Acharya et al the social value of the financial sector; too big to fail or just too big (2014)

THE SOCIAL VALUE OF THE FINANCIAL SECTOR Too Big to Fail or Just Too Big? 8865hc.9789814520287_tp.indd 18/9/13 10:12 AM World Scientific Studies in International Economics (ISSN: 1793-3641) Series Editor Robert M Stern, University of Michigan and University of California-Berkeley, USA Editorial Board Vinod K Aggarwal, University of California-Berkeley, USA Alan Deardorff, University of Michigan, USA Paul DeGrauwe, Katholieke Universiteit Leuven, Belgium Barry Eichengreen, University of California-Berkeley, USA Mitsuhiro Fukao, Keio University, Tokyo, Japan Robert L Howse, New York University, USA Keith E Maskus, University of Colorado, USA Arvind Panagariya, Columbia University, USA Vol 22 International Trade Policy Formation: Theory and Politics by Wolfgang Mayer (University of Cincinnati, USA) Vol 23 Priorities and Pathways in Services Reform: Part I — Quantitative Studies edited by Philippa Dee (Australian National University, Australia) Vol 24 Globalizing Information: The Economics of International Technology Trade by Keith E Maskus (University of Colorado at Boulder, USA) Vol 25 Priorities and Pathways in Services Reform: Part II — Political Economy Studies edited by Christopher Findlay (University of Adelaide, Australia) Vol 26 World Trade Organization and International Trade Law: Antidumping, Subsidies and Trade Agreements by Gary N Horlick (Law Offices of Gary N Horlick, USA & University of Bern, Switzerland) Vol 27 European Economic Integration, WTO Membership, Immigration and Offshoring by Wilhelm Kohler (University of Tübingen, Germany) Vol 28 Services Trade Reform: Making Sense of It by Philippa Dee (Australian National University, Australia) Vol 29 The Social Value of the Financial Sector: Too Big to Fail or Just Too Big? edited by Viral V Acharya (New York University, USA & Centre for Economic Policy (CEPR), UK), Thorsten Beck (Tilburg University, The Netherlands & Centre for Economic Policy (CEPR), UK), Douglas D Evanoff (Federal Reserve Bank of Chicago, USA), George G Kaufman (Loyola University Chicago, USA), & Richard Portes (London Business School, UK & Centre for Economic Policy (CEPR), UK) Vol 30 The Role of Central Banks in Financial Stability: How Has It Changed? edited by Douglas D Evanoff (Federal Reserve Bank of Chicago, USA), Cornelia Holthausen (European Central Bank, Germany), George G Kaufman (Loyola University Chicago, USA) & Manfred Kremer (European Central Bank, Germany) The complete list of the published volumes in the series can be found at http://www.worldscientific.com/series/wssie 29 World Scientific Studies in International Economics THE SOCIAL VALUE OF THE FINANCIAL SECTOR Too Big to Fail or Just Too Big? Editors Viral V Acharya New York University, USA & Centre for Economic Policy (CEPR), UK Thorsten Beck Tilburg University, The Netherlands & Centre for Economic Policy (CEPR), UK Douglas D Evanoff Federal Reserve Bank of Chicago, USA George G Kaufman Loyola University Chicago, USA Richard Portes London Business School , UK & Centre for Economic Policy (CEPR), UK World Scientific NEW JERSEY • LONDON 8865hc.9789814520287_tp.indd • SINGAPORE • BEIJING • SHANGHAI • HONG KONG • TA I P E I • CHENNAI 18/9/13 10:12 AM Published by World Scientific Publishing Co Pte Ltd Toh Tuck Link, Singapore 596224 USA office: 27 Warren Street, Suite 401-402, Hackensack, NJ 07601 UK office: 57 Shelton Street, Covent Garden, London WC2H 9HE Library of Congress Cataloging-in-Publication Data Acharya, Viral V The social value of the financial sector : too big to fail or just too big? / by Viral V Acharya (New York University, USA & Centre for Economic Policy (CEPR), UK), Thorsten Beck (Centre for Economic Policy (CEPR), UK & Tilburg University, The Netherlands), Douglas D Evanoff (Federal Reserve Bank of Chicago, USA), George G Kaufman (Loyola University Chicago, USA) & Richard Portes (Centre for Economic Policy (CEPR), UK & London Business School , UK) pages cm (World scientific studies in international economics, ISSN 1793-3641 ; 29) Includes bibliographical references and index ISBN 978-9814520287 Financial institutions Financial institutions Government policy Banks and banking Social policy I Title HG173.A224 2013 332.1 dc23 2013027960 British Library Cataloguing-in-Publication Data A catalogue record for this book is available from the British Library Cover Illustration by Ping Homeric Copyright © 2014 by World Scientific Publishing Co Pte Ltd All rights reserved This book, or parts thereof, may not be reproduced in any form or by any means, electronic or mechanical, including photocopying, recording or any information storage and retrieval system now known or to be invented, without written permission from the Publisher For photocopying of material in this volume, please pay a copying fee through the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, USA In this case permission to photocopy is not required from the publisher In-house Editors: Sandhya Venkatesh/Dipasri Sardar Typeset by Stallion Press Email: enquiries@stallionpress.com Printed in Singapore September 17, 2013 11:3 Social Value of the Financial Sector: Too Big to Fall or Just Too Big 9in x 6in Preface The large-scale damage inflicted on the economies of countries throughout the world by the financial crisis of 2007 to, at least, 2010, has ignited widespread re-evaluation of the net social benefits derived from large and growing domestic and international financial sectors These sectors tended to expand much faster before the crisis than did their national GDPs For example, the aggregate on-balance-sheet dollar size of the 11 major types of US financial institutions included in the Federal Reserve’s flow of funds data more than doubled from 1.27% of GDP in 1970 to 2.85% of GDP in 2007 A large number of empirical research studies have provided evidence that deeper and more efficient financial systems are associated in the longer run with higher and more rapid economic growth But periodically, the system crashes, and the larger the system, the deeper and broader the damage Does the damage partially, totally, or more than totally offset the gains realized from the financial sector during noncrisis periods? We typically think of market distortions, and resulting adverse welfare effects, from having financial institutions that are too-big-to-fail However, it may be that in certain cases, the financial sector is simply too big, resulting in inefficiencies and generating societal welfare losses If this is the case, how can public policy something about it? These were some of the major questions addressed by participants at the Fifteenth Annual Federal Reserve Bank of Chicago International Banking Conference, cosponsored with the Centre for Economic Policy Research (CEPR) in London The conference was held in Chicago on November 15–16, 2012 Some 175 participants, representing policymakers, financial regulators, financial practitioners, researchers, and academics from some 30 countries participated Specific topics discussed included the costs and benefits of the current financial industry structure, social benefits from financial industry innovation, effects of regulation on societal welfare, the financial situation and resulting economic activity across v b1606-fm September 17, 2013 vi 11:3 Social Value of the Financial Sector: Too Big to Fall or Just Too Big 9in x 6in Preface countries, and the potential benefits and costs associated with the breaking up of large banks This volume includes the papers presented at the Chicago conference, including the keynote addresses by leading experts in the field The publication of the papers in this volume is intended to disseminate the conference ideas, analyses, and conclusions to a wider audience Hopefully, that broader distribution will generate additional discussion, serve as the basis for further analyses, and be used to guide public policy b1606-fm September 17, 2013 11:3 Social Value of the Financial Sector: Too Big to Fall or Just Too Big 9in x 6in Acknowledgments Both the conference held at the Federal Reserve Bank of Chicago, November 15–16, 2012, and this volume represent a joint effort of the Federal Reserve Bank of Chicago and the Centre for Economic Policy Research (CEPR) Various people at each institution contributed to the effort The five editors served as the principal organizers of the conference program and would like to thank all the people who contributed their time and energy to the effort At the risk of omitting some people, we would like to thank Julia Baker, John Dixon, Ella Dukes, Ping Homeric, and Rita Molloy Special mention should be accorded Kathryn Moran, who managed the Chicago Fed’s web effort; Sandy Schneider, who expertly managed the conference administration; as well as Helen O’D Koshy and Sheila Mangler, who had primary responsibility for preparing the manuscripts for this book vii b1606-fm September 17, 2013 11:3 Social Value of the Financial Sector: Too Big to Fall or Just Too Big This page intentionally left blank 9in x 6in b1606-fm September 17, 2013 11:3 Social Value of the Financial Sector: Too Big to Fall or Just Too Big 9in x 6in b1606-fm Contents Preface v Acknowledgments Part I Chapter vii Keynote Addresses A Ferment of Regulatory Proposals Charles A E Goodhart Chapter Progress and Priorities for Financial Reform 11 Mary John Miller Part II Description and Measurement of the Financial System Chapter What Is Meaningful Banking Reform, Why Is It So Necessary … and So Unlikely? 21 23 Charles W Calomiris Chapter The Great Leveraging 33 Alan M Taylor Chapter Finance and Economic Development in a Model with Credit Rationing 67 Jean-Louis Arcand, Enrico Berkes, and Ugo Panizza Chapter Too Much Finance, Too Much Credit? Comments on Papers by Calomiris, Arcand–Berkes–Panizza, and Taylor Eugene N White ix 81 September 17, 2013 11:3 Social Value of the Financial Sector: Too Big to Fall or Just Too Big The Social Value of the Financial Sector 9in x 6in b1606-ch27 509 the SEC and make that a bureau within this agency The Fed would monetary policy and the FDIC would be the insurer They could get any data they want about individual banks from this consolidated supervisor The Financial Stability Oversight Council could serve as a counterweight to this new agency In my ideal world, the FSOC has members: Treasury, the leader of the new federal agency for supervision, the Fed, FDIC, and the independent OFR director It would operate as a commission and need a majority vote to approve actions The one piece of the pie that I am not addressing is the shadow system … Actually, I am not sure what’s left of it once the nonbank SIFI net is cast But bankers tell me they are really worried about it from both a business and a talent perspective Clearly it’s a chunk of the financial world that needs monitoring and FSOC should be on top of it Finally, I’d get the scores of researchers working for the government try to answer some basic questions — the answers to which we could base future policy decisions We really don’t have answers to some fundamental questions like: — — — — Does our economy need big banks? How big is “too big?” Is proprietary trading really bad? Does enterprise risk management really work? I think if we had some of these answers we could make better policy decisions Thank you September 17, 2013 11:3 Social Value of the Financial Sector: Too Big to Fall or Just Too Big This page intentionally left blank 9in x 6in b1606-ch27 September 17, 2013 11:3 Social Value of the Financial Sector: Too Big to Fall or Just Too Big 9in x 6in Public Policy Options Jürgen Stark∗ University of Tübingen, Germany My remarks are based on the experience in the run-up to the crisis until 2007 and during the crisis since 2008 In my comments I will discuss the following issues: The G20 financial sector reform agenda; Progress made in implementing reforms; Is the financial system safer today?; Is there “too much finance?”; and Has the financial sector stepped out of its role of serving the real economy? It is very likely that I will raise more questions than I provide answers Nobody can argue today that there were no early warnings or serious questions raised before 2007–2008 about the risks in the global financial system and whether these risks were appropriately priced and managed What did we know about the allocation of risks? It was assumed that unregulated new risk transfer instruments and new financial institutions would create a safer financial system by distributing the risks more evenly across the system, including the shadow banking system In the end, it was the financial crisis that made the allocation of risks more transparent — in a very dramatic and costly way It was obvious that the global financial system — markets, institutions, and instruments — had become too ∗ Jürgen Stark is affiliated with the University of Tübingen, Germany, and is also an independent economist He is a former Member of the European Central Bank’s Executive Board and Governing Council (2006–2011) and former Deputy Governor of Deutsche Bundesbank (1998–2006) 511 b1606-ch28 September 17, 2013 512 11:3 Social Value of the Financial Sector: Too Big to Fall or Just Too Big 9in x 6in J Stark sophisticated and too complex and was understood and managed solely by highly remunerated specialists Risk-taking was separated from riskbearing through securitization Four years ago the G20 leaders recognized that “the global economy is facing its most serious financial crisis and economic slowdown in decades.” In November 2008 the G20 finance ministers and Central Bank governors pointed to the root causes that have led to the crisis: “…the current financial crisis is largely a result of excessive risk taking and faulty risk management practices in financial markets, inconsistent macroeconomic policies, which gave rise to domestic and external imbalances, as well as deficiencies in financial regulation and supervision in some advanced economies.” The G20 members drew the conclusion that “all countries (…) must improve their regulatory and supervisory regimes.” The G20 meetings in Washington, DC, in November 2008 and in Pittsburgh in the fall of 2009, generated an agenda for putting financial regulation on a stronger footing The declaration of the Washington Summit already established the major principles that should henceforth guide the reform of financial markets These principles are still valid: (i) strengthening transparency and accountability; (ii) enhancing sound regulation; (iii) promoting integrity in financial markets; (iv) reinforcing international cooperation; and (v) reforming international financial institutions Regarding the call for better regulation, the declaration pledged “to strengthen our regulatory regimes, prudential oversight, and risk management, and ensure that all financial markets, products and participants are regulated or subject to oversight ….” This call was amended by an important political escape clause: “…as appropriate to their circumstances.” The G20 leaders’ statement of Pittsburgh in 2009 foresaw “strict and precise timetables” for the implementation of the reforms However, after the initial impetus under the impact of the culminating financial crisis, the steps toward reform have frequently been criticized as having lost momentum In fact, the Financial Stability Board has put in place a framework to monitor the progress made in implementing the G20 financial reforms This shows that, for some of the identified priority areas, the advances have not gone beyond agreeing some general pronouncements Important reforms are expected to be finalized only in the years to come This is b1606-ch28 September 17, 2013 11:3 Social Value of the Financial Sector: Too Big to Fall or Just Too Big Public Policy Options 9in x 6in b1606-ch28 513 true, for instance, of the key task of regulating and supervising the shadow banking system, which is at the stage of spelling out the respective policies Some progress has been made In particular, the necessary regulations or legislation aimed at implementing the Basel III framework — especially strengthening banks’ capital and liquidity standards — will start to be put in place as of January 2013 The full set of regulations will only be phased in by 2019, more than 10 years after the recent financial crisis peaked Unfortunately, it is very likely that Basel III will not be implemented in all G20 jurisdictions within the agreed time frame If this turns out to be the case, this would set a bad precedent for other G20 reform agenda items In case anyone forgets, Basel III was endorsed by all G20 leaders in spring 2011 at their meeting in Seoul However, there is a valid criticism of the Basel III rules, which relates to their complexity The new framework regarding banks’ capital and liquidity standards is indeed very comprehensive and detailed But complex rules merely reflect a complex system? Or should the system itself become simpler to allow for simpler rules as well? All in all, we are still in the early stages of financial reform The G20 Leaders warned at their Pittsburgh meeting that “a sense of normalcy should not lead to complacency.” Indeed, the first signs of a restabilizing global economy eased the necessary pressure behind the process of reforming financial regulation While regulators have correctly adopted the view that it is more important to get the regulations right and make them waterproof, we have to ensure that the financial market reform is put in place not just rigorously, but also rapidly, in order to make the global financial system safer There is a broad political consensus that we need a safer financial system However, vested interests have come into play, linked to the fear of possible negative growth effects of a more appropriate regulation and supervision regime But these fears represent a short-term view Perhaps the most important benefits of a safer financial system are those stemming from effective prevention and mitigation of banking crises, which cause enormous economic and social costs Indeed, as history shows, systemic banking crises can produce losses that are multiples of annual GDP, which undoubtedly makes the benefits of reducing the likelihood of costly financial crises very high September 17, 2013 514 11:3 Social Value of the Financial Sector: Too Big to Fall or Just Too Big 9in x 6in J Stark The costs of the recent crisis were in fact sizable For the OECD countries, a loss of about 4% of GDP was recorded in 2009 Added to this is the likelihood of a permanent dampening of medium-term potential output Governments and central banks took unprecedented action globally in response to the perils originating from the financial market turmoil Euroarea governments, for instance, increased their deficits on average by more than 5% points of GDP in 2010 This was the combined consequence of rescue packages for financial institutions, cyclical stimulus packages, and the operation of automatic stabilizers Debt-to-GDP ratios in advanced economies have increased on average by about 25% points since 2007 Central banks around the world have expanded their balance sheets, though to different extents and with different asset–liability structures It is clear that, in our democracies, such measures taken by fiscal and monetary authorities can only be an exception to the rule They are in no way repeatable, either in nature or in scale The disasters that we have witnessed in the financial system must not be allowed to recur All the evidence points to one conclusion: More radical reforms of the financial system are urgently required Recently, the International Monetary Fund raised the question of whether the financial system is safer today than it was on the eve of the crisis According to the chairman of the Financial Stability Board, the answer is “yes.” The IMF, however, provides a more differentiated and ambiguous answer: Financial systems are still overly complex; banking assets are concentrated; the too-important-to-fail issues are unresolved; new products are being developed, circumventing new regulations This assessment reflects the limited progress that has been made in financial market regulation, despite some improvement in increasing capital and liquidity and more proactive risk management at the level of individual banks For all these reasons — and also for as long as the focus of reform and regulation is on individual banks rather than on the system as a whole — we have to dig deeper into the causes of the crisis by asking more searching questions: (i) Is the G20 regulation approach credible, or is it just about curing the symptoms? (ii) Do we need much more radical reforms of the system, because the root causes of the financial crisis are not being addressed? (iii) Has the massive bailout of the financial system created b1606-ch28 September 17, 2013 11:3 Social Value of the Financial Sector: Too Big to Fall or Just Too Big Public Policy Options 9in x 6in b1606-ch28 515 moral hazard? (iv) In more general terms: What kind of financial system is required to properly and adequately fulfill its economic and social role? As the reform process has not gone far enough and has additionally lost steam over time, there is still the perception in the market that governments and central banks will intervene again when faced with a failing bank which is considered to be systemically important As a consequence, the expectation of a bailout may lead to a financial sector that is “too large” with respect to the “social optimum.” In order to avoid taxpayers being taken hostage again by banks (…by the system…?), more resolute measures are needed to make the system less complex, less leveraged, more transparent, and the risks better managed Ultimately, a safer system should be more narrowly focused and, as mentioned by Hal Scott, should provide less short-term funding, which is a deeply rooted problem of today’s capital markets The two or three decades preceding the crisis saw a large expansion of the financial sector in many advanced economies Viewed together with the negative experiences of the recent financial crisis, it is thus tempting to assert that the financial sector has in fact grown out of proportion The idea that “too much finance” can be detrimental to economic growth has found some empirical and theoretical confirmation It evidences a nonmonotonic relation between the size of the financial sector and economic growth: If the size of the financial system exceeds a certain threshold, it may have a negative growth impact One mechanism behind such a pattern may be that a larger financial sector could contribute to exacerbating the positive relation between average growth and the probability of sizeable economic downturns Another explanation could be that even in tranquil times, an oversized financial sector may represent a misallocation of financial and human resources that could be better utilized elsewhere in the economy According to recent BIS research, once bank assets exceed annual GDP in size, they start to act as a drag on economic growth Nevertheless, it should be clear that the sheer scale of financial sector activity per se is not the only relevant factor for growth and economic welfare, but rather the types and qualities of financial sector activity as well This applies, in particular, to the assessment of the years preceding the crisis Beyond merely stating that “the financial sector has become too big,” September 17, 2013 516 11:3 Social Value of the Financial Sector: Too Big to Fall or Just Too Big 9in x 6in J Stark a more specific conclusion can be drawn: “The financial sector had stepped out of its role of serving the real economy.” It has long been recognized that the financial sector does not exist in the economy for its own sake Its role is that of serving the real economy Or, as Joseph Schumpeter put it in 1934: “He (the banker) stands between those who wish to form new combinations and the possessors of productive means…He is the ephor (the overseer) of the exchange economy.” In fact, all the elements that have been identified in financial and economics literature as the key functions of the financial sector are ultimately directed at supporting the real economy In providing these well-known functions, the financial industry plays its role in contributing to sustainable economic growth In recent years, however, the financial sector has allowed its focus to wander from this central role In a period characterized by the search for yield — featuring inadequate risk assessment and pricing, weak underwriting standards, inadequate risk management practices, fragile short-term funding of long-term assets, a proliferation of opaque financial products, and excessive leverage — the financial sector has become to some extent self-referential These failures were undoubtedly attributable partly to deficiencies in financial regulation and supervision The regulatory overhaul of the financial sector is intended to correct this But will it help the financial sector to refocus on its service role? Looking forward, a system serving the real economy requires a safer and more narrowly focused banking system, equipped with sufficiently high capital In fact, a sounder and more role-focused financial system has to be smaller than the one before the crisis started In this respect, some progress has been made on this side of the Atlantic, less so in Europe, where in the fall of 2008 all banks were considered to be systemically important and the possibility of banks exiting the market became a taboo To conclude, recent years have seen a financial system that has outgrown its proper size, lost track of its core functions and become a major source of risk itself Overall, the financial sector has veered away from its genuine role of serving the real economy and thereby society as a whole The current overhaul of financial regulation is a key element in helping the financial sector to become safer and thus eventually to once again contribute toward b1606-ch28 September 17, 2013 11:3 Social Value of the Financial Sector: Too Big to Fall or Just Too Big Public Policy Options 9in x 6in b1606-ch28 517 sustainable economic growth At present, the system is not as safe as it needs to be and as it could be It is now vital to regain the necessary momentum and to strictly follow the implementation schedules At the same time, the adequacy of the regulatory system needs to be assessed on a regular basis This will help to avoid the past mistake of regulators failing to spot new sources of risk arising in the financial sector The guiding principles of all regulatory measures and any redimensioning of the financial sector must be: simplicity, transparency, and the avoidance of short-termism Finance must resume its core role of serving both society and the real economy without becoming a source of risk itself Finally, let me raise an issue which is not the subject of this conference: Whatever impact any new and more adequate regulation has on the soundness of the financial system and on sustainable economic growth, we should not forget the macroeconomic environment in which financial institutions operate We have been living for a very long time already in an era of “ultra-cheap money,” with de facto zero-interest rates (negative interest rates in real terms), and “ultra-cheap credit ” globally Major central banks have already signaled that they will maintain their zero-rate policy for at least three more years The key question in this context is: How would the financial system operate in this environment of very low interest rates if it is maintained too long? The most likely result is: inadequate pricing of risks, market distortions, and misallocation of resources — thus sowing the seeds of the next crisis September 17, 2013 11:3 Social Value of the Financial Sector: Too Big to Fall or Just Too Big This page intentionally left blank 9in x 6in b1606-ch28 September 17, 2013 11:8 Social Value of the Financial Sector: Too Big to Fall or Just Too Big 9in x 6in b1606-agenda Agenda Thursday, November 15, 2013 9:00 am Registration and Continental Breakfast 9:40 am Welcoming Remarks Charles L Evans, President and Chief Executive Officer, Federal Reserve Bank of Chicago Richard Portes, London Business School and Founder and President, Centre for Economic Policy Research (CEPR) — London 10:00 am Session I: Description and Measurement of the Financial System Moderator: Douglas D Evanoff, Federal Reserve Bank of Chicago Charles W Calomiris, Columbia University Alan M Taylor, University of Virginia Enrico Berkes, Northwestern University Ugo Panizza, University of Geneva Commentator: Eugene N White, Rutgers University 11:45 am Luncheon and Keynote Address Introduction: Charles L Evans, President and Chief Executive Officer, Federal Reserve Bank of Chicago Charles Goodhart, Emeritus Professor of Banking and Finance, Financial Markets Group, London School of Economics 1:45 pm Session II: Social Benefits and Costs of the Current Financial System Moderator: Richard Portes, London Business School and CEPR Ross Levine, University of California, Berkeley Marco Pagano, University of Naples Federico II Commentator: Gerard Caprio, Jr., Williams College 519 September 17, 2013 11:8 Social Value of the Financial Sector: Too Big to Fall or Just Too Big 520 9in x 6in b1606-agenda Agenda 3:30 pm Break 3:45 pm Session III: Financial Industry Innovation Moderator: Daniel G Sullivan, Executive Vice President and Director of Research, Federal Reserve Bank of Chicago Viral V Acharya, New York University W Scott Frame, University of North Carolina at Charlotte Luc Laeven, International Monetary Fund 5:50 pm Reception 6:45 pm Dinner and Keynote Address Introduction: Charles L Evans, President and Chief Executive Officer, Federal Reserve Bank of Chicago Raghuram Rajan, Eric J Gleacher Distinguished Service Professor of Finance, University of Chicago Friday, November 16, 2013 7:30 am Registration and Continental Breakfast 8:15 am Session IV: Effects of Regulation, the Safety Net, and Other Government Guarantees Moderator: Bethany McLean, Vanity Fair Edward Kane, Boston College Nicola Cetorelli, Federal Reserve Bank of New York Javier Suarez, Center for Monetary and Financial Studies (CEFMI), Madrid Commentator: Mathias Dewatripont, National Bank of Belgium 10:00 am Break 10:15 am Session V: Finance and Economic Activity: Variations across Emerging and Developed Markets Moderator: María J Nieto, Banco de Espa Franklin Allen, University of Pennsylvania September 17, 2013 11:8 Social Value of the Financial Sector: Too Big to Fall or Just Too Big 9in x 6in Agenda b1606-agenda 521 Thorsten Beck, Tilburg University, The Netherlands Neeltje van Horen, De Nederlandsche Bank Commentator: Elias Papaioannou, London Business School 12:00 pm Luncheon and Keynote Address Introduction: David Marshall, Senior Vice President, Associate Director of Research and Director of Financial Markets, Federal Reserve Bank of Chicago Mary John Miller, Under Secretary for Domestic Finance, U.S Treasury Department 2:00 pm Session VI: Break Up the Big Banks? Moderator: David Marshall, Federal Reserve Bank of Chicago James R Barth, Auburn University and Milken Institute Thomas M Hoenig and Charles S Morris, Federal Deposit Insurance Corporation Harvey Rosenblum, Federal Reserve Bank of Dallas Hal S Scott, Harvard University Law School 3:45 pm Break 4:00 pm Session VII: Where to from Here? What Does All of This Mean for Financial Regulatory Policy? Moderator: George G Kaufman, Loyola University Chicago Claudio Borio, Bank for International Settlements Thomas Huertas, Ernst & Young, London Vasileios Madouros, Bank of England Danièle Nouy, Banque de France Barbara A Rehm, American Banker Jürgen Stark, Formerly European Central Bank Executive Board 6:00 pm Reception September 17, 2013 11:8 Social Value of the Financial Sector: Too Big to Fall or Just Too Big This page intentionally left blank 9in x 6in b1606-agenda September 17, 2013 11:3 Social Value of the Financial Sector: Too Big to Fall or Just Too Big 9in x 6in Index adverse selection, 218, 224 agency problems, 304, 306 leverage ratio, 5, 8, 271, 393, 420, 459, 462, 466, 481, 482, 499 banking industry concentration, 431 Basel III, 5, 6, 18, 27, 28, 161, 257–260, 262, 268, 270, 393, 447, 449, 450, 456, 462, 465, 466, 472, 473, 476, 480, 486, 488, 499, 513 macroprudential regulation, 85, 483, 494, 495 market discipline, 159, 162, 197, 309, 402, 419, 430, 433, 434, 436, 439, 443, 449, 450, 457, 462, 463, 471, 495 market discipline: enhancement, 24, 490 market discipline: reducing, 403, 414, 490 market distortions, 478, 517 compensation, 85, 121, 149, 434, 441, 507 economic development, 67, 112, 283, 296, 309, 345–348, 355, 358, 360, 365, 367 externalities, 8, 167, 194, 204, 258, 307, 338, 492, 496 stress tests, 13, 135, 489–491, 493, 506 systemic crisis, 166, 186, 199, 233, 398 too-big-to-fail, v, 85, 86, 163, 177, 268, 386, 417, 450 too much finance, 75, 77, 82, 511, 515 finance and economic activity, 67, 77, 345, 346, 348, 365 financial innovation, 136, 151, 215–217, 220, 221, 225, 226, 229, 230, 233, 234, 268, 304, 305, 311, 313, 317, 485 Volcker rule, 11, 12, 390–393, 506 government guarantees, 317, 403, 422 GSEs, 223, 224, 480 523 b1606-index ... Social Value of the Financial Sector: Too Big to Fall or Just Too Big PART I KEYNOTE ADDRESSES 9in x 6in b1606-ch01 September 17, 2013 11:2 Social Value of the Financial Sector: Too Big to Fall... Value of the Financial Sector: Too Big to Fall or Just Too Big This page intentionally left blank 9in x 6in b1606-ch03 September 17, 2013 11:2 Social Value of the Financial Sector: Too Big to Fall... 11:3 Social Value of the Financial Sector: Too Big to Fall or Just Too Big 9in x 6in Preface The large-scale damage inflicted on the economies of countries throughout the world by the financial