapore• Sweden• UK
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TWO QUESTIONS?
• Are Governments going back as influential shareholders in the banking business?
• “ Too big to fail” but “Not too big to save”?
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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!!!!!
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Many Thanks!!!
For the invitation to this Celebration
All my best wishes to the
Central Bank of Nigeria!