05 Jun 2016

Regulating Financial Markets

Financial market regulation is a recurring issue in contemporary policy discussions and debates. To discuss the latest findings and challenges on this topic the Conference on Regulating Financial Markets at the House of Finance on May 30 and 31, 2016 brought together policy-makers and prominent economists from academia. The event was organized by the Deutsche Bundesbank, the Research Center SAFE, the Centre for European Economic Research (ZEW) as well as the Centre for Economic Policy Research (CEPR).

The two-day conference focused on five main themes: Liquidity, Monetary Policy, Banking, Modeling and Structured Products.

The first session theme “Liquidity”, chaired by Günter Strobl (Frankfurt School of Finance & Management), covered a model for welfare analysis of fragmented liquidity markets (Alexander Guembel, Toulouse School of Economics) as well as an analysis on how ECB’s activity as a lender of last resorts crowded out liquidity demand in the interbank market during the global financial crisis (Florian Heider, ECB).

The second session, “Monetary Policy”, chaired by Ben Craig (Federal Reserve Bank of Cleveland), was opened by Johannes Stroebel (New York University) who discussed the ability of policymakers to stimulate household spending through banks. Andrea Polo (Universitat Pompeu Fabra and Barcelona GSE) contributed to the topic by focusing on the transmission channel of monetary policy.

The keynote address of Douglas Diamond (Chicago Booth School of Business) provided novel insights for the design of liquidity regulation by presenting a framework on liquidity requirements, liquidity choice and financial stability.

The third session on “Banking”, chaired by Michael Koetter (IWH and Otto-von-Guericke University Magdeburg), covered a model on insecure debt that is the first in the literature to incorporate both repo and unsecured short-term debt (Enrico Perotti, University of Amsterdam and CEPR). Vikrant Vig (London Business School) concluded the Banking session by showing that bailout decisions in the German saving bank sector are distorted by personal considerations of local politicians leading to considerable lower long-run performance of affected banks.

The second day of the conference started with a session on “Modelling”, chaired by Andreas Pfingsten (University of Münster). Christian Laux (Vienna University of Economics and Business) presented evidence on the procyclicality of US bank leverage, followed by Tim Landvoigt (University of Texas at Austin) who presented a quantitative model incorporating both commercial banks and shadow banks to study unintended consequences of capital requirements.

The second keynote address in the conference was given by Patrick Bolton (Columbia Business School) who provided interesting insights for efficient resolution of global banks by national regulators.

The final session of the conference was on “Structured Products” (Chair: Günter Franke, University of Konstanz). Alexander Wagner (Swiss Finance Institute, University of Zurich) presented conditions under which financial engineering generates neglected risk in the economy. The conference was concluded by Mariassunta Giannetti (Stockholm School of Economics) who showed that hedge funds that are affiliated with financial conglomerates have more stable funding and lower flow-performance sensitivity than other funds.

Katharina Petricevic and Deyan Radev