Adrian Blundell-Wignall

The current financial crisis

This article treats some ideas and issues that are part of ongoing reflection at the OECD. They were first raised in a major research article for the Reserve Bank of Australia conference in July 2008, and benefited from policy discussion in and around that conference. One fundamental cause of the crisis was a change in the business model of banking, mixing credit with equity culture. When this model was combined with complex interactions from incentives emanating from macro policies, changes in regulations, taxation, and corporate governance, the current crisis became the inevitable result. The paper points to the need for far-reaching reform for a more sustainable situation in the future.

Bank business models, capital rules and structural separation policies

Purpose – The study examines the roles of capital rules, macro variables and bank business models in determining the safety of banks as measured by the “distance-to-default” (DTD) with the purpose of drawing implications for regulation of bank capital and business models. Design/methodology/approach – A panel regression study using pre- and post-crisis data for 108 US and European banks is used to explore the issue empirically. A new technique is also used to back out the amount of capital banks would have needed during the crisis to keep the “DTD” in the very safe zone. Findings – The simple leverage ratio has a strong relationship with “DTD”, while the Basel ratio does not. The most important business model features are derivatives and wholesale funding, which have a strong negative relationship with “DTD”. Trading and available-for-sale securities have a positive influence. Calculations show that it is not possible for any reasonable capital rule to compensate for the risks created by business model fe...

The Business Models of Large Interconnected Banks and the Lessons of the Financial Crisis

This paper looks at the urgent and ongoing need to change the business models of global systemically important banks — particularly those that dominate the OTC derivatives markets which carry massive counterparty risk via collateralisation practices. It explores the three main lessons of the financial crisis: too big to fail, excess leverage and conflicts of interest. While regulatory reforms have been plentiful, none have adequately addressed the main source of the problems which lie in the very nature of the business models of large interconnected banks.

Problèmes soulevés par les fonds souverains et les fonds de pensions

Les fonds souverains sont des pools d‘actifs detenus et geres, directement ou indirectement, par des pouvoirs publics et repondant a des objectifs nationaux. Ces fonds suscitent des preoccupations en termes de : (i) stabilite financiere, (ii) gouvernement d‘entreprise et (iii) interferences politiques et protectionnisme. Parallelement, les pouvoirs publics ont constitue de grands pools de capitaux destines a financer les systemes publics de retraite, les fonds de pension publics. Les fonds souverains sont constitues pour diversifier et ameliorer la rentabilite des reserves de changes ou des revenus tires des matieres premieres ainsi que pour proteger l‘economie nationale des fluctuations des cours des matieres premieres. Les fonds de pension publics sont constitues pour contribuer au financement des plans de retraite par repartition. Le total des actifs des fonds souverains est estime aux alentours de USD 2 600 milliards en 2006/7, et il augmente rapidement, du fait des politiques actuelles de taux de change et des cours du petrole. Le montant total des actifs des fonds de pension public est encore plus important, on l‘estime en effet a quelque USD 4 400 milliards pour 2006 si l‘on y inclut le « US Trust Fund » (USD 2 200 milliards autrement). Les fonds souverains et les fonds de pension publics ont des caracteristiques communes et, de ce fait, soulevent des inquietudes similaires. En revanche, leurs objectifs, leurs strategies d‘investissement, leurs sources de financement et leurs obligations en matiere de transparence different. Les objectifs strategiques et politiques des fonds souverains sont sources de preoccupation, de meme que leur impact sur les taux de change et les prix des actifs. Cela etant, ils sont egalement assortis de mecanismes permettant de rompre les concentrations de portefeuilles qui ont pour effet d‘accroitre les risques. Il est important d‘ameliorer la gouvernance et la transparence des fonds souverains, mais ces considerations doivent etre mises en balance avec les objectifs commerciaux.

Financial Liberalisation and Consumption Behaviour

The paper addresses the question of whether financial liberalisation and innovation have significantly altered consumption behaviour by reducing liquidity constraints as capital markets have become more flexible. A consumption model in which the permanent income hypothesis and extreme Keynesian consumption functions are nested as special cases is the starting point for this analysis. Estimated values for the sensitivity of consumption to current income for different time periods and for several OECD countries are assessed and compared in the light of various econometric properties, country-specific liberalisation measures and a variety of proxies reflecting changing liquidity constraints.

The Demand for Money and Velocity in Major OECD Countries

In recent years the behaviour of the income velocity of money in major OECD economies has displayed considerable volatility for both narrow and broad monetary aggregates (Table 1). Velocity in a number of large OECD economies, for example, fell sharply in 1982. Most notably, declines in the income velocity of M1, M2 and M3 in the United States of 2.3, 4.9 and 5.9 per cent, respectively, were large by historical standards. Such movements in velocity may arise as a consequence of changes in money demand in two important ways: they may result from movements along the money demand function, as the normal implication of changes in its interest rate and inflation expectations arguments; and the money demand function itself may shift (money demand instability), leading to unpredictable changes in velocity. Velocity may also move as the mechanical result of policies by the authorities which alter the supply of money in the short run, while the private sector is able to adjust only with ...

Monetary Policy in the OECD INTERLINK Model

The international financial linkage block of the OECD Secretariats multi-country model, INTERLINK, is based on a portfolio balance model of exchange rate determination. International consistency is ensured by cross country restrictions on parameters imposed during estimation (1). However, in an earlier version of the model, the specification of the domestic financial sector for each country was too rudimentary for simulation analysis under alternative monetary policy assumptions. The main element missing from this version of the model was an explicit formulation of the money demand and supply process (2). This gap has been filled in the version of the model reported in this study, which opens the way for a more comprehensive set of alternative policy regimes under which the model can be run, notably: non-accommodating monetary policy; managed floating; fixed exchange rates; and floating with accommodating monetary policy. These will be elaborated upon in more detail below.In a ...

Managing the Crisis, Exit and Requirements of Reform

The authors set out how all crises should be managed according to four key steps and contrast this with what authorities actually did in different jurisdictions following 2008 (showing the USA to be closer to the mark than Europe). They raise two questions that have occupied policy makers since then: how to exit from emergency measures and what reforms are needed. The authors present and analyse the different proposals including inter alia: dealing with too big to fail; improving corporate governance; ensuring capital adequacy; and separating investment and deposit banking. Based on observed facts about the crisis, they present a number or a priori ideas about capital regulation and bank business models, setting the scene for a fuller discussion based on empirical evidence in subsequent chapters.

The MNE Guidelines at 40: Implementation still matters

If you were asked to name the most recent year when a major European country passed a law against slavery, you might suggest some date in the 19th century. Surprising, then, to learn that the British parliament approved a law called the Modern Slavery Act just last year. This new law is recognition that, far from being an evil of the past, slavery survives today. But the law is also recognition that international business has a major role to play in fighting slavery. As Karen Bradley, a minister in the UK Home Office told The Guardian: “ Businesses risk

On Solving Europe’s Financial Issues to Promote Sustainable Growth

While the financial crisis is global in nature, Europe has its own special brand of institutional arrangements that are being tested in the extreme and which have exacerbated the financial crisis. The monetary union is being subjected to asymmetric real shocks, both from abroad and internally. With its inability to adjust exchange rates, these pressures are forced through the labour market and cause unemployment. This has led some countries over past years to try to alleviate pressures with fiscal slippage. The resulting indebtedness has been exacerbated by the financial crisis and recession and this, in turn, has contributed to underlying financial instability.