professor mark taylor warwick network day monday 12 april 2010

Professor Mark Taylor

WARWICK NETWORK DAYMonday 12 April 2010

Background: Vision 2015

University of Warwick Strategy: Vision 2015

• ‘To be firmly in the global top 50 universities by 2015’

• Important element: international profile• Warwick Commission: to provide informed policy

analysis and recommendations on issues of global importance

• First Warwick Commission, 2007: International Trade• Second Warwick Commission, 2009: International

Financial Reform• Third Warwick Commission, forthcoming, likely to be on

Global Warming

The Second Warwick Commission

Second Warwick Commission

• International Financial Reform in the wake of the global crisis

• Interdisciplinary, 12-person commission

• Economists, political scientists, and lawyers

• Practitioners and academics

The Commissioners

Avinash Persaud – ChairChairman, Intelligence Capital Len Seabrooke – Director of StudiesProfessor of International Political Economy, Warwick Director of the Centre for the Study of Globalisation and Regionalisation

Heribert Dieter – Co-DirectorSenior Fellow in the Global Issues Research Unit, German Institute for International and Security Affairs, Berlin

Mark BlythProfessor of International Political Economy, Brown University, USA

Anna Gelpern

Associate Professor of Law, American University, Washington DC

Stephany Griffith-Jones

Professor of Political Economy, Columbia University, USA

Eric Helleiner

Professor of International Governance, University of Waterloo, Canada.

Rajiv Kumar

Director, Indian Council for Research on International Economic Relations, Delhi, India.

The Commissioners

Diery Seck

Director of the Center for Research on Political Economy, Dakar, Senegal

Injoo Sohn

Assistant Professor of Politics and Public Administration, University of Hong Kong

Mark Taylor 

Professor of International Finance, Warwick Business School, Managing Director, Barclays Global Investors

Eleni Tsingou

Research Fellow, Centre for the Study of Globalisation and Regionalisation, Warwick

The Commissioners

• Central bank officials

• Supervisory authority officials

• Financial sector practitioners in banking and the hedge funds

• Credit rating agency officers

• Financial policy experts

• Interviews by telephone and in person

• Brussels, Frankfurt, London, Paris, New York, Washington

Evidence

• Warwick

• Berlin

• Ottawa

Meetings

• Published November 2009

• Launched Delhi, November 2009

• Press coverage:

– The Economist

– Financial Times

– Wall Street Journal

– Handelsblatt

– Forbes

• Events planned in 2010

– London

– New York

– Washington

– Beijing

The Report

• In times of economic and financial boom, banks and financial institutions need to have their ability to create loans reined in, in order to avoid fuelling asset market bubbles

• Financial regulators need to curtail institutions’ ability to heighten risk by mismatching the maturity of their assets

• Regulators must have the flexibility to apply tight regulatory requirements on institutions that threaten the stability of the whole financial system

• Increased powers for national regulators in a bid to prevent banks from establishing overseas branches and regulating them from their home base

• Host regulation would lead to a ‘right-sizing’ of the financial sector, so that the finance industry is not allowed to excessively dominate a country’s economy

Key recommendations

• Banks and financial institutions hold capital as a ‘cushion’ to protect their depositors

• More capital is held, the lower the risk that the bank will not be able to meet its liabilities

• Regulators set limits on the minimum amount of capital that must be held for a given amount of liability

• This is the ‘capital adequacy ratio’

Capital Adequacy Ratios

Systemic Risk

• Fallacy of Composition

• Individual risk vs system-wide risk

• Based on an analysis of a single institution

• Prudent capital adequacy ratios

• As capital value rises, lend more

• As capital value falls, reduce lending

• But what if this happens to everyone at the same time?

Lessons for financial regulation?

• Supplement micro-prudential regulation • Alleviate systemic effects • Raise capital adequacy ratios as capital value

rises faster than a benchmark rate of growth• “In times of economic and financial boom, banks

and financial institutions need to have their ability to create loans reined in, in order to avoid fuelling asset market bubbles”

Macro-Prudential Regulation