How to Avoid Another Financial Crisis Central European Perspective Andrzej Raczko.
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Transcript of How to Avoid Another Financial Crisis Central European Perspective Andrzej Raczko.
How to Avoid Another Financial CrisisCentral European Perspective
Andrzej Raczko
Reputable monetary policy (independent central bank)
Long-term fiscal stabilization
Structural reforms boosting international competitiveness (labor market)
Free float of capital
Good business climate
Domination of private financial sector
Accumulation of huge global imbalances (exchange rate rigidity)
Ample liquidity (global saving glut)
- „negative experience” from former financial crisis – growing F/X
reserves of central banks,
- corporate saving,
- high commodity prices and financial accumulation (oil countries)
Low interest rates (easy monetary policy in the USA)
Widespread growth of price assets (housing bubble)
Low personal saving in the USA
Wholesale financial market development
Interaction between mark-to-market pricing and liquidity
Reduction of pro-cyclicality (amplitude of credit cycles) Automatic countercyclical mechanism vs. discretionary interventions
Scope of banking operations (the Volcker’s Rule) Systemic important institution (requirements and costs) Taxation of banking sector Consumer protection law
Bank capital Liquidity Risk management International cooperation
Trading book capital Securitization risk weights
Improvement of guidance on management and supervision
Compensation system Concentration of risk
Principles of cooperation (G-20, FSB – Standard Setters, BIS, IMF, EU) Supervisory colleges EU attempts to strengthen supervision
Quality and transparency of capital base
Reduction of Basel II build-in pro-cyclicality
Counter cyclical capital buffer
Capital conservation buffer
Leverage ratio
Forward looking provisioning
New liquidity measures
Revision of Code of Conduct FundamentalsRevision of Code of Conduct Fundamentals
Differentiated ratings on structured productsDifferentiated ratings on structured products
Conflict of interests
Minimum standards
Systemic monitoring
Standardization of products
Integrated clearing system
Alternative approach to mark-to-market system
Transparent standards for off-balance sheet vehiclesstandards for off-balance sheet vehicles
Originate-to-distribute model
Collateralized Debt Obligation (securitization)
Structured Investment Vehicle (SIV)
OTC market and wholesale financing system
Abrupt outflow of foreign saving
Long-term assets denominated in foreign currency
Finance innovation (F/X options)
Quality and transparency of capital base
Fair competition (based on risk not reputation)
Hybrid capital (subordinated debt in foreign currency)
Subsidiary vs. branch model
Reform of Basel II
Risk weights(standardized vs. internal rating-based approach)
Pro-cyclicality (F/X sensitivity)
Counter cyclical capital buffer
Flexibility of automatic stabilizers definition
Capital conservation buffer
Specific risks - role for domestic supervisor
Leverage ratio
Domination of standardized approach
Forward looking provisioning
System based on domestic risk assessment
New liquidity measures
Phasing-in mechanism
European Systemic Risk Board
Domination of central banks (monetary policy vs. financial stability
function)
Early warning system (practical solution?)
Communication (via non-binding recommendations)
European System of Financial Supervisors (ESFS)
Structure (built on Lamfalusy structures)
Sectoral vs. national supervisors (balance of powers)
European Supervisory Authorities
Single rule book (binding technical standards)
Interpretation of regulations
Mediation (even addressing individual financial institution)
Colleges of Supervisors
Supervision of cross-border groups (day-to-day supervision)
European systemic institutions
Crisis resolution Cross-border insolvency Selection of institutions (financial viability criterion?) Models of resolution („bad” bank, guaranty of price of assets, transfer of
assets)
Pan-European Deposit Guarantee Scheme Structure (domestic vs. Pan-European) Coverage (cross-border operation) Funding (ex-ante contribution) Membership (compulsory) Fiscal responsibility of last resort Potential arbitrage (subsidiary vs. branch)