Conference Proceedings

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A conference by the International Centre for Financial Regulation, brought together leading academics at a time when the regulatory response to the financial crisis has reached at a critical juncture, with imminent decisions on implementation poised to have a lasting impact on banks’ costs of capital and business models as well as on the wider global economy.

Papers presented by leading academics at the “New Global Banking Regulations and the Cost of Intermediation” conference included: The Regulation of Liquidity Risk (Enrico Perotti, University of Amsterdam); Capital Regulation after the Crisis (Martin Hellwig, Director, Max Planck Institute); Bank Capital and Uncertainty (Fabián Valencia, IMF); Executive Compensation and Risk Taking (Joel Shapiro, Said Business School); Is the Cure Worse than the Disease? (Alistair Milne, Cass Business School); Why Bank Equity is Not Expensive (Anat Admati, Stanford). 

One early focus of discussion was the extent to which the regulatory response to the crisis had been vigorous enough or even that the framework of the new paradigm for the regulatory response was appropriate, with a view being expressed that there was still no conceptual foundation for bank capital regulation. Even on the basis that some element of the regulatory response should include higher capital requirements, and there a robust exchange of views on the value of risk-weighted capital requirements, there was also a wide range of views over the implementation period for such changes.

The economic arguments seemed to indicate that as there was considerable uncertainty with regards to the transitional costs, a good case could be made for a gradual adoption of the new standards. Against this was a view that some institutions, perhaps with the encouragement of market pressures, might even adopt their own faster schedule. Perhaps there could even have been competition between regimes in order to enhance their perceived attraction by removing uncertainty over the adoption process. Hence, why not just move immediately to the new regime. One paper in particular pointed to various shortcomings associated with many of the studies which have attempted to calibrate the economic impact of the new capital regulations and also noted that the ultimate effect was likely to be all the less significant given the appropriate monetary response. But this paper too emphasised the potential for considerable transition costs. 
                                                                                        
A constant theme of the Q & A sessions was the need for all sides in financial intermediation, the buy side and the sell side, to feel comfortable with the changing consensus on the understanding of the relative costs of debt and equity. One paper in particular was keen to challenge the apparent received wisdom that bank equity is expensive. Hence, significantly higher capital requirements could yield large social benefits.

There was a lively discussion about what “significant” meant in this scenario. Consistent with the theme of social costs one paper looked at the possible use of liquidity taxes (or charges) as a way of internalising externalities in the financial sector. It was pointed out that this was a question for legislators rather than regulators. In passing, it is worth noting the increasing sympathy on the part of the IMF to certain emerging countries looking to adopt measures to deal with liquidity bubbles as capital flows into their economies have surged.
 

Allied to the question of broader social responsibility, the thorny issue of executive compensation and tying this to risk was covered. Although some doubts were raised about the practicality of using indicators such as CDS spreads to link executive compensation to default risk, there was nevertheless a feeling that the approach of relating remuneration to some risk calibration might be warranted.

Elsewhere though some have observed that a more fundamental examination of why at least some financial institutions have been able to exact such high economic rents would be a more relevant subject to examine rather than the particular distribution of such rents. A very useful contribution on the value of countercyclical capital buffers was also presented at the conference. Much work remains to be done in this area and it’s clear that the degree of discretion which will have to be exercised remains a major outstanding question.
 

In the final Q&A session of the conference a number of issues were aired, from the general thrust of the regulatory response in the EU context (how vigorous will the drive be to limit the size of financial institution – is small good?), to how much power and influence the new regulatory structures actually wield, and how soon, to issues which would be good to follow up on.

The future structure and size of European banking institutions, alternative sources of credit and dealing with particular market segments for example SME’s and small depositors), all raise fundamentals issues which are barely being addressed yet. Providing data and information on a timely and comparable basis are also key issues to be dealt with, as are other barriers within the EU to the provision of an open market in financial services, for example the plethora of accounting, settlements and payments systems.
 

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