Navigating global challenges: An insurance viewpoint

Political risks in Europe: Brexit and its impact on businesses

Demise of doctrine: Policy-making in the real world

Caroline Atkinson, 12 June 2018

In her talk, Caroline Atkinson discusses the development of the post-war doctrine of cooperation, the implications of shifting political and economic power, and policy-makers’ rigid response to the 2008 financial crisis.

After WW2, the world adopted a more rules-based system designed to foster cooperation and openness. Domestically, under the influence of John Maynard Keynes, economic doctrine began to play a significant role in political decisions. The Marshall Plan, IMF, and World Bank fostered global economic cooperation--with national governments ceding a degree of sovereignty to these institutions to ensure international cooperation.

Fragmentation in banking markets: The crisis legacy and the Brexit challenge

Andrea Enria (European Banking Authority) 28 May 2018

The post-crisis period has seen the disintegration of European finance. There has been a marked decrease in both cross-border banking and cross border mergers and acquisitions. This seems to be a problem particular to Europe, as, internationally, globalisation continues as usual. By comparing the American reaction to the crisis with that of Europe we are able to determine some causal factors of this disintegration.

The financial collapse can be taken as an indication that there was excessive financial infrastructure. This infrastructure would have grown during the boom phase of the boom-bust cycle, the bust then ought to result in the failure and therefore elimination of the excess infrastructure, allowing for a restructuring of the financial sector. In the US, many banks exited the market entirely, investment in these entities was highly spread across the states so the burden of these failures were able to be absorbed. In the EU there were many bailouts of institutions which, in the US, would have been allowed to fail. With all these government bailouts there is an expectation from the government that said bank will use its bailout to restructure its business model in order to support the local economy. Indeed, a UK study showed that banks which received government money reduced cross-border exposures by 15% on average. In addition to this vague nationalization of investment government support also came with a new set of macroprudential controls. As international investment is now often seen as a risk, it is common for governments to impose harsher regulations on banks investing internationally. This regulation all has the effect of creating a less connected EU economy, a trend which is intensified by the prospect of Brexit.

Formalisation through taxation: Paraguay's approach and its implications

Jonas Richter, 7 May 2018

The informal economy encompasses all transactions of legal goods which are not reported to the government. It is estimated that, globally, one third of the non-agricultural workforce makes their living from the informal economy. In Latin America, sub-Saharan Africa, and Central Asia, 40% of GDP is informal.

The benefits of formalizing the informal sectors of a given economy are clear. Most obviously the government would see an increase in revenue from taxes, and such economies would be given access to credit and the ability to legally enforce contracts. It has also been shown that there is correlation between a broad tax base and successful democracy. This is quite logical as citizens who pay tax will be much more likely to take interest in how the government spends their money. While it is obvious that it is desirable to formalize an economy, convincing a large segment of a given population to start paying taxes is a difficult proposition.

A feminist analysis of women’s work experiences in finance

Kristina Keampfer, 7 May 2018

Kristina Kaempfer began her talk with a description of an ad recently run by Commerzbank. In it a woman is shown travelling while the history of the bank is described; the ad has the twist ending of the woman entering Commerzbank showing that she is an employee there. This symbolic depiction of Commerzbank’s commitment to gender equality seems contradicted by the reality that only 1 in 7 of the bank’s executive board members are women. In the advisory board things are slightly more equal, with 6 women out of a total of 22, as it is required by German law that 30% of advisory board members must be women.

In the wake of the 2008 financial crisis many have lamented that, had the financial sector had a higher proportion of women, this crisis could have been avoided. These comments come from an assumption that women are naturally more thoughtful and less willing to take risks. While such statements about women may have been positively intentioned, Kaempfer suggests that depictions of women as saviours have the effect of disempowering women.

Finance in Africa: Banks, debt and development

Conference, 25 April 2018

On 25 April PEFM hosted a conference on finance in Africa.Several strands of thinking led us to focus on Africa. First, having looked at the impact of the global financial crisis on developed country economies, particularly the UK and Europe more broadly, it was a natural step to look at the impact on other regions. The impact on Africa has been significant, through several channels, resulting on the banking side for instance in disintermediation from the global banking system as weakened banks from developed countries, including the United Kingdom, retrenched towards their homelands, and because the low interest rates that have prevailed have driven investors to “search for yield” and enabled more borrowing by governments and companies in the continent, with results good and bad: infrastructure investment on the one hand, but also the accumulation of debt on the other.

And there are other strands that have led this conference to be particularly timely. Earlier this year a breakthrough agreement was signed in Addis Ababa in which 41 countries committed to establishing a regional free trade agreement amongst themselves. Meanwhile, finance in Africa has been highly innovative in recent years. In mobile banking, for instance, the countries of East Africa lead the world.

The digital revolution and the State

William Janeway, 26 February 2018

William Janeway began his talk by claiming that the relationship between the US Government and technical innovation has reversed with the advent of digital technology. In the cold war days, and even before that, during World War II, the U.S. Department of Defense was the largest funder of scientific research and technological development. In fact it was the patronage of the US military which allowed the formation of what we would call “research universities.” In addition to funding R&D the Department of Defense was the “lead purchaser” of early computing equipment. Having the government as a customer is inherently different from producing for the wider population of consumers, as the government is interested in maximum effectiveness over the long term rather than short-term affordability.

Along with funding technological innovation, the government controlled the environment in which it would occur. Entities funded by The Department of Defense had to license any patents they produced to all competitors, and all technology being produced had to have at least two manufacturers to maintain competition and to ensure supply in case one producer went bankrupt. This weak intellectual property environment almost certainly allowed for accelerated innovation, however as digital technology progressed, it outgrew its fertile but limiting origins.

Financial resilience and bank size – are we forgetting what is most important?

Piroska Nagy-Mohasci, 12 Feb 2018

Starting off with a bit of scolding of financial sector regulators and professionals, Piroska Nagy-Mohacsi asserted that, in the wake of the financial crisis, financial institutions and individuals who manage them have been prone to congratulate themselves on their success on returning the market to its pre-2008 levels, rather than taking responsibility for the crisis which they, in fact, caused. To be fair, there have been significant advances in regulation during the crisis and post-crisis period. A new layer of micro-prudential policies, affecting individual banks, was instituted, along with macro-prudential policies, and the identification of international and domestic banks whose central place in a given economy necessitated higher capital requirements.

Overall, studies show that post-crisis banks are both better capitalized and more liquid than before. The benefit of this achievement should not be underestimated. Domestically, macro-prudential policy has arguably avert crises in the cases of Iceland, Croatia, and Spain. Additionally, in 2013, with the economic shock created by the US’s “taper tantrum” it was the countries with the strongest macro-prudential policy which were least affected. Notwithstanding this success on the part of financial regulators, Nagy-Mohacsi points to several “elephants in the room” which are not being properly addressed by the financial community.

A monetary history of the euro area

Christopher Marsh, 5 Feb 2018

Chris Marsh begins his talk by looking at the US Great Depression in order to draw parallels to the economic crisis in Europe. The Depression began with a massive movement of capital from independent, country banks, to large, central, city banks. This mass movement was sparked by the inability of banks to provide cash to all those who wished to withdraw. The panic of insufficient currency created an unfavorable balance of payments as loss of money supply in country areas encouraged debt holders to liquidate debt held and to cease to invest in these areas. It is not hard to see that this behavior is self-reinforcing; this is just the sort of economic behavior that monetary policy was created to prevent.

The EU saw a similar decrease in currency levels during 2010. Marsh focusses on Latvia and Greece to tell the story of the crisis. Prior to the crisis Latvian banks had borrowed heavily from abroad and lent domestically, so when the crisis hit it saw a great contraction in its currency supply. Domestic demand and real GDP fell sharply in 2009, prompting the IMF to step in. The IMF decreased reserve requirements in order to allow Latvia to begin to pay off debt.

Economic convergence in the Euro area: coming together or drifting apart?

Jeff Franks, 29 January 2018

Jeff Franks began his talk with the good news that, since the crisis, all members of the EU have been experiencing some degree of economic growth. The first caveat, of course, is that this growth is in many cases a mere recovery to pre-crisis levels, but this news is certainly better than the alternative and shows that the EU is able to stabilize after a severe shock. A closer look at European growth shows us, however, that although all countries have experienced growth, the levels of growth between countries are diverging meaningfully. The concept of divergence, and its opposite, convergence is central to how Franks analyses the effectiveness of the European Union.

For Franks, there are four key types of convergence: nominal convergence, which measures variation in inflation levels and interest rates between EU states; structural convergence, which looks at variation in government regulation of the economy; real convergence, which measures income levels; and cyclical convergence, which measures not the current level of economic activity but the current stage an economy finds itself in, assuming a natural pattern of boom and bust. An ideal EU would see convergence by all these measures between all its component states.

Economic convergence in the Euro Area: Coming together or drifting apart?

Price and financial stability: rethinking financial markets

David Harrison, 22 Jan 2018

According to David Harrison, since the start of the Bretton-Woods system every few years an economic crisis of some sort occurs. He considers that under the current system these crises are inevitable, and can be compared to the occurrence of earthquakes in areas located on tectonic faults. Harrison attributes this catastrophic nature to the fact that the markets include two separate price systems.

The first is pricing based on current output of a given good or service. This is the real market. The second is the value placed on future asset flows, known as the financial market. One can understand the difference between these two markets by considering the expectations which drive price changes in each of them. In the real market, the output of a given asset is measured often and sales are made frequently so a given good or service’s price can gradually change with the reality of its output. In the financial market the value of a given investment can only be predicted, not measured. As a result of this, speculators are left guessing what the average other speculator expects a given stock to do and thereby feedback loops can result in grossly overvalued assets.

Price and financial stability: Rethinking financial markets