SAFE Conference on Finance between Liquidity and Insolvency
Organizers: Dan Awrey, Brigitte Haar and Katharina Pistor
Cosponsors: Research Center SAFE, Stiftung Geld und Währung, Max-Planck-Gesellschaft and Alexander von Humboldt Stiftung
Download the program (pdf)
There is a tendency in finance to view (il)liquidity and (in)solvency as conceptually distinct problems, capable of being described, analyzed, and regulated independently of one another. Nowhere is this more clearly the case than in banking regulation, where central bankers have long cited – even if they have not always followed – Bagehot’s dictum to lend freely to illiquid, but not insolvent, banks. In reality, however, liquidity and solvency are inextricably linked. The solvency of the banking system requires the relaxation of banks’ liquidity constraints by central banks as a matter of day-to-day practice. Central banks also play a critical role as liquidity backstops during periods of institutional or broader financial instability. The effect of these and other interventions is to insulate banks from the application of general insolvency rules.
Whether banks should be exempt from the application of general insolvency rules is of course an interesting and important question. On one level, the post crisis answer to this question has been a resounding “no”. On another level, the answer has been to develop more tailored substitutes for general insolvency laws, reflective of the particular challenges of resolving failing banks. Neither of these answers, however, speaks directly to the question of where to draw the line, much less whether such line-drawing exercises go to the core of governing inherently instable financial systems.
To complicate matters even further, finance is no longer all about banks. With the rise of shadow banking systems, many of the challenges of bank governance faced over the centuries are now replicated at the level of non-bank financial intermediaries and at the intersection between financial institutions and markets. Whether institutions or markets are more or less deserving of protection from binding liquidity constraints has been a recurring theme in debates about bail-in, closeout netting protocols, and access to central bank lending. However, they have rarely been addressed as a unifying theme for governing finance in all its manifestations. This conference seeks to fill this gap.
The conference will be organized around three main themes: Markets v. Institutions, Safety Nets, and “Liquolvency” with specific institutional arrangements scrutinized that revolve around these themes. The fourth and final theme is an invitation to rethink the relation between (il)liquidity and (in)solvency at a conceptual level.
Please, note that Chatham House rules will apply.