Session at Bretton Woods Conference
Saturday, April 9, 2011
Can Sovereignty and Effective International Supervision be Reconciled? The Challenge of Large Complex Financial Institutions
Henry Kaufman, President of Henry Kaufman and Company, introduced the panelists and moderated the ensuing discussion.
Erik Berglöf - Chief Economist and Special Adviser, European Bank for Reconstruction & Development
Erik Berglöf portrayed the complexities of European responses to the financial crisis affecting Eastern Europe. Both the European Commission and private sector coordination were slow off the mark initially. Regulatory power shifted from banks’ home countries to their host countries. Although large gaps remain in institutions’ ability to act as needed, the Vienna Initiative holds promise for coordinating actions by 16 key banks and both home and host countries.
Claudio Borio - Deputy Head of Monetary and Economic Department, Bank for International Settlements
Claudio Borio contended that absolute sovereignty was neither feasible nor desirable today and that there is no alternative to international cooperation. He described the challenge of Basel III, the new international agreement on financial regulation, to find a capital standard applicable across all countries that would counter the procyclical tendency of financial activity. They needed an indicator of excess credit creation that would be consistent across countries, properly take into account international exposure, and assign responsibilities on both home and host countries.
Garry Schinasi - Visiting Fellow, Bruegel, Brussels
Garry Schinasi explained that because banks pose serious systemic risks to the entire economy, they require different regulation than other industries. He found both Dodd-Frank and the new European financial regulatory architecture to be promising starts in addressing the market failures of systemically important financial institutions. Sovereign national governments can maximize the welfare of their citizens today only by global arrangements. He predicted that political pressures rather than conceptual problems would threaten the success of regulation going forward.
Andrew Sheng - Chief Adviser, China Banking Regulatory Commission
Andrew Sheng labeled large complex financial institutions (LCFI’s) “Global Godzillas.” He argued that LCFI’s were only the channels for the financial crisis and that the real problem was excess consumption made possible by increased leverage. He also found the challenge of regulating LCFI’s to be more political than conceptual. The problems are compounded by asymmetries in both information (particularly of offshore activity) and power (created by the network effect of a few large banks) and their reflexive leveraged trading. Private debt problems have been shifted on to public balance sheets without fixing the basic problem.
Anat Admati - Professor of Finance and Economics, Stanford University
Anat Admati criticized Basel III for imposing equity requirements that were far too low – effectively 3% of banks’ balance sheets, not the 7+% advertised, largely because of risk weighting assets. Leverage has negative externalities, yet we subsidize it. Contrary to banks’ arguments about the high cost of equity, raising requir3equity requirements would lead to better economic outcomes.
Simon Johnson - Professor of Entrepreneurship, Global Economics and Management, Sloan School of Management, Massachusetts Institute of Technology
Simon Johnson contended that the Dodd-Frank legislation did not live up to its hype. Resolution authority is inadequate to global institutions. Too big to fail banks have been made bigger. Basel III set too low a bar for capital because of bank influence. The banking crisis has raised unemployment by 6 percentage points and federal debt to GDP by 40%. Nothing has been done so far that will prevent a a major financial crisis from happening again soon.
The Q&A and discussion was moderated by Henry Kaufman.