17 October 2014, Goethe University Frankfurt
On 17 October 2014, the second Frankfurt Conference on Financial Market Policy brought together high-level regulators, academics and industry representatives to discuss the functions and functioning of the non-bank banking sector and the challenges lying ahead for regulators, consumers and practitioners alike. The annual Frankfurt Conference is organized by the Policy Center of the Research Center SAFE. Over 170 participants from more than 15 countries, among them high-level researchers and decision-makers from central banks, supervisory institutions and the financial industry, attended the event held at Goethe University Frankfurt and seized the opportunity to address the speakers with their own insights and questions.
The audience was welcomed by Rainer Klump, Representative of the Executive Board of Goethe University, and Jan Pieter Krahnen, Director of SAFE. Vítor Constâncio, Vice President of the European Central Bank (ECB) delivered the subsequent keynote address. Constâncio argued that the term “shadow banks”, though value-loaded, is fitting none the less, as banking activities outside the regular banking sector are still not visible in monetary statistics and flow of funds accounts, leading to a persistent lack of transparency. He underlined that it should be of highest priority to improve data availability for activities of non-bank banks. Constâncio conceded that stricter regulation of regular banking activities is one of the drivers for the rise of shadow banks and the shift towards market-based financing.
The first of three ensuing panel sessions dealt with “What is special/normal about non-bank banking?” The session was chaired by Hans-Helmut Kotz, Program Director of the SAFE Policy Center and host of the Frankfurt Conference. Claudia Buch, Vice President of the Deutsche Bundesbank, noted that monetary policy traditionally targets bank balance sheets. That banking-similar activities are increasingly being conducted beyond the regular banking sector is posing challenges to the transmission of monetary policy. Buch made a plea for improved statistics and more precise knowledge of the shadow-banking sector. John Berrigan, Director for Financial Stability, Economic and Financial Affairs in DG ECFIN of the European Commission, underlined that his institution is interested in promoting securitization, a particular part of the shadow-banking sector. He advocated more diversified financial institutions on the capital markets to stimulate financial stability and growth. As a complement to the Banking Union, a ”Capital Market Union”, a single rulebook for buyers and sellers of securities and related infrastructures, would facilitate market integration in market-based financing.
Adrian Blundell-Wignall from the OECD identified the excessive use of derivatives as one primary cause of the financial crisis. He argued that derivatives continue to be a large source of risk and interconnectedness in non-bank banking. For the regular banking sector, Blundell-Wignall argued forcefully for a separation of investment banking activities from retail banking, to eliminate cross-financing between these activities. In his view, correct price signals will be a necessary part of any solution, which seeks to reduce the risks of financial innovations. Günter Beck, Professor for European Macroeconomic Studies at the University of Siegen, contributed with theoretical insights on the shadow banking sector and pointed to the problem of asymmetric information at the different steps of the credit intermediation process characteristic for non-banks, which are likely to result in suboptimal outcomes. A lively debate ensued around the question of how the risks linked to shadow banking, securitization and derivatives can best be handled.
The challenges that practitioners are facing were discussed in the second panel “Asset Managers: deep pocket specialization, long horizon?”, chaired by Andreas Hackethal, Professor of Personal Finance at Goethe University. This panel brought up controversial arguments regarding the role of hedge funds in the context of financial stability, and here also, transparency was central to many arguments. Andreas Billmeier from Stone Milliner Asset Management, argued that hedge funds contribute substantially to market efficiency through arbitrage trading. However, as they operate with high leverage, investments in hedge funds are risky, especially when markets become illiquid. Billmeier sees no justification of public bail-outs of hedge funds, as investors should be aware of the riskiness of this business. Anton Brender from Candriam Investors Group praised the fact that securitization provides flexibility to the financial system, both for banks, that want to share the risks of their loan portfolio, and for firms in search of funds. Normalizing securities products and increasing transparency in the markets will make loss behavior predictable and thereby decrease the risks in securitization. Peter Cornelius of the Carlyle Group contributed the view of a private equity firm, arguing that the alignment of interests between investors and the private equity fund is close. Andrew Bosomworth from Pimco and Jan Seifert, Senior Portfoliomanager Corporate Bonds at DEKA Investment, completed this panel.
The third panel turned to the question of “Infrastructures: delivering safety and liquidity?”. This panel was chaired by Jürgen Schaaf, Counsellor to the Executive Board of the ECB. Thomas Book, CEO of the Eurex Clearing AG, Jean-Michel Godeffroy, ECB and Chairman of the T2S Board, and Joachim Nagel, Member of the Executive Board of the Deutsche Bundesbank, discussed the vital role of financial market infrastructures, such as central counter parties, central banks and standard-setting institutions. The question whether central counter parties can themselves become systemically important and whether there should be a requirement also for recovery and resolution plans for financial infrastructures was discussed lively. The question of how far the mandate of central banks can be stretched to ensure financial stability, raised similar interest.
In his remarks on Perspectives, Nouriel Roubini, Chairman of Roubini Global Economics and Professor of Economics at New York University, criticized current economic policy in Europe as being too little, too late and too slow. In particular, the German government continues to be unwilling to show a stronger fiscal response to the dismal growth outlook for Europe. This would force the ECB into more quantitative easing. On the issue of shadow banking, Roubini expressed the optimistic opinion that a rise in non-bank banking could go hand-in-hand with the banking sector concentrating on more narrow banking activities.