On 18 and 19 May 2015, the Conference on Regulating Financial Markets brought together researchers and central bankers who discussed the latest findings and challenges in financial markets regulation. The event was organized by the Research Center SAFE and attended by about 80 participants from 10 countries, among them high-level researchers and decision-makers from central banks.
The audience was welcomed by Rainer Haselmann, SAFE Professor of Finance, Accounting and Taxation and organizer of the conference, together with Thomas Kick (Deutsche Bundesbank), Jan Pieter Krahnen (SAFE and Goethe University), Thilo Liebig (Deutsche Bundesbank), Christoph Memmel (Deutsche Bundesbank), Jörg Rocholl and Sascha Steffen (both ESMT Berlin).
The two-day-conference was divided into four sessions. The first one, chaired by Sascha Steffen, addressed challenges concerning the incentives regulators should consider when implementing financial regulation. In particular, the opening presentation by Diane Pierret (University of Lausanne) of her work with Viral Acharya (New York University) and Sascha Steffen showed how short term funding of European banks during the sovereign debt crisis reduced exposure to funding risk and market discipline. The authors stressed that a reduced market discipline can have important implications for the stability of the financial system itself. In the same spirit of incentives impacting banks behaviors and risk taking, Agnese Leonello (ECB) stressed the idea that government guarantees induce banks to engage in excessive risk taking and that a more moderate form of intervention could result in a more efficient risk taking of banks.
In the following keynote address, Claudia Buch (Deutsche Bundesbank) stressed the importance of using new and detailed data on macroprudential policy. She gave an overview of recent developments in macroprudential regulation and highlighted the challenges to validate some policies in microprudential regulation (like use of derivatives and repo). She emphasized that policies have to move ahead and look carefully to the linkages across banks, in particular to the exposition of the banking system during periods of economic crises.
The second session on “Macroprudential Policies” was opened by Eugenio Cerutti (IMF) who presented the paper “The Use and Effectiveness of Macroprudential Policies: New Evidence”, joint work with Stijn Claessens (Federal Reserve Board) and Luc Laeven (ECB). The authors used a recent IMF survey to analyze the use of macroprudential instruments across more than 100 countries in the period 2000-2013. They documented that macroprudential policies were used more frequently by emerging economies whereas advanced economies predominantly used borrower-based instruments. While the use of these instruments is usually associated with lower credit growth, this effect is smaller in financially developed and open economies. The authors also find evidence that the policies work better in the boom than in the bust phase of a financial cycle.
In the third session on “Bank lending and systemic risk,” chaired by Thilo Liebig, Ibolya Schindele (Norwegian Business School) presented a work analyzing the differential impact of domestic and foreign monetary policy on the local supply of bank credit.
The second day started with a session on bank capital, chaired by Thomas Kick. Sebastian Pfeil (University of Bonn) presented the paper “Bank Capital and Aggregate Credit” (with Nataliya Klimenko and Jean-Charles Rochet, both University of Zurich). The authors developed a continuous time equilibrium model to explain the role of bank capital in lending and output fluctuations. Commercial banks are modeled to finance their loans by deposits and equity and to face costs when issuing new equity. Aggregate bank capitalization drives the dynamics of the loan rate and the volume of lending in the economy. The authors show that while the competitive equilibrium is inefficient, with too much bank lending in upturns and too little in downturns, imposing a minimum capital regulation also leads to a reduction of lending in the economy and hence it is not of much help.
In the following keynote speech, Viral Acharya focused on the real effects of the European sovereign debt crisis, using evidence from the syndicated loans market (a joint work with Tim Eisert, Erasmus University Rotterdam, Christian Eufinger, University of Navarra, and Christian Hirsch, SAFE and Goethe University). Focusing on the impact of loan supply disruptions in the Eurozone on the corporate policies of the firms, Acharya presented firm-level evidence that the reduction in the loan supply of GIIPS banks lead to disruptions in investment, job creation and sales growth experienced by European borrowers of these banks. These borrowers focused on building up cash reserves for their liquidity management instead of seeking bank lines of credit. Furthermore, the large sovereign bond losses of GIIPS banks were the reason for the loan supply contraction and negative real effects endured by firms across Europe.
The conference concluded with a policy panel on the question “What are the Challenges of the SSM?,” chaired by Anne Le Lorier (Banque de France). Elena Carletti (Bocconi University) pointed out several challenges in the design and the functioning of the European banking union, including the continuous lack of a centralized deposit insurance scheme and the insufficient size of the planned single resolution fund that could cover only individual but not systemic crises. Furthermore, the SSM does not cover an important part of the financial system: the shadow banking sector. Andreas Dombret (Deutsche Bundesbank) expressed concerns that the issue of bank transparency is not fully addressed by the SSM, yet he appreciated the objective of the SSM to harmonize supervision standards. William Perraudin (Risk Control Limited) was skeptical about the potential conflicts of interest that might arise between monetary policy and banking supervision and pointed out that the role of the EBA should be clarified. However, he also welcomed the harmonization of banking supervision standards.
Michela Altieri, Deyan Radev