Musings of a London Property Search Agent
In a speech to the European Business School in London given by Sir John Gieve, Deputy Governor of the Bank of England, Sir John said that complete seizure in the money markets had been averted but warned that we are at the beginning of a recession and that further action may be necessary. He cited hedge funds as an area of concern, although banks are now more secure following the national Bank’s pledge to underwrite capital issuance of £50 billion which has underpinned confidence.
In addition to considering the causes of the current global financial turmoil which has led to recession in the US, the UK and several other advanced Western economies, the Deputy Govenor set out 4 lessons for the medium term, declaring the need for “… far better coordination of policy internationally and the need for some new policy instruments alongside interest rates to dampen the financial cycle.”
1. Closer International Co-ordination of macroeconomic policy
International cooperation at global level is necessary in a global economy. Sir John reiterated that cooperation among members of the EU and G7 was not wide enough and welcomed the G20 and the IMF as playing key parts in macroeconomic coordination, citing inflationary oil prices as an external event beyond the reach of national policy makers but not of the global economy.
2. Better ground rules for cross-border financial crises
“In particular emergencies there are often different national interests at stake and the sheer pressure of events can limit cross-border consultation. However, if we do not tackle this we will see the growth of national restrictions on the terms on which cross-border operations are permitted - in terms of capital, liquidity and legal structure - and that could have great economic costs.”
3. Strengthening banks’ resilience
There is a need for agreement on liquidity and capital requirements of banks. ” The FSA is developing proposals for UK which will deliver tougher standards. But we are pressing for international agreement in the Basel Committee. Events also brought home the need for a fundamental review of both the amount and definition of capital requirements.”
4. Developing macro-prudential tools
The Deputy Governor outlined three schemes which could decrease the impact of future financial crises, highlighting the need to “bridge the gap between macroeconomic policy and the regulation of individual firms.”
He continued, “We need a third club in our bag which can directly dampen the financial cycle. This is needed both for financial stability and for wider economic management.”
“But we have seen how the financial sector can drive the wider business cycle, by becoming over-confident in the upswing and over-constrained (by lack of financial resources - capital and liquidity) in the downswing. It seems to me that mechanisms which oblige banks to build up resources in good times can serve a second useful purpose of dampening the economic cycle. I think of this as ‘protecting the cycle form banks’.”
In brief the 3 schemes described were
- The Spanish System of dynamic provisions which requires banks to build a general reserve that can be drawn on in downturns
- Growth related capital requirements which make it more expensive for banks to expand their balance sheets faster than normal when confidence is high and could be a useful means of dampening banks’ contribuition to the business cycle
- Less stable sources of funding could be treated as an added risk factor in assessing a banks liquidity needs.
http://www.bankofengland.co.uk/publications/speeches/2008/speech367.pdf
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Technorati Tags: Averting Financial Meltdown, Banks, credit crunch, Financial Crisis, liquidity, London Property Search Agent, recession
Tags: Averting Financial Meltdown, Banks, credit crunch, Financial Crisis, liquidity, London Property Search Agent, recession
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