1 / 34

Financial Globalization and Instability

Financial Globalization and Instability. Azim Premji Winter School January 15, 2013. The challenge of financial globalization. Globalization Supply chains, Trade flows, Labor mobility State law/policy vs. private international Financial Capital Markets, Cross-border lending, FDI

taylor
Download Presentation

Financial Globalization and Instability

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. Financial Globalization and Instability AzimPremji Winter School January 15, 2013

  2. The challenge of financial globalization • Globalization • Supply chains, Trade flows, Labor mobility • State law/policy vs. private international • Financial • Capital Markets, Cross-border lending, FDI • Real/equilibrium vs. hierarchy/instability • Global dollar funding market • E.g. Asian financial crisis, 2007-9 GFC

  3. Shadow banking as characteristic institutional form “Money market funding of Capital market lending” • Global funding of local lending • Market pricing, both money and capital • Key role of market-making institutions • Key role of central bank as backstop

  4. Backstopping Global Funding Markets

  5. Transformation of the Fed

  6. A Bagehot Moment

  7. Touching the Elephant

  8. Economics View • Monetary Walrasianism • Marschak, Patinkin, Tobin, Friedman: Md(.) = Ms • QThM: MV=PT • NIPA: C+I+G=Y • Arrow-Debreu Walrasianism • Intertemporal GE, DSGE: β(1+r) = E{U’(Ct)/U’(Ct+1)} • Practical Macro (accounting models, flows) • Flow of Funds: ∑iS(i,j) = ∑iU(i,j), ∑jS(i,j) = ∑jU(i,j)

  9. Finance View • Asset pricing: Pk = ∑(1/1+r)tCEt • Modern: • CAPM, ERi = Rf + βi(ERm-Rf) • “Banking in a World without Money” (1970) • Practical finance: • “Economics of the dealer function” • “Funding Liquidity and Market Liquidity”

  10. The Money ViewResources from the Past • Copeland (1952): A Moneyflow Economy • Minsky (1957): The Survival Constraint • Hawtrey (1919): Hierarchy of Money and Credit, Inherent Instability • Hicks (1989): Centrality of the Dealer Function • Bagehot (1873): Central Bank as Dealer of Last Resort

  11. Money and Banking defined • Money = “transferable credit” • “inside” not “outside” • “public” and “private” hybrid • Payment system as credit clearing • Banking = “swap of IOUs” • On-balance sheet: “loans create deposits” • Derivatives, e.g. Interest Rate Swaps • Banks as money dealers, market makers

  12. Simple Hierarchy of Market Makers

  13. Leverage vs. Liquidity Equity Finance Bond Finance Money Finance • Leverage: Equity vs. Bond • Modigliani-Miller Thm, vs. bankruptcy (insolvency) • Liquidity: Bond vs. Money • Minsky: Hedge, Speculative, Ponzi (illiquidity) • Timing (mis)match of cash inflows/outflows

  14. Liquidity, Old and New Money Finance Shadow Bank Asset Manager • Survival Constraint, old and new • Payment system clearing • Collateral system clearing • Secured lending • Derivative settlement

  15. Making Markets, Money and Risk Capital Funding Bank Global Money Dealer Asset Manager Derivative Dealer

  16. Backstopping Markets: Funding and Market Liquidity • Global Bank (money) • Derivative Dealer (risk) • Central Bank(or C5)

  17. Regulation I: Systemic Risk “Inherent Instability of Credit” • Hawtrey (1919) Currency and Credit • Minsky (1986) Stabilizing an Unstable Economy • Adrian and Shin (2010) “Liquidity and Leverage”

  18. Centrality of the Dealer Function • Treynor, 1987

  19. Funding Liquidity and Market Liquidity

  20. Boom Order Flow: Asset Manager > Capital Funding Bank

  21. Bust Order Flow: Capital Funding Bank > Asset Manager

  22. Bust Order Flow: Dealer Funding Stress

  23. Fed Balance Sheet Transformed Dec 15, 2011 Dec 15, 2011 (restated) • Fed as Dealer of Last Resort • Global Money Dealer (OIS) [and FX swap] • Global Derivative Dealer (IRS, CDS)

  24. Regulation II: Plumbing Collateral and Payment Flows • Aitken and Singh (2010) “The (sizable) role of rehypothecation in the shadow banking system.” • Minsky, “survival constraint”, settlement in the payments system

  25. Why is Backstop Needed? CFB GMD AM DD • Abstracting from Counterparty Risk • Lending (RMBS collateral as security) • Derivatives (Pre-funding and hedging)

  26. Value Fluctuation and Collateral Flows CFB GMD AM DD • Blocking a liquidity spiral (firesale of RMBS, CDS) • Lender of Last Resort to GMD, DD • Dealer of Last Resort for RMBS, CDS

  27. Value Fluctuation and Payment Flows CFB GMD AM DD • Blocking a liquidity spiral (firesale of RMBS, CDS) • Lender of Last Resort to GMD, DD • Dealer of Last Resort for RMBS, CDS

  28. “Making” Markets, Money and Risk Capital Funding Bank Global Money Dealer Asset Manager Derivative Dealer

  29. Implications for development • Tapping global dollar funding markets, for domestic currency lending==FX risk • National central bank as dollar liquidity backstop • C5 (and IMF) as crisis backstop for NCB • Japan, Switzerland, BoE, ECB, Fed? • IMF • Normal backstop? • Payments system—home country NCB • Collateral system--???

  30. Implications for development • Tapping global dollar funding markets, for domestic currency lending==FX risk • National central bank as dollar liquidity backstop • C5 (and IMF) as crisis backstop for NCB • Japan, Switzerland, BoE, ECB, Fed? • IMF • Normal backstop? • Payments system—home country NCB • Collateral system--???

  31. Tutu: The “Pipeline” Value Proposition: • Grant program • Research programs • Young Scholars Initiative • INET Online university Career Stage: • Young tenured • Assistant professors • Post-doctoral students • Doctoral students Fall 2012 Governing Board Meeting

  32. Connecting the Dots Amplification INET Online University Community Nurture Fall 2012 Governing Board Meeting

More Related