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The Pursuit of Financial Stability: What Works and What Doesn't
4-day intensive residential programme, 2 –
6 April 2006
Venue: Cumberland Lodge The Great Park, Windsor
Chairman: E. Philip Davis, Professor of Economics and Finance, Brunel
University and member of the European Shadow Regulatory Committee
Series adviser: Charles Goodhart, CBE
Professor Emeritus, London School of Economics, Financial Markets Group
Details of how to register
are here
THE PURSUIT OF FINANCIAL STABILITY: WHAT WORKS AND WHAT DOESN’T
Recent tremors in credit markets caused by the downgrades of General Motors and Ford underline how much remains to be understood about how credit risk transfer is rewiring the linkages in the international financial system.
In such a fast-developing market environment, financial policymakers realise that close supervision of individual financial firms is not sufficient to guarantee the stability of the financial sector. This requires new methods of surveillance which track threats to the system as a whole.
Central banks and regulators must understand the impact of unregulated entities like hedge funds and look beyond individual institutions to analyse the impact of new actors and new linkages in the system. And they must look beyond the current benign environment: in the past the worst banking mistakes have been committed during just such periods of high asset valuation, and low yields.
However, consensus about how to deliver financial stability, and the macroprudential surveillance it requires, is still some way away. But there are important areas of growing agreement on best practice.
This course identifies the key current threats to financial stability and draws on the experiences of leading central banks, regulatory authorities and academic experts to examine how macroprudential surveillance can in fact be made most effective.
The focus throughout is on identifying what works and what does not. The course is structured into four sections:
• Emerging threats and issues: what are the key themes and issues which are occupying financial stability watchers? This session will identify and assess the key market and institutional forces driving change. It will take particular account of asset prices misalignments, hedge funds and the robustness of the new range of credit risk transfer techniques;
• Operationalising macro-prudential surveillance: then speakers examine how in practice leading institutions are developing tools, procedures and organisational structures to attempt to safeguard their banking systems and financial markets.
• Risk mitigation: “joined-up” policymaking integrates the analysis of threats with work to mitigate and manage them. This day explores leading current mitigation techniques.
• Crisis management: what management defences can central banks and supervisors can put in place before a crisis strikes?
The seminar meets in roundtable format to allow an international group of delegates 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 1,000 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
Chairman: Professor E. Philip Davis
How can central
banks best monitor financial stability risks?
Roundtable discussion, led
by Professor
Philip Davis
This roundtable discussion will
give the group an opportunity to consider together the most pressing
potential threats to financial stability and to discuss the main challenges
facing their organisation, in terms of both external threats and internal
capacity constraints. Delegates will be encouraged to step back and
consider what their financial stability work entails and in particular,
what is the best way of using limited economic analytical resources
in this field.
Data needs for macro-prudential surveillance
Mattias Persson
Head of Macroprudential Division,
Financial Stability Department, Riksbank
Macro-prudential surveillance, like
all economic analysis, depends on the ability of policy makers to identify,
define, collect and analyse relevant and timely data. Informational
gaps, which have the potential to mask the build-up of 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.
Best practice in macro-prudential analysis
Ian Woolford
Manager, Macro-Financial Stability,
Financial Stability
Department, Reserve Bank of New Zealand
Central banks and other national
financial authorities now agree on the need for macro-prudential surveillance.
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 organised and managed? This session will examine
how central banks should approach these challenges.
Developing financial stability reporting
in a central bank
John Fell
Head of Financial Stability,
European Central Bank
At least 31 central banks now publish
a financial stability review. For many financial stability departments
the work that goes into this review provides the major focus for their
work. However, review writers face serious constraints, not least the
need to be cautious in their judgements lest they destabilise markets
or firms with too gloomy an assessment. Also, they face the challenge
of educating readers to be able to digest the (necessarily) technical
analysis. This session examines how the European Central Bank has addressed
some of these challenges with its own financial stability review.
Chairman: Professor E. Philip Davis
Mar Gudmundsson
Deputy Head, Monetary and Economic Department, Bank for International Settlements (to be confirmed)
No question has proven more troublesome for central bankers over the last decade than how to treat asset price bubbles. Continuing high prices in property markets, coupled with low yields, make this a particularly pressing issue. This session draws on recent analysis to shed light on this phenomenon, and proposes some policy options for addressing current and future bubbles.
Monitoring hedge funds – new threats and new supervisory techniques
Andrew Shrimpton
Head Of Hedge Fund Manager Supervision Team, Financial Services Authority (invited)
With a tough year behind them, hedge fund managers continue to expect rapid growth in 2006. Supervisors will be taking an increased interest too as they move increasingly to regulate or monitor these newly significant market players. In the UK, the Financial Services Authority has recently created a dedicated team to oversee more than 25 firms. This session examines how the FSA are going about monitoring these relatively opaque firms, and what have been the results so far of their investigation into the London market.
Credit risk transfer – implications for macroprudential surveillance
Imène Rahmouni
Deputy Head, Markets and Financial Stability Division, Banque de France
Innovative credit risk transfer techniques (in particular collateralised debt obligations) which convert credit risk into a marketable commodity have improved non-bank investors’ access to credit markets. However, these innovative instruments are not always sufficiently tried and tested. Both investors and market participants may thus be exposed to relatively high potential losses, and the growth in CDO issuance seems to have contributed to the marked narrowing of spreads over the past two years on all credit markets. This session examines the recent growth in the use of these instruments, and examines how central banks and regulators can respond.
Can operations staff help financial stability departments?
Dr Tim Young
Norwich Union Lecturer in Finance, University of York
In pursuit of their financial stability mandate some central banks, such as the Bank of England, have tasked staff in the market operations area with an additional surveillance role. The idea is that, as active participants in the markets, operations staff will be better able to perform market surveillance. However, this arrangement is not without costs. This session explores the possible trade-offs and conflicts of interest that may arise for those carrying out this dual role.
Procedures
in macro-prudential analysis (stress tests, VARs etc.)
Jukka
Vesala
Financial Supervision Authority,
Finland
The role of bank capital regulation in risk mitigation
Patricia Jackson
Partner, Risk Management Practice, Ernst and Young
The end-2006 deadline for implementing the new Basel accord is focusing minds everywhere on the vital role played by regulatory capital. What is less appreciated however is the fact that market-generated capital requirements can be as important as regulatory minima. This session examines how regulators and central banks can use the tool of regulatory capital requirements, with particular emphasis on how the new Basel II rules will interact with the central bank’s financial stability mandate.
Mitigating risks in payments systems
Jeffrey Marquardt
Associate Director, Division of Reserve Bank Operations and
Payment Systems, Federal Reserve Board (invited)
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
Professor
E. Philip Davis
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 examines how lender-of-last-resort policy
can best minimise/mitigate problems.
Lessons and key issues for financial
stability analysis
Wrap-up discussion and action points led by
Philip
Davis
This session will bring together
the different themes of the course and focus on key ideas and conclusions.
Delegates will reflect on lessons learnt throughout the course and identify
opportunities for moving forward, both in their own organisations and
at the international level.
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