1. Transforming finance conference May 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

11. Table 2: Additional proposed EIB and EU growth expenditure programme (in billions Euros) 201220132014-2015 (annual)2016-2020 (annual) Additional EU budget15 25 Additional EIB lending total204535 -- Risk buffers10 -- Capital increase103525 Grand Total3560 25

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