Transforming finance conference

May 10, 2013, London

Professor Stephany Griffith-JonesFinancial Markets Program Director at

the Initiative for Policy Dialoguesgj2108@columbia.edu

www.stephanygj.netwww.policydialogue.org

Overall context

Aims of the financial system-Managing risk, rather than creating it-Allocating capital to the real economy efficiently; supporting development-Financial system did neither properlyDo we need very different financial system?-Restricting or isolating speculation -Financial system serves real economy

Historical context (brief)

• 1930s Crash and Great Depression• Major regulation of finance, Glass-Steagall • Practically no crises for 40 years; crises

avoidable if good regulation & small fin sector• Major deregulation and liberalization 1980s• Many crises in developing world • North Atlantic crisis, since 2007• Crises became the new normal

Major challenges for regulation include

• Macro-prudential regulation to compensate for pro-cyclical finance

• Need for comprehensive regulation major challenge, to include shadow banking; what quacks like a duck shd be regulated like a duck

• Separating and/or limiting “speculative” finance. Volcker, Vickers, Likkannen

• Possibly reducing size,leverage, opaqueness and complexity financial sector(Solow, IMF, BIS, Griffith-Jones)

Counter-cyclical regulation

• Need for counter-cyclical regulation to compensate for pro-cyclical finance

• History; dynamic provisioning successful• Rules preferable to discretion• Can be done via capital requirements,

provisions and loan to value ratios• Capital account management part EE macro-

prudential regulation; now accepted by IMF

Basle 3

• Size and quality of core capital improved (but is it enough?)

• Simple leverage ratio 1:30 (too generous)• Counter-cyclical regulation • Liquidity coverage ratio positive• Does not deal enough with sources of

systemic risk, like eliminating links between more speculative and utility banking

Implications of North Atlantic crisis for developing countries

• Traditional advice that deeper and more complex financial sector always good for growth and development challenged. IMF and BIS recognize this in 2012

• Challenges for developing countries Desirable scale and structure fin sector. Rigorous domestic regulation Major challenge for developed countries

Role for public development banks• Where markets fail, governments need to act• Successful public banks, KfW, BNDES, EIB major support for growth• Do major counter-cyclical lending in crises• Fund SMEs, infrastructure, green economy• Can finance development strategy• British Investment Bank very desirale• Can leverage public resources

European pro growth policies

•Pan European measures•Countries without market

access•Countries with market

access; the UK case

Pan European measures

• Role of the EIB and of Structural Funds• Doubling capital of EIB and creating project

bonds• Can lead to increased resources of E 60 billion

annually• Leverage implies net contribution from EU

governments is small• Can lead to 1 million EU jobs at least, as well

as ½ % extra EU GDP by 2014

Table 2: Additional proposed EIB and EU growth expenditure programme (in billions Euros)

2012 2013 2014-2015 (annual) 2016-2020 (annual)

Additional EU budget 15 15 25 25

Additional EIB lending total 20 45 35

-- Risk buffers 10 10 10

-- Capital increase 10 35 25

Grand Total 35 60 60 25

National policies

• Countries with limited market access need to have their debt servicing costs lowered

• Promise unlimited ECB purchases of government debt significantly lowers spreads. Needs slower fiscal consolidation

• Option of postponing debt service; precedents • Country with market access, like UK, can

postpone fiscal consolidation; this could imply16% more of GDP according to modelling

Table 3: GDP in £ billion, 2010 prices under two scenarios

•