One challenge is managing the United States' disengagement from its accommodative monetary policy. Doing so in an elegant, orderly manner could be difficult as markets adjust to reflect investors' expectations of a new monetary regime with higher interest rates. Interest rates could rise too sharply if exacerbated by a structural decline in market liquidity from higher interest rates and greater volatility, or by structural deleveraging in short-term securities and in the shadow banking system (particularly the mortgage market and real estate investment trusts).
Other central banks are contemplating ways to exit unconventional monetary policies employed in recent years. Some nations however, such as Japan, are attempting stimulus programs at larger scales to combat deflationary pressures. The Eurozone's nations implemented myriad national reforms aimed at strengthening the monetary union and alleviating stress on banks and governments. Yet some European nations such as Portugal, Italy, and Spain continue to struggle with heavily leveraged corporate sectors and fragmented financial markets in which investors face pricing inefficiency and difficulty identifying quality assets.
Banks operating in such environments may need stronger provisions in place to withstand corresponding market adjustments and absorb potential losses. Emerging market economies face challenges to greater stability as bond markets indicate heightened sensitivity to monetary easing from external investors flooding into domestic markets, rendering exposure to potential capital flights brought on by heavy corporate leveraging in expansionary credit environments. Policymakers in these economies are tasked with transitioning to more sustainable and balanced financial sectors while still fostering market growth so as not to provoke investor withdrawal.
The global financial crisis and Great Recession prompted renewed discourse on the architecture of the global financial system. These events called to attention financial integration, inadequacies of global governance, and the emergent systemic risks of financial globalization. Since the establishment in 1945 of a formal international monetary system with the IMF empowered as its guardian, the world has undergone extensive changes politically and economically.
This has fundamentally altered the paradigm in which international financial institutions operate, increasing the complexities of the IMF and World Bank's mandates. The lack of adherence to a formal monetary system has created a void of global constraints on national macroeconomic policies and a deficit of rule-based governance of financial activities. French economist and Executive Director of the World Economic Forum's Reinventing Bretton Woods Committee, Marc Uzan, has pointed out that some radical proposals such as a "global central bank or a world financial authority" have been deemed impractical, leading to further consideration of medium-term efforts to improve transparency and disclosure, strengthen emerging market financial climates, bolster prudential regulatory environments in advanced nations, and better moderate capital account liberalization and exchange rate regime selection in emerging markets. He has also drawn attention to calls for increased participation from the private sector in the management of financial crises and the augmenting of multilateral institutions' resources.
The Council on Foreign Relations' assessment of global finance notes that excessive institutions with overlapping directives and limited scopes of authority, coupled with difficulty aligning national interests with international reforms, are the two key weaknesses inhibiting global financial reform. Nations do not presently enjoy a comprehensive structure for macroeconomic policy coordination, and global savings imbalances have abounded before and after the global financial crisis to the extent that the United States' status as the steward of the world's reserve currency was called into question.
Post-crisis efforts to pursue macroeconomic policies aimed at stabilizing foreign exchange markets have yet to be institutionalized. The lack of international consensus on how best to monitor and govern banking and investment activity threatens the world's ability to prevent future global financial crises. The slow and often delayed implementation of banking regulations that meet Basel III criteria means most of the standards will not take effect until 2019, rendering continued exposure of global finance to unregulated systemic risks. Despite Basel III and other efforts by the G20 to bolster the Financial Stability Board's capacity to facilitate cooperation and stabilizing regulatory changes, regulation exists predominantly at the national and regional levels.
Reform efforts
Former World Bank Chief Economist and former Chairman of the U.S. Council of Economic Advisers Joseph E. Stiglitz referred in the late 1990s to a growing consensus that something is wrong with a system having the capacity to impose high costs on a great number of people who are hardly even participants in international financial markets, neither speculating on international investments nor borrowing in foreign currencies.
He argued that foreign crises have strong worldwide repercussions due in part to the phenomenon of moral hazard, particularly when many multinational firms deliberately invest in highly risky government bonds in anticipation of a national or international bailout. Although crises can be overcome by emergency financing, employing bailouts places a heavy burden on taxpayers living in the afflicted countries, and the high costs damage standards of living. Stiglitz has advocated finding means of stabilizing short-term international capital flows without adversely affecting long-term foreign direct investment which usually carries new knowledge spillover and technological advancements into economies.
American economist and former Chairman of the Federal Reserve Paul Volcker has argued that the lack of global consensus on key issues threatens efforts to reform the global financial system. He has argued that quite possibly the most important issue is a unified approach to addressing failures of systemically important financial institutions, noting public taxpayers and government officials have grown disillusioned with deploying tax revenues to bail out creditors for the sake of stopping contagion and mitigating economic disaster.
Volcker has expressed an array of potential coordinated measures: increased policy surveillance by the IMF and commitment from nations to adopt agreed-upon best practices, mandatory consultation from multilateral bodies leading to more direct policy recommendations, stricter controls on national qualification for emergency financing facilities (such as those offered by the IMF or by central banks), and improved incentive structures with financial penalties.
Governor of the Bank of England and former Governor of the Bank of Canada Mark Carney has described two approaches to global financial reform: shielding financial institutions from cyclic economic effects by strengthening banks individually, and defending economic cycles from banks by improving systemic resiliency. Strengthening financial institutions necessitates stronger capital requirements and liquidity provisions, as well as better measurement and management of risks.
The G-20 agreed to new standards presented by the Basel Committee on Banking Supervision at its 2009 summit in Pittsburgh, Pennsylvania. The standards included leverage ratio targets to supplement other capital adequacy requirements established by Basel II. Improving the resiliency of the global financial system requires protections that enable the system to withstand singular institutional and market failures.
Carney has argued that policymakers have converged on the view that institutions must bear the burden of financial losses during future financial crises, and such occurrences should be well-defined and pre-planned. He suggested other national regulators follow Canada in establishing staged intervention procedures and require banks to commit to what he termed "living wills" which would detail plans for an orderly institutional failure.
At its 2010 summit in Seoul, South Korea, the G-20 collectively endorsed a new collection of capital adequacy and liquidity standards for banks recommended by Basel III. Andreas Dombret of the Executive Board of Deutsche Bundesbank has noted a difficulty in identifying institutions that constitute systemic importance via their size, complexity, and degree of interconnectivity within the global financial system, and that efforts should be made to identify a group of 25 to 30 indisputable globally systemic institutions.
He has suggested they be held to standards higher than those mandated by Basel III, and that despite the inevitability of institutional failures, such failures should not drag with them the financial systems in which they participate. Dombret has advocated for regulatory reform that extends beyond banking regulations and has argued in favor of greater transparency through increased public disclosure and increased regulation of the shadow banking system.
President of the Federal Reserve Bank of New York and Vice Chairman of the Federal Open Market Committee William C. Dudley has argued that a global financial system regulated on a largely national basis is untenable for supporting a world economy with global financial firms. In 2011, he advocated five pathways to improving the safety and security of the global financial system: a special capital requirement for financial institutions deemed systemically important; a level playing field which discourages exploitation of disparate regulatory environments and beggar thy neighbor policies that serve "national constituencies at the expense of global financial stability"; superior cooperation among regional and national regulatory regimes with broader protocols for sharing information such as records for the trade of over-the-counter financial derivatives; improved delineation of "the responsibilities of the home versus the host country" when banks encounter trouble; and well-defined procedures for managing emergency liquidity solutions across borders including which parties are responsible for the risk, terms, and funding of such measures.
No comments:
Post a Comment