Should there be more or less competition in the financial system? Should new financial instruments be regulated more or less stringently? What is the right market share of state-owned financial institutions? These are just a few of the vexing questions in finance. For some, there is robust evidence and a broad agreement on answers, but for most, views are split. Moreover, due to the global financial crisis, the balance of opinion on some issues has been shifting. We have done a survey of views on these topics, and would like to hear more from you, our online readers!
In a recent paper by myself and my colleague Megumi Kubota (forthcoming in the Journal of International Economics), we argue that the distinction between sudden stops caused by domestic versus foreign residents is crucial when we examine the effects of these types of episodes on economic performance and their policy implications. Identifying the relative importance of the shocks underlying these different types of sudden stops is essential. If sudden stops were, for instance, attributed to reduced inflows by foreigners, policymakers should minimize the country’s vulnerability to external shocks. The policy advice would be different, however, if net reversals in capital flows are explained by gross outflows of domestic residents looking for better risk-taking opportunities abroad.
On May 14-18 the World Bank held its annual Overview Course on Financial Sector Issues in Washington, DC. Geared towards mid-career financial sector policy-makers and practitioners, the objective of this one-week event was to discuss issues of current and long-run importance to the development of the financial sector. This year’s course focused on Lessons from Recent Crises and Current Priorities for Finance Practitioners and Policy-Makers. The timing was quite fitting—the course took place the same week that JP Morgan’s billion-dollar trading became public and the European crisis intensified as Greek banks suffered large deposit runs.
Perhaps not surprisingly in light of recent events affecting the financial sector in the US and Europe, three main broad themes resonated in many of the sessions of the course: (1) the need for more and better bank capital, (2) the importance of putting in place the right incentives for banks to limit the risks they take, and (3) the role of macroprodudential regulation in monitoring and limiting systemic risk.