Transforming finance conference May 10, 2013, London

1. Transforming finance conferenceMay 10, 2013, London Professor Stephany Griffith-Jones Financial Markets Program Director at the Initiative for Policy Dialogue sgj2108@columbia.edu www.stephanygj.net www.policydialogue.org

2. Overall context Aims of the financial system • Managing risk, rather than creating it • Allocating capital to the real economy efficiently; supporting development • Financial system did neither properly Do we need very different financial system? • Restricting or isolating speculation • Financial system serves real economy

3. Historical context (brief) • 1930s Crash and Great Depression • Major regulation of finance, Glass-Steagall • Practically no crises for 40 years; crises avoidable if good regulation & small fin sector • Major deregulation and liberalization 1980s • Many crises in developing world • North Atlantic crisis, since 2007 • Crises became the new normal

4. Major challenges for regulation include • Macro-prudential regulation to compensate for pro-cyclical finance • Need for comprehensive regulation major challenge, to include shadow banking; what quacks like a duck shd be regulated like a duck • Separating and/or limiting “speculative” finance. Volcker, Vickers, Likkannen • Possibly reducing size,leverage, opaqueness and complexity financial sector(Solow, IMF, BIS, Griffith-Jones)

5. Counter-cyclical regulation • Need for counter-cyclical regulation to compensate for pro-cyclical finance • History; dynamic provisioning successful • Rules preferable to discretion • Can be done via capital requirements, provisions and loan to value ratios • Capital account management part EE macro-prudential regulation; now accepted by IMF

6. Basle 3 • Size and quality of core capital improved (but is it enough?) • Simple leverage ratio 1:30 (too generous) • Counter-cyclical regulation • Liquidity coverage ratio positive • Does not deal enough with sources of systemic risk, like eliminating links between more speculative and utility banking

7. Implications of North Atlantic crisis for developing countries • Traditional advice that deeper and more complex financial sector always good for growth and development challenged. IMF and BIS recognize this in 2012 • Challenges for developing countries Desirable scale and structure fin sector. Rigorous domestic regulation Major challenge for developed countries

8. Role for public development banks • Where markets fail, governments need to act • Successful public banks, KfW, BNDES, EIB major support for growth • Do major counter-cyclical lending in crises • Fund SMEs, infrastructure, green economy • Can finance development strategy • British Investment Bank very desirale • Can leverage public resources

9. European pro growth policies • Pan European measures • Countries without market access • Countries with market access; the UK case

10. Pan European measures • Role of the EIB and of Structural Funds • Doubling capital of EIB and creating project bonds • Can lead to increased resources of E 60 billion annually • Leverage implies net contribution from EU governments is small • Can lead to 1 million EU jobs at least, as well as ½ % extra EU GDP by 2014

13. National policies • Countries with limited market access need to have their debt servicing costs lowered • Promise unlimited ECB purchases of government debt significantly lowers spreads. Needs slower fiscal consolidation • Option of postponing debt service; precedents • Country with market access, like UK, can postpone fiscal consolidation; this could imply 16% more of GDP according to modelling

14. Table 3: GDP in £ billion, 2010 prices under two scenarios