Pursuit of Financial Stability: What Works and What Doesn't
4-day intensive residential programme, 17 April-
21 April 2005
Venue: Cumberland Lodge, Windsor
Series adviser: Charles Goodhart, CBE
Professor Emeritus, London School of Economics,Financial Markets Group
PURSUIT
OF FINANCIAL STABILITY:WHAT WORKS AND WHAT DOESN’T
Over the last decade financial policymakers have come to understand that
supervising individual financial firms is not sufficient to guarantee
the stability of the financial sector as a whole. In addition to “micro
prudential” supervision, financial market authorities need to monitor
threats to the stability of the system as a whole.
As a result, around the world, central banks and supervisory authorities
are upgrading, or creating from scratch, teams and departments to undertake
“macro-prudential surveillance” aimed at safeguarding systemic
stability. However, while the costs of instability and crises are well
known, consensus about how to deliver financial stability is still some
way away.
This course draws on the experiences of leading central banks, regulatory
authorities and academic experts to examine how macro-prudential surveillance
can in fact be made effective. The focus throughout is on identifying
what works and what does not.
The course is structured into four sections:
• What we know about financial instability: the
first day of this course examines current research into financial stability
(by central banks and others) and investigates the challenge posed by
the central bank’s mandate to safeguard systemic stability;
• Operational sing macro-prudential surveillance:
the second day of the course examines how in practice leading institutions
have developed tools, procedures and organizational structures to deliver
on their mandate;
• Unpacking the toolkit: policy levers
and mitigation: critically, the ability to identify systemic
vulnerabilities must be complemented by policy tools and levers which
central banks and supervisors can employ to mitigate identified weaknesses.
This third day draws on a series of case studies to examine how in practice
this is done;
• Unresolved issues and crisis management: the
final session of the seminar examines critical unresolved issues, and
looks at different approaches to crisis management.
The seminar meets in roundtable format to allow an international group
of delegate’s maximum opportunities to learn from each other and
from an elite panel of speakers. Each session of the seminar is structured
to allow participating supervisors and central bankers an opportunity
to “benchmark” their work against best practice internationally
and to exchange views with their peers in an informal setting.
Since 1999, over 700 supervisors and central bankers have attended roundtable
seminars hosted by Central Banking Publications Ltd, publishers of Central
Banking journal.
We look forward to welcoming you to this new seminar
in Windsor.
Yours sincerely,
William Clarke, PhD, CBE
Chairman, Central Banking Publications
Theories
of financial instability
Professor
E. Philip Davis
Professor of Economics and Finance,
Brunel University andmember of the European Shadow Regulatory Committee
Effective strategies to maintain financial stability
require an understanding of what causes financial instability. Fortunately,
there is a considerable and growing body of research into the causes
of financial crises, which central banks and regulatory authorities
can draw on. This session provides an overview of this research and
thus a foundation for the whole process of “macro-prudential surveillance”:
the monitoring of conjunctural and structural trends in financial markets
so as to give warning of the approach and potential impact of financial
instability.
Empirical work on financial instability
Glenn Hoggarth
Bank of England
As important as a grounding in the economic theory
on the causes of financial crises is an understanding of the empirical
work on recent episodes of financial instability. The increased frequency
of financial crisis over the last quarter of a century provides a wealth
of empirical evidence regarding the onset, costs and outcomes of financial
crises. This session reviews the lessons for both current policy and
crisis management.
How can central banks deliver financial
stability?
Professor
Charles Goodhart
London School of Economics
Maintenance of financial stability is coming to
be recognised as one of the most important objectives for a central
bank. Central bank researchers and economists are at the forefront of
newresearch on how this goal can be achieved. It is instructive therefore
to step back and consider what this work entails. This presentation
from Professor Charles Goodhart examines how infact leading central
banks like the Bank of England, European Central Bank and the US Federal
Reserve approach this mandate. In particular, what is the best way of
using limited economic analytical resources in this field?
Current threats to financial stability
Speaker to be confirmed
The International Monetary Fund, in September’s
Global Financial Stability Report, argued that it was “hard to
see where systemic threats could come from in the short term”.
However, doubts about the sustainability of the current pattern of capital
flows are increasing. Policymakers therefore must remain vigilant. This
session will call on delegates to share their institutions’ assessments
of current issues and threats.
Aerdt Houben
Monetary and Economic Policy Department,De Nederlandsche Bank
Over the past decade, maintenance of financial stability has become an increasingly important objective in economic policymaking. Many central banks now have an explicit mandate to safeguard financial stability. Many also publish aregular formal review of their work in this area. This session examines how the mandate for financial stability can be “operationalised” and the micro-prudential tools which central banks and supervisors can best employ in this effort.
Data needs for macro-prudential surveillance
Martin Andersson
Head of the Financial Systems Division, Sveriges Riksbank
Macro-prudential surveillance, like all economic analysis, depends on the ability of policy makers to identify, define, collect and analyse relevant and timely information. Informational gaps, which have the potential to mask the buildupof financial sector weakness, can seriously undermine this effort. This session examines the data needed to perform macro-prudential surveillance, and looks at some of the financial soundness indicators now being tracked by institutions such as the IMF.
Procedures in macro-prudential analysis (stress tests, VARs etc.)
Jukka Vesala
Financial Supervision Authority, Finland (to be confirmed)
Surveillance of key indicators does not, by itself, provide a means of estimating the impact on the banking sector of a destabilising event, such as a sharp decline in asset prices. Once areas of vulnerability have been identified, policymakers and analysts need to determine under what conditions these weaknesses could lead to systemic stress. This session examines the use of stress tests to allow this scenario analysis, and details the experience of institutions like the European Central Bank which have adopted such scenario analysis techniques.
The organisation of macro-prudential analysis
Thorvald G. Moe
Special Adviser, Financial Stability, Norges Bank
Central banks and other national financial authorities now agree on the need for macro-prudential surveillance, which goes beyond the supervision and monitoring of individual institutions. However, despite this agreement, a “template” for delivering financial stability is very far from complete. How, for instance, should those engaged in macro-prudential surveillance cooperate with front-line (“micro-prudential”) supervisors? How should the financial stability department be reorganized and managed? How can national and international financial policymakers best cooperate in this endeavour? This session will examine how leading central banks have approached these challenges.
The
role of bank capital regulation in risk mitigation
Patricia Jackson
Partner, Risk Management Practice, Ernst
and Young,(former Head of Financial Industry and Regulation Division,Bank
of England)
This session examines how regulators and central banks can use the tool of regulatory capital requirements, with particular emphasis on the new Basel rules currently being implemented.
The current array of policy tools
Speaker to be confirmed
Once central banks and supervisors have identified vulnerabilities, what policy tools and levers do they have available to mitigate them? Clearly, front-line supervisors can work to safeguard the integrity of individual institutions, but how can central banks, outside times of crisis, influence financial stability? In fact, central banks have a range of preventive tools. These include standard setting, performing oversight (for instance of payment systems), and providing the market with analyses and assessment of developing threats. This session examines these options.
Mitigating risks in payments systems
Speaker to be confirmed
In recent years increasing attention has been paid to the systemic risks of payment systems and their prevention. Wide ranging payment system disturbances can paralyse large parts of society and cause considerable costs to payment system users. An economic crisis can spread via payment systems from bank to bank or even country to country if the systems do not include effective firewalls and contingency plans for cases of operational distress. This session examines current work to increase the resiliency of payment systems.
Liquidity
management in banking crises
Marc Quintyn
International Monetary Fund
The central bank’s ability to inject liquidity
into markets and individual institutions is one of the key policy levers
available to financial market authorities in a crisis. Keen to avoid moral
hazard, many authorities have traditionally declined to discuss their
policy stance on the grounds of “constructive ambiguity”.
However, recent thinking is investigating whether central banks should
adopt a less ambiguous and more structured approach to their provision
of liquidity support. This session examines recent episodes of central
bank liquidity support, and examine show lender-of-last-resort policy
can best minimise/mitigate problems.
Financial instability in a securitised
world: market liquidity risk, credit derivatives
Speaker to be confirmed
Increasing securitisation fundamentally changes
the linkages between financial firms. Credit is often now provided directly
through market processes as opposed to indirectly through financial intermediaries.
While this may help to diversify risk out of the banking sector, it may
also erode “relationship banking” and thus banks’ monitoring
of borrowers. In addition, securitised markets may be more volatile, particularly
when under stress. This session examines the financial stability implications
of this trend.