Transcript With the Benefit of Hindsight… lessons from the credit crisis for

The G20 Summit: what to expect
Howard Davies
Director, LSE
Director’s Circle Lecture
Alumni Theatre, NAB
11th March 2009
The phases of the crisis
Rising US sub-prime mortgage arrears
Losses and downgrades on related asset-backed
securities (ABS) and other structured instruments
Loss of confidence in the value of ABS globally
Wider flight from risk in credit and other markets
Risks flow back to banks’ balance sheets
Money markets tighten as liquidity is hoarded
Funding problems for some banks
The Credit Crisis: A Five-Act
Tragedy
Act One:
Subprime
Act Two:
Liquidity
Act Three:
Unravelling
Act Four:
Meltdown
Act Five:
Pumping
But what are the underlying
causes?
•global imbalances
•loose monetary policy, leading to
•mispricing of risk
•credit bubble
•‘excess’ growth of financial sector
•‘excess’ leverage, facilitated by procyclical
regulation
Global current account balances
China’s Growth Laggard
Personal Consumption as % of GDP
Source: China National Bureau of Statistics and Morgan Stanley
Household debt as a proportion of
GDP
Source: FSA, ONS, Federal Reserve, Eurodata, Datastream
“ Bank failures are caused by
depositors who don’t deposit
enough money to cover the
losses due to mismanagement”.
Dan Quayle
“ The owners of capital will stimulate the working
class to buy more and more of expensive goods,
houses, and mechanical products, pushing them
to take more and more expensive credits, until
their debt becomes unbearable The unpaid debt
will lead to bankruptcy of the banks, which will
have to be nationalised, and the state will have
to take the road which will eventually lead to
communism.”
Das Kapital
So what next?
• growth prospects have deteriorated
sharply, across the world
• Europe mired in recession
• long downturn the most likely outcome,
and anaemic recovery
Growth Rates: IMF Forecasts
4
3
2
1
0
-1
-2
-3
-4
Germany
France
US
UK
2007
2008
2009
2010
European Economic Forecast – April 2008
Source: www.ft.com
European Economic Forecast – January 2009
Source: www.ft.com
Larger than previous crises
Recovery options:
• V-shaped: sharp contraction, quick
bounce-back
• U-shaped: longer trough, delayed but
strong recovery
• L-shaped: Japanese style stagnation
• Nike swoosh: sharp downturn, weak
recovery
G20 Summit: 2 April
The declared agenda
• stimulating global demand
• strengthening the international financial
institutions
• reshaping the global financial and regulatory
system
• putting the world economy on track for
sustainable growth
Stimulating global demand: the issues
• fiscal packages uncoordinated so far
• uneven scale of stimuli – Germany and
Japan lagging
• financial protectionism
Strengthening the International Financial
Institutions
• increasing the IMF’s resources to allow it to lend more
• strengthening the early warning and surveillance
functions
• more trade credit support from Development banks,
together with bank recapitalisation
Reshaping the global financial and
regulatory system
• enhance corporate governance and risk management
• strengthen prudential regulation, but with a ‘managed
transition’ to avoid exacerbating the downturn
• regulate financial activities according to their economic
substance and ensure regulation is consistent in all
jurisdictions
Global Committee Structure –
A Regulator’s View
G-7
(Gov’ts)
IMF
World Bank
(Gov’ts)
OECD
(Gov’ts)
WTO
FATF
(Money Laundering)
IASB
(Accounting
Financial Stability
Forum
IAASB
(Audit)
Bank for International
Settlements
(Central Banks)
G-10
(Central Banks)
CGFS
Basel
(Banking)
CPSS
IOSCO
(Securities)
Joint Forum
IAIS
(Insurance)
PIOB
IASC
Monitoring
Group
IFIAR
(Audit)
Source: Adapted with permission from Sloan and
Fitzpatrick in Chapter 13, The Structure of
International Market Regulation, in Financial
Markets and Exchanges Law, Oxford University
Press, March 2007
Specific measures may include:
• enlarging and strengthening the Financial Stability Forum
• a new approach to capital: Basel 3?
• regulation of systemic hedge funds
• a tough approach to offshore centres
• more regulation of credit rating agencies
• supervisory colleges
Will it work? The omens are not good:
• financial protectionism on the rise
• little co-ordination of fiscal policies so far, even in Europe
• fundamental mismatch between global markets, global
banks and domestic taxpayer-funded support
But:
• Monetary and fiscal stimulation on a massive scale
ought to work in the end… though many businesses may
not be there to see it.
The G20 Summit: what to expect
Howard Davies
Director, LSE
Director’s Circle Lecture
Alumni Theatre, NAB
11th March 2009