How to Avoid Another Financial CrisisCentral European Perspective

Andrzej Raczko

Reputable monetary policy (independent central bank)

Long-term fiscal stabilization

Structural reforms boosting international competitiveness (labor market)

Free float of capital

Good business climate

Domination of private financial sector

Accumulation of huge global imbalances (exchange rate rigidity)

Ample liquidity (global saving glut)

- „negative experience” from former financial crisis – growing F/X

reserves of central banks,

- corporate saving,

- high commodity prices and financial accumulation (oil countries)

Low interest rates (easy monetary policy in the USA)

Widespread growth of price assets (housing bubble)

Low personal saving in the USA

Wholesale financial market development

Interaction between mark-to-market pricing and liquidity

Reduction of pro-cyclicality (amplitude of credit cycles) Automatic countercyclical mechanism vs. discretionary interventions

Scope of banking operations (the Volcker’s Rule) Systemic important institution (requirements and costs) Taxation of banking sector Consumer protection law

Bank capital Liquidity Risk management International cooperation

Trading book capital Securitization risk weights

Improvement of guidance on management and supervision

Compensation system Concentration of risk

Principles of cooperation (G-20, FSB – Standard Setters, BIS, IMF, EU) Supervisory colleges EU attempts to strengthen supervision

Quality and transparency of capital base

Reduction of Basel II build-in pro-cyclicality

Counter cyclical capital buffer

Capital conservation buffer

Leverage ratio

Forward looking provisioning

New liquidity measures

Revision of Code of Conduct FundamentalsRevision of Code of Conduct Fundamentals

Differentiated ratings on structured productsDifferentiated ratings on structured products

Conflict of interests

Minimum standards

Systemic monitoring

Standardization of products

Integrated clearing system

Alternative approach to mark-to-market system

Transparent standards for off-balance sheet vehiclesstandards for off-balance sheet vehicles

Originate-to-distribute model

Collateralized Debt Obligation (securitization)

Structured Investment Vehicle (SIV)

OTC market and wholesale financing system

Abrupt outflow of foreign saving

Long-term assets denominated in foreign currency

Finance innovation (F/X options)

Quality and transparency of capital base

Fair competition (based on risk not reputation)

Hybrid capital (subordinated debt in foreign currency)

Subsidiary vs. branch model

Reform of Basel II

Risk weights(standardized vs. internal rating-based approach)

Pro-cyclicality (F/X sensitivity)

Counter cyclical capital buffer

Flexibility of automatic stabilizers definition

Capital conservation buffer

Specific risks - role for domestic supervisor

Leverage ratio

Domination of standardized approach

Forward looking provisioning

System based on domestic risk assessment

New liquidity measures

Phasing-in mechanism

European Systemic Risk Board

Domination of central banks (monetary policy vs. financial stability

function)

Early warning system (practical solution?)

Communication (via non-binding recommendations)

European System of Financial Supervisors (ESFS)

Structure (built on Lamfalusy structures)

Sectoral vs. national supervisors (balance of powers)

European Supervisory Authorities

Single rule book (binding technical standards)

Interpretation of regulations

Mediation (even addressing individual financial institution)

Colleges of Supervisors

Supervision of cross-border groups (day-to-day supervision)

European systemic institutions

Crisis resolution Cross-border insolvency Selection of institutions (financial viability criterion?) Models of resolution („bad” bank, guaranty of price of assets, transfer of

assets)

Pan-European Deposit Guarantee Scheme Structure (domestic vs. Pan-European) Coverage (cross-border operation) Funding (ex-ante contribution) Membership (compulsory) Fiscal responsibility of last resort Potential arbitrage (subsidiary vs. branch)