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What's at the Top of the Agenda for the Financial Sector after the Crisis?

Maria Soledad Martinez Peria's picture

The 2011 Overview Course of Financial Sector Issues took place earlier this month at the World Bank's headquarters in Washington, DC. This annual event is sponsored by the Office of the Chief Economist of Finance and Private Sector Development, and it provides an overview of issues of current importance for policy-makers, researchers, and practitioners working in the financial sector. Speakers included a number of well-known thinkers and researchers on financial sector issues such as Simon Johnson, Ross Levine, and Franklin Allen, and attracted some 70 external participants from central banks, ministries of finance, and bank regulatory agencies representing 45 countries.

The theme of the course this year was Financial Sector Practices and Policies after the 2007-2008 Crisis (view the full agenda). Lectures, case studies, and panel discussions covered a broad spectrum of issues surrounding this theme, such as long-run policy lessons from the financial crisis, the role of the government in the financial sector after the crisis, bank risk management models before and after the crisis, bank resolution mechanisms, building crisis management capabilities, the future of bank regulation, macro-prudential regulation and stress testing banking systems, capital markets and pension systems after the crisis, to mention the main ones. Also, the course looked into longer-term issues related to the development of the financial sector, e.g. remittances, financial inclusion, SME finance, and microfinance.Some of the main messages from the course were:

(1)  Bank capital levels need to be strengthened both in terms of their composition and aggregate levels, especially among systemically important institutions.

(2)  Banks should be encouraged to build countercyclical buffers to mitigate credit cycle effects.

(3)  Supervisors need to adopt a framework for macroprudential supervision that includes monitoring leverage ratios and liquidity levels, watching for asset bubbles, and being mindful of the interconnectedness among financial institutions. Stress tests need to become a regular tool in bank supervision to assess the resilience of banks within a system.

(4)  Greater cooperation must be fostered among supervisors in different jurisdictions (through the colleges of supervisors and other initiatives) in order to monitor the activities of global banks.

(5)  A framework for cross-border resolution of institutions needs to be developed to deal with the potential failure of large global institutions.

(6)  The problem of too-big-to fail needs to be addressed by providing the right incentives to large banks, making sure they have “enough skin” in the game, and by promoting a framework that does not protect bank shareholders in the event a bank needs to be rescued.

(7)  Enhance financial literacy and consumer protection to avoid some of the abuses that have occurred in the past.

(8)  While government banks may play a role in reducing the volatility of lending during crises, countries should not create new government lending institutions to deal with future crises and should be mindful that there are important preconditions for such institutions to have a beneficial impact on the financial sector (like the right corporate governance, appropriate legal institutions, absence of corruption, etc.)

(9)  Bank risk management models should try to take account of the “fat tails” that often characterize market, credit, and operational risks and try to do a better job of measuring correlations across risks.

(10)  In preparation for future crises, countries should ensure that they have the legal and procedural requirements in place to deal with failing banks. Crisis simulation exercises can help countries assess and strengthen their level of crisis preparedness.

Stay tuned for information on next year’s course, which will be held next spring!

Comments

Dear Maria, It is very good to hear about the course organised by the World Bank. I somehow missed the announcement or else I would have liked to have asked some of my colleagues to apply. On reading the recommendations that came out at the course, I wonder if they have gone far enough and if perhaps the message from the crisis, at least for developing countries, isn't that a deeper set of changes is needed. We are organising a conference in Chennai on August 5th and 6th to discuss exactly these issues as they apply to India. We have been fortunate that regulators, academics, practitioners as well as people from the real sector have agreed to participate in the dialogue. We hope that the two day conclave will allow us to identify a few broad areas of reflection and serious research which can then be pursued. Regards, Nachiket Mor

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