Spring
2007 Training Course/Seminar Series
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The Pursuit of Financial Stability:
What Works and What Doesn’t 
4-day intensive residential programme, 1-5 April
2007
Venue: Cumberland Lodge, The Great Park, Windsor
Course 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
Dear
Delegate,
THE PURSUIT OF FINANCIAL STABILITY: WHAT WORKS AND WHAT DOESN’T
Unease over the impact of hedge funds, asset price bubbles
and credit derivatives on financial stability has risen to the top of
policymakers’ agenda. As new financial products and vehicles emerge,
the challenge for policymakers responsible for financial stability is
to stay abreast of these concerns and formulate a robust policy response.
In such a market environment, policymakers know that policy to promote
the stability of the financial sector require new methods of surveillance
which track threats to the system as a whole. Central banks and regulators
also need to look beyond the current environment: the worst banking mistakes
are made during periods of high asset valuation and low yields.
Consensus about how to deliver financial stability, and the macro-prudential
surveillance it requires, is still some way away. But there are important
areas of growing agreement on sound practice.
This course identifies the current threats to financial stability and
draws on the experiences of leading central banks, regulatory authorities
and academic experts to examine how macro-prudential surveillance is most
effectively conducted.
The focus throughout is on identifying what works and what does not. The
course is structured around four themes:
- Identifying current sources of instability: what are the key themes and issues occupying financial stability watchers? This seminar 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: speakers examine how in practice leading institutions are developing tools, procedures and organisational structures to attempt to safeguard their banking systems and financial markets;
- Best practice reporting: how can central banks best present and communicate their insights and views on developments affecting the stability of the financial system;
- Crisis management: what defences can central banks and supervisors put in place before and during a crisis strikes? The course will emphasise that policymakers need to create the incentives for prudent behaviour.
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 1,200 supervisors and central bankers have attended roundtable
seminars hosted by Central Banking Publications Ltd, publishers of Central
Banking and Financial Regulator journals. We look forward to welcoming
you to this seminar in Windsor.
Yours sincerely,
William Clarke, PhD, CBE
Chairman, Central Banking Publications
Chairman: E. Philip Davis
Professor of Economics and Finance, Brunel University and member of the European Shadow Regulatory Committee
How can central
banks best monitor financial stability risks?
Introductory roundtable discussion, lead by
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,
the best way of using limited economic analytical resources in this
field.
Data needed for macro-prudential surveillance
Mattias Persson
Head of Macro-prudential Division,
Financial Stability Department, Riksbank
Macro-prudential surveillance, like
all economic analysis, depends on the ability of policymakers to identify,
define, collect and analyse relevant and timely data. Information 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.
Publishing a financial stability report
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 research and analysis 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 judgments lest they destabilise
markets or financial institutions 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.
Macroeconomic threats to financial stability: asset price bubbles
Mar Gudmundsson
Deputy Head,
Monetary and Economic Department, Bank for International Settlements
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
but rising yields, make this a particularly pressing issue today. This
session draws on recent analysis to shed light on this phenomenon, and
proposes some policy options for addressing current and future bubbles.
Chairman: E. Philip Davis
Giles Drury
Senior Manager, Financial Services Advisory, KPMG
Recent high-profile successes – and failures – have moved hedge funds up policymakers’ agenda. Supervisors will be taking an increased interest as they move cautiously to regulate or monitor these newly significant market players. This session draws on a recent survey by KPMG on the impact of the hedge fund industry on financial markets to test a variety of approaches to reducing the potential risks to financial stability.
Credit transfer and derivatives: implications for macro-prudential surveillance
Imene 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 in all credit markets. This session examines the recent growth in the use of these instruments, and examines how central banks and regulators can respond.
Pro-cyclicality: evidence and policy implications
Sean Craig
Senior Economist, IMF Monetary and Exchange Affairs Department
Financial systems tend to be pro-cyclical. Credit to the non-financial private sector typically increases when output is expanding and contracts during recessions, while asset prices respond to favourable growth expectations. Indeed, pro-cyclicality is a normal feature of economic systems, but financial sector weaknesses can exacerbate it sufficiently to pose a threat to macroeconomic and financial stability. In this session the speaker will assess the empirical evidence on pro-cyclicality and examine the policy implications for regulators and central banks.
Chairman: E. Philip Davis
Empirical work on financial stability
and the use of stress testing
Michael Boss
Financial Stability Department, Oesterreichische Nationalbank (invited)
Empirical work on financial stability
and the use of stress testing Michael Boss (invited) Financial Stability
Department, Oesterreichische Nationalbank 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. Yet, 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.
This session will also examine and evaluate the use of stress tests to
allow this scenario analysis.
Mitigating risks in payment
systems
Speaker
to be confirmed
Streamlining your focus
Simon
Hall
Senior Manager and FSR
Editor, Systemic Risk Assessment Division, Bank of England
The Bank of England has recently made sweeping changes
to its Financial Stability Review (which has, in fact, been renamed the
Financial Stability Report). Most significant was the central bank’s
decision to identify six main threats, rather than engage in a general
discussion of risks facing the financial system. The report also adopts
a more forward-looking stance than previous editions and is considerably
shorter. In this session the editor of the report will outline the thinking
behind these changes and evaluate the feedback received.
The role of bank capital
regulation in risk mitigation
Patricia
Jackson
Partner, Risk Management
Practice, Ernst and Young
The past 20 years have seen increasing moves to develop
and harmonise capital requirements in the G10 and beyond – culminating
in Basel II. Why are capital requirements seen as important for financial
stability? Do they conflict with monetary policy goals?
Chairman: E. Philip Davis
The role
of incentives in financial stability
Philip
Davis
Theories of financial instability,
and experience of crises, underline the importance of incentives in generating
vulnerability. To a large extent the maintenance of financial stability
depends on aligning the incentives of private agents with that of the
regulator. A clear example is that regulators should reduce moral hazard
by making access to lender-of-last-resort facilities uncertain so that
the market may not take for granted the action to be followed by authorities.
However, incentive assessment needs to be only a part of the picture –
monetary policy, international developments and other key aspects all
need to be taken into account. In this session the speaker considers the
role of incentive assessment and other key factors in the central bank’s
financial stability function.
Lessons learned and action points
Wrap-up session, led by chairman
The day and course concludes with
a discussion led by the chairman. This provides a chance for delegates
to share views and experiences gained during the four days of the course
and draw conclusions and action plans which they can take back to their
home institution.
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