تأملاتی در بحران و درس های آن برای اصلاح مقررات و سیاست های بانک مرکزی

This paper discusses the problems exposed by the global financial crisis in the areas of financial regulation and supervision and possible solutions. It describes and evaluates current proposals regarding the role of the central bank as a systemic regulator, the pros and the cons of locating financial supervision in the central bank, and the conflicts and synergies that such an arrangement entails. Once a crisis erupts, central bank liquidity injections constitute a first line of defense. But in the longer term these injections create a trade-off between price and financial stability, and may compromise central bank independence. Problems exposed by the crisis include the growth of a poorly regulated shadow financial system, shortermism in executive compensation packages and consequent adverse incentive effects, the too-big-to-fail problem, procyclicality in the behavior of financial institutions, conflicts of interest in the rating agencies industry and the trade-off between the scope of intermediation through securitization and transparency in the valuation of assets. The paper also discusses international dimensions including international cooperation in regulatory reform and the scope for limiting exchange rate variability. The conclusion points out inherent difficulties in distinguishing ex ante between a fundamentals based expansion and a “bubble.”

The global financial crisis (GFC) has exposed numerous problems of moral hazard and of asymmetric information in financial intermediation. In good times such problems are not as salient because various excesses – such as exaggerated commissions, large compensation packages, biased financial advice and outright fraud – are overshadowed by the generally good performance of the economy. When everybody is making money and credit is plentiful the general public, as well as politicians, are not inclined to be inquisitive and various excesses are more likely to be glossed over. Easy access to credit makes it possible to maintain such excesses and even outright fraud over long periods of time.2 Many of those problems call for substantial reforms in the regulation and supervision of financial institutions and some reconsideration of the way central bank policies operate. Paradoxically, a benefit of the crisis is that it has exposed the fact that in a world with serious asymmetries of information, vigorous financial innovations and incomplete regulatory frameworks, “self-regulation” does not work. This realization will, no doubt, induce institutional changes designed to reduce the likelihood of systemic crises through reforms of the current regulatory and supervisory systems. Some of this process is already taking place. The crisis also presents new challenges for recent conventional wisdom regarding monetary policy procedures. Many reasons – such as inadequate regulation of financial institutions, overly expansionary monetary policy and a global savings glut – have been suggested as reasons for the crisis.3 With an eye to potential reforms in the regulation of financial institutions, the paper focuses mainly on inadequate regulation and supervision. It takes the view that suggestions for reforms must start with an identification of the factors that contributed to the eruption of the subprime crisis in the US and then to its transformation into a GFC.4 The most glaring regulatory failures are the rise of an unregulated shadow banking system, the existence of compensation packages that encourage excessive risk taking behavior, the too-big-to-fail problem, procyclicality in the behavior of financial institutions, and moral hazard problems in the rating agencies sector. Section 2 describes the roles of those factors in the generation of the crisis and suggests detailed regulatory reforms to address the problems that surfaced in each of those areas. Contrary to the great depression, both fiscal and monetary policies in the US, and to a lesser extent in Europe, have responded swiftly and vigorously to the crisis and are likely to be maintained for some time. It is highly likely that in the absence of those quick and large policy responses the crisis would have been deeper and more sustained. Particularly notable here is the response of the Fed which, unlike fiscal policy that requires a longer legislative process, was very quick and determined. This swift response maintained financial markets afloat in face of the panic that took hold following the bankruptcy of Lehman Brothers. This experience revealed the crucial role of the central banker as a first line of defense in the face of a panic. Section 3 discusses this “old-new” aspect of short run central bank policy and argues that it is likely to lead to a resuscitation of this function in parallel with the (recently) more traditional inflation targeting regime. Although warranted by the seriousness of the crisis, the short-run response of monetary policy, and subsequently of fiscal policy, created a new state of affairs in which the central bank (CB) holds a large (and more risky) share of debt in the economy and in which the share of public debt in GDP is expected to increase substantially. This is particularly notable in the case of the Fed. When the US ultimately emerges from the crisis, this new state of affairs may create a painful trade-off between price stability and financial stability. However, price and financial stability may also reinforce each other, as was the case during the Savings and Loan Association crisis in the US. Section 4 discusses those issues along with other longer-term lessons for regulatory reform and for the role of the CB within the newly created regulatory environment. The section discusses the pros and cons of delegating responsibility for financial stability and regulation to the CB, and in particular, its potential role as a macroprudential regulator. It also discusses the long-term risks posed by the crisis for CB independence as well as the independence and professionalism of other financial regulators. The globalization of financial flows and of trade in conjunction with the central role of the US in both of these areas contributed to the quick transformation of the subprime crisis into a GFC. Thus, along with its substantial benefits, globalization also contributed to a quick transmission of the adverse effects of the subprime crisis to the rest of the world. This suggests that although the crisis originated in the US, other countries have to adapt their institutions as well. In the presence of globalization, regulatory reforms should not be confined to the US and should be sufficiently coordinated in order to prevent regulatory arbitrage.5 The onset of the crisis dramatically increased volatility on forex markets. In times of global crisis, when much of the world is hit by a common shock, there may be room for beneficial coordination of monetary policies among major central banks in order to offset some of this volatility. Those international dimensions are discussed in Section 5. This is followed by concluding thoughts including, inter alia, some conjectures about the relation between the likelihood of bubbles and the effectiveness of regulation and of supervision.

In view of the large costs imposed by various aspects of incomplete regulation that led to the financial crisis, the task of appropriately reforming this system is of paramount importance. The discussion in this paper is based on the premise that globalization is desirable and that it is here to stay. Financial globalization broadens the scope of intermediation, thereby increasing the efficiency of flows between savers and investors. But the same efficient channels quickly transmit the adverse impacts of a crisis across countries. It is therefore important that regulatory and supervisory reform be sufficiently coordinated across countries. The remainder of this closing section is devoted to some conjectures triggered by the evolution of the crisis and open questions. Can appropriately devised regulation and supervision reduce the probability of a crisis, and if so through which channels? This paper suggests that the answer is yes, and points to several channels. First, by assuring adequate transparency about the valuation of assets, regulation can alleviate mutual suspicions among financial institutions, contribute to the uninhibited flow of funds between them and reduce uncertainty and volatility. In particular, it is quite likely that in the presence of adequate transparency about financial assets, the interbank market would not have dried up as it did during the last quarter of 2008. Second, direct and efficient regulation of all financial institutions and rating agencies would have reduced the leverage buildup and the subsequent bust induced by the unwinding of this leverage. Third, built-in countercyclical measures of the type discussed in Section 2.4 also operate in the same direction through their moderating effect on booms and busts. The crisis vividly demonstrated the need for a systemic regulator that would produce and disseminate information about macroeconomic risks and regulate TBTF financial institutions. An important issue, currently debated by legislators in the US, concerns the role of the CB as a potential systemic regulator. Although there is room for different institutional regulatory arrangements, I believe it is clear that in any of those the role of the CB as a systemic regulator is central. Section 4 discusses and evaluates current proposals for regulatory reform and the role of the CB and discusses the relation between price and financial stability when the CB plays an important role in assuring the stability of the financial system. It is argued that, depending on the nature of shocks to the financial system, those two objectives may be either complements or substitutes. In the first case there is no harm in charging the CB with financial stability; in the second there is a trade-off between price and financial stability. In such cases additional regulatory instruments should be developed to maintain financial stability in order to leave interest-rate policy free to focus on the price stability objective. Financial crises usually occur following expansionary periods nurtured by overly optimistic expectations that induce financial institutions and the general public to assume higher risks. When this overoptimism is sufficiently controverted by reality, expectations become overly pessimistic and the boom turns into bust. In the jargon of economists, the first phase is identified as a “bubble” and the second as the “bursting of the bubble.” A widely accepted tenet of economic theory is that a bubble may develop through the interaction between self-fulfilling expectations and economic developments, when the possible range of paths for those expectations is larger than one. In the presence of opaqueness and a shadow banking system, there are potentially many such self-fulfilling paths, since there are less constraints regarding expectations about feasible outcomes. By imposing tighter constraints on behavior and assuring adequate transparency, regulation is likely to reduce the scope for “wild” self-fulfilling expectations and with it the likelihood of booms and busts associated with bubbles. As a by-product it also reduces the probability of errors on the part of financial institutions, policymakers and the general public. By reducing the magnitude of the positive interaction between expectations and cyclically oriented behavior, built-in countercyclical regulation of financial institutions can also contribute to the reduction of “wild” self-fulfilling expectations. It would be highly desirable to have a procedure for identifying bubbles ex ante. Unfortunately, economists do not possess a clear-cut recipe for distinguishing between a bubble and a healthy expansion based on fundamentals for both conceptual and practical reasons. The conceptual difficulty originates in the observation that (as far as theory is concerned) all expansions are driven by self-fulfilling expectations blurring the distinction between what is a bubble and what is not. One possibility would be to rank self-fulfilling paths as being “more bubbly” if the amplitudes of cycles created through their booms and busts is larger. Even if we accept such a notion, theoretically based indicators for more bubbly paths do not currently exist.29 However, as we have seen above, it is still possible to make statements about the relation between the institutional framework, such as regulation, and the likelihood of a bubble. It is also possible, based on the experience of past crises, to draw inferences about circumstances that increase the likelihood of bubbles.