Professor Mark Taylor WARWICK NETWORK DAY Monday 12 April 2010

Background: Vision 2015

University of Warwick Strategy: Vision 2015 ‘ To be firmly in the global top 50 universities by 2015’ Important element: international profile Warwick Commission: to provide informed policy analysis and recommendations on issues of global importance First Warwick Commission, 2007: International Trade Second Warwick Commission, 2009: International Financial Reform Third Warwick Commission, forthcoming, likely to be on Global Warming

The Second Warwick Commission

Second Warwick Commission International Financial Reform in the wake of the global crisis Interdisciplinary, 12-person commission Economists, political scientists, and lawyers Practitioners and academics

The Commissioners Avinash Persaud – Chair Chairman, Intelligence Capital Len Seabrooke – Director of Studies Professor of International Political Economy, Warwick Director of the Centre for the Study of Globalisation and Regionalisation Heribert Dieter – Co-Director Senior Fellow in the Global Issues Research Unit, German Institute for International and Security Affairs, Berlin Mark Blyth Professor of International Political Economy, Brown University, USA

Anna Gelpern Associate Professor of Law, American University, Washington DC Stephany Griffith-Jones Professor of Political Economy, Columbia University, USA Eric Helleiner Professor of International Governance, University of Waterloo, Canada. Rajiv Kumar Director, Indian Council for Research on International Economic Relations, Delhi, India. The Commissioners

Diery Seck Director of the Center for Research on Political Economy, Dakar, Senegal Injoo Sohn Assistant Professor of Politics and Public Administration, University of Hong Kong Mark Taylor Professor of International Finance, Warwick Business School, Managing Director, Barclays Global Investors Eleni Tsingou Research Fellow, Centre for the Study of Globalisation and Regionalisation, Warwick The Commissioners

Central bank officials Supervisory authority officials Financial sector practitioners in banking and the hedge funds Credit rating agency officers Financial policy experts Interviews by telephone and in person Brussels, Frankfurt, London, Paris, New York, Washington Evidence

Warwick Berlin Ottawa Meetings

Published November 2009 Launched Delhi, November 2009 Press coverage: –The Economist –Financial Times –Wall Street Journal –Handelsblatt –Forbes Events planned in 2010 –London –New York –Washington –Beijing The Report

In times of economic and financial boom, banks and financial institutions need to have their ability to create loans reined in, in order to avoid fuelling asset market bubbles Financial regulators need to curtail institutions’ ability to heighten risk by mismatching the maturity of their assets Regulators must have the flexibility to apply tight regulatory requirements on institutions that threaten the stability of the whole financial system Increased powers for national regulators in a bid to prevent banks from establishing overseas branches and regulating them from their home base Host regulation would lead to a ‘right-sizing’ of the financial sector, so that the finance industry is not allowed to excessively dominate a country’s economy Key recommendations

Banks and financial institutions hold capital as a ‘cushion’ to protect their depositors More capital is held, the lower the risk that the bank will not be able to meet its liabilities Regulators set limits on the minimum amount of capital that must be held for a given amount of liability This is the ‘capital adequacy ratio’ Capital Adequacy Ratios

Systemic Risk Fallacy of Composition Individual risk vs system-wide risk

Based on an analysis of a single institution Prudent capital adequacy ratios As capital value rises, lend more As capital value falls, reduce lending But what if this happens to everyone at the same time? Lessons for financial regulation?

Supplement micro-prudential regulation Alleviate systemic effects Raise capital adequacy ratios as capital value rises faster than a benchmark rate of growth “In times of economic and financial boom, banks and financial institutions need to have their ability to create loans reined in, in order to avoid fuelling asset market bubbles” Macro-Prudential Regulation