Download Financing Supervision

LARS JONUNG
LESSONS FROM FINANCIAL
INTEGRATION AND
FINANCIAL CRISES IN
SCANDINAVIA
David G Mayes
University of Auckland
Bank of Finland
THE 14 LESSONS
1.
power of financial markets
•
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
what is the right after tax real rate in a crisis?
dangers of financial ignorance
- backward-looking policy
- procyclical monetary policy
- procyclical fiscal policy – consequence of crisis
sequencing of financial reforms
inadequacy of micro-prudential supervision
- resolution policies – post hoc arithmetic
- LOLR of central banks - no
- the advice from the IMF - !!
financial liberalisation changes the monetary and fiscal regime –
Lucas
12.
13.
- has far reaching effects outside the financial system
- may be costly in the short run and beneficial in the
long run – a thesis well worth exploring
14.
- does not necessarily lead to deep crisis
SOME QUESTIONS
• Were the crises beneficial in the long run?
• Why were the crises not avoided?
– Denmark, Iceland, New Zealand
• Are fixed but adjustable pegs to blame?
– Lessons for other EU countries approaching EMU
• The real rate of interest problem
• Why did others not learn?
A SMALL CORRECTION
• Not an LOLR problem
– An investor of last resort problem
– Blanket guarantees – deposit insurance does not work
for large crises
– Taxpayer is the only resort
• Dangerous conclusion – taxpayers got their
money back
– Only true on narrow definition without interest and
all costs
WHY WERE THE CRISES NOT
AVOIDED?
• The example of Denmark
– Stronger banking supervision
– More measured deregulation
– Better timing
BUT serious problems
• The example of New Zealand
– Studies of problems of deregulation (Hunn et al, 1989)
– Strong advice to the banks
– Mistake of pragmatic ordering but exchnage rate
flexibility first
WHY WERE THE CRISES NOT
AVOIDED?
• Iceland 2000/1 – lucky not to make the same
mistake
– Privatisation
– High household indebtedness (130% income)
– House price inflation
BENEFICIAL IN THE LONG RUN?
•
•
•
•
Are shocks needed? Schumpeter?
Can adjust to gradual pressure
New Zealand in 1984
Need window of political opportunity
–
–
–
–
–
There is no alternative
Removal of restraints on private sector?
Labour market incentives?
But Danish flexicurity
Countries different – oil, EMU (forced
adjustment for Finland
FIXED BUT ADJUSTABLE PEGS
• Will fall under heavy attack
– Are currency boards different?
• Encourage defence and failure to adjust
• Does this alter the problem of changes in real
rates of interest?
– High rates lower inflation faster under floating
– Exchange rate rose when controls removed in NZ
– Higher rates worsen competitiveness (Iceland, UK,
NZ) intolerably for NZ
STOCKS VS FLOWS
• Lesson clearly learnt by the profession by
early 1980s in US, UK and NZ but not in
Nordics?
• and not by the IMF?
WHO WERE THE REAL
CULPRITS?
• Bad macro policy
• Bad financial market policy (deregulation
and supervision/capital requirements etc)
• Bad luck
• The Mayes et al. (2001) list
WHO WERE THE REAL
CULPRITS?
•
The Mayes et al. (2001) list
1. A major regulatory change that opens both buyers
and sellers to new opportunities and risks of which
they have little experience
2. A period of rapid economic growth
3. A rapid rise in asset prices
4. A weak framework for supervision
5. A tax regime that encourages borrowing
6. Unsustainable macroeconomic policies
7. A substantial adverse shock
8. Realtively undiversified economies
REFERENCESS
• Hunn, N, Mayes, D G, Williams, N and Vandersyp, S
(1989) Financial Deregulation and Disinflation in a small
Open Economy: the New Zealand Experience, Research
monograph 44, NZ Institute of Economic Research
• Mayes, D G, Halme, L and Liuksila, A (2001) Improving
Banking Supervision, Basingstoke: Palgrave
• Haukur Benediktsson, Már Guðmundsson, Arnór
Sighvatsson and Gylfi Zoega, Interaction of Monetary
and Financial Stability in a Small Open Economy – The
Case of Iceland