Shigehara (ed ) the limits of surveillance and financial market failure; lessons from the euro area crisis (2014)

The Limits of Surveillance and Financial Market Failure This page intentionally left blank The Limits of Surveillance and Financial Market Failure Lessons from the Euro-Area Crisis Edited by Kumiharu Shigehara President, International Economic Policy Studies Association Editorial matter, selection and introduction © Kumiharu Shigehara 2014 Individual chapters © Respective authors 2014 All rights reserved No reproduction, copy or transmission of this publication may be made without written permission No portion of this publication may be reproduced, copied or transmitted save with written permission or in accordance with the provisions of the Copyright, Designs and Patents Act 1988, or under the terms of any licence permitting limited copying issued by the Copyright Licensing Agency, Saffron House, 6–10 Kirby Street, London EC1N 8TS Any person who does any unauthorized act in relation to this publication may be liable to criminal prosecution and civil claims for damages The authors have asserted their rights to be identified as the authors of this work in accordance with the Copyright, Designs and Patents Act 1988 First published 2014 by PALGRAVE MACMILLAN Palgrave Macmillan in the UK is an imprint of Macmillan Publishers Limited, registered in England, company number 785998, of Houndmills, Basingstoke, Hampshire RG21 6XS Palgrave Macmillan in the US is a division of St Martin’s Press LLC, 175 Fifth Avenue, New York, NY 10010 Palgrave Macmillan is the global academic imprint of the above companies and has companies and representatives throughout the world Palgrave® and Macmillan® are registered trademarks in the United States, the United Kingdom, Europe and other countries ISBN 978–1–137–47146–8 This book is printed on paper suitable for recycling and made from fully managed and sustained forest sources Logging, pulping and manufacturing processes are expected to conform to the environmental regulations of the country of origin A catalogue record for this book is available from the British Library Library of Congress Cataloging-in-Publication Data The limits of surveillance and financial market failure : lessons from the Euro-area crisis / [edited by] Kumiharu Shigehara pages cm Includes index ISBN 978–1–137–47146–8 (hardback) Finance—European Union countries Financial crises—European Union countries Monetary policy—European Union countries Eurozone European Union countries—Economic policy I Shigehara, Kumiharu HG186.A2L56 2015 332 0415094—dc23 2014028144 Dedicated to the memory of Rutsu Shigehara This page intentionally left blank Contents List of Tables and Figures ix Preface and Acknowledgements x Notes on Contributors xiii Part I The Limits of Surveillance and Financial Market Failure: Some Fundamental Issues Arising from the Euro-Area Crisis Kumiharu Shigehara Part II Global and Regional Surveillance: Lessons from the Euro-Area Crisis André Icard Surveillance Failure or Systemic Failure? Leif Pagrotsky The Role of Surveillance: Lessons from the Euro-Area Crisis Val Koromzay 39 52 64 Part III Beyond Surveillance: Reducing the Risk of Financial Crises Paul E Atkinson 77 How Should Microprudential Control Be Strengthened to Prevent Local and Global Financial Market Failure? Jeffrey R Shafer 88 Financial Market Failures and Their Remedies Carol Sirou vii 93 viii Contents Part IV On the Connection between Monetary Policy and the Regulation of Banking and Financial Markets Stephen H Axilrod Macroprudential Policy, Capital Controls and Bank Systemic Risk Adrian Blundell-Wignall and Caroline Roulet 10 Risk, Reward and Bank Resilience Charles A.E Goodhart 99 108 131 Part V 11 Can Europe Get Its Political Act Together? Alternative Scenarios for the Eurozone William R White 12 More Effective Management of the Euro Area Gunter D Baer 143 163 Part VI 13 Executive Summary Robert W.R Price 173 14 Overview Report Robert W.R Price and Nicholas J Vanston 180 Annex 1: Conference Programme 209 Annex 2: Contributors to the Conference 213 Index 216 Tables and Figures Tables 9.1 Determinants of bank distance to default: multivariate panel results 9.2 Correlations of model-identified variables and monetary policy variables 14.1 Derivatives as a percentage of asset portfolios 116 118 190 Figures 9.1 India, Korea and China: interest differential, forward/spot and covered interest parity 14.1 Changes in unit labour costs 14.2 Current account balances 14.3 Ten-year government bond spread 14.4 Risk-weighted assets as a share of total assets 14.5 Net international investment positions 14.6 General government gross debt ratio 14.7 General government primary balances 14.8 Unemployment rate ix 122 184 185 187 189 203 204 205 207 212 Annex 1: Conference Programme of reducing incentives for structural reforms by lowering the yield curves of bonds issued by the governments of Spain, Italy and some other debtor countries.2 How you think motivations for structural reform in debtor countries can be secured or strengthened? After all, given political constraints in democratic societies, would it not be under severe financial market stress only that politicians could enforce needed but unpopular structural reforms that are disliked by the general public? Such enforcement mechanism of financial market pressure would not work in creditor countries which also need to implement structural reform according to the IMF and the OECD The limits of surveillance by these institutions were discussed in Session How you think the international community can effectively influence structural policy-making in creditor countries? What should be the role of the G8/G20 process of global political leaders as well as that of G7? Notes See the second paragraph of Chapter See endnote 22 and Appendix to Chapter Annex 2: Contributors to the Conference Paul E Atkinson Executive Director and Senior Fellow of the International Economic Policy Studies Association Former Deputy Director of the Directorate for Science, Technology and Industry at the Organisation for Economic Co-operation and Development (OECD) Former editor of OECD Economic Outlook Stephen H Axilrod Consultant on policy and markets Former Staff Director for Monetary and Financial Policy on the board of governors of the Federal Reserve System and Staff Director and Secretary of the Federal Open Market Committee Also, formerly Vice-Chairman, Nikko Securities Co International, headquartered in New York Author of Inside the Fed: Monetary Policy and Its Management: Martin through Greenspan to Bernanke, Revised Edition (MIT Press 2011) and The Federal Reserve: What Everyone Needs to Know (Oxford University Press 2013) Gunter D Baer Former Secretary General of the Bank for International Settlements (BIS) Former Secretary General of the Committee of Governors of the EEC central banks Rapporteur, together with the late Tommaso Padoa-Schioppa, of the Delors Committee Adrian Blundell-Wignall Special Advisor to the Secretary-General on Financial Markets and Director of the Directorate for Financial and Enterprise Affairs at the OECD Carles A Gasoliba President of Barcelona Centre for International Affairs Chairman of the Spanish Committee of the European League for Economic Cooperation and of its Mediterranean Committee in Brussels Former Chairman of the Senate Committee for the Economy and Treasury Former member of the European Parliament on the Economics and Monetary Committee Charles A.E Goodhart Professor Emeritus and member of the Financial Market Group at the London School of Economics Former member of the Bank of England’s Monetary Policy Committee Developer of Goodhart Law, an economic law named after him André Icard Member of the Enforcement Committee of the French Prudential Supervision and Resolution Authority Former Deputy General Manager of the BIS Former Directeur General des Etudes at the Banque de France Coeditor, together with Jack Boormann, of the final report on the reform of the international monetary system prepared by the Palais Royal group 213 214 Annex 2: Contributors to the Conference initiated by Michel Camdessus, Alexandre Lamfalussy and the late Tommaso Padoa-Schioppa Donald J Johnston Former Secretary-General of the OECD Val Koromzay Former Director of the Country Studies Branch of the Economic Department of the OECD Wolfgang Michalski Managing Director at WM International and former chief adviser to the Secretary-General of the OECD Leif Pagrotsky Former member of the cabinet of the Swedish government, former Minister of Industry and Trade, and former Minister of Education, Research and Culture Former Vice Chairman of the General Council of the Riksbank Robert W.R Price Senior Fellow of the International Policy Studies Association Former Head of the Monetary and Fiscal Policy Division, General Economic Analysis Division and Country Studies Division II in the OECD’s Economics Department Former editor of OECD Economic Outlook Robert Raymond Former Director General of the European Monetary Institute Honorary Director General at the Banque de France Former Chairman of CPR Bank Advisor to the International Economic Policy Studies Association Treasurer of La Maison de l’Europe de Paris Caroline Roulet Economist, Directorate for Financial and Enterprise Affairs at the OECD Jeffrey R Shafer Consultant Former Vice Chairman of Citigroup Global Markets Former Undersecretary of the US Treasury for International Affairs Former staff official of the OECD and the Federal Reserve (board of governors and NewYork Bank) Kumiharu Shigehara President of the International Economic Policy Studies Association Former Chief Economist and Deputy Secretary-General of the OECD Former Chief Economist and Director-General of the Institute for Monetary and Economic Studies of the Bank of Japan Carol Sirou President of Standard & Poor’s Credit Market Services France Philip Turner Deputy Head of the Monetary and Economic Department of the BIS Niels C Thygesen Professor Emeritus of International Economics at the University of Copenhagen Former Chair of the Economic and Development Committee of the OECD Advisor to the International Economic Policy Studies Association Nicholas J Vanston Senior Fellow of the International Policy Studies Association Former Head of the Country Studies II Division, Structural Policy Annex 2: Contributors to the Conference 215 Analysis Division, and Foreign Trade and Payments Division in the OECD Economics Department William R White Chair of the Economic and Development Review Committee of the OECD Former Economic Adviser and Head of the Monetary and Economic Department of the BIS Former Deputy Governor of the Bank of Canada Index Note: The letter ‘A’ and ‘n’ following locators refers to Annex and notes Act of 1879, 133 Admati, A.R., 135 advanced market economies (AMEs), 143–4 AIG, 90, 192, 194 Aleksashenko, Sergey, 50n Al Sayari, Hamad, 50n Angelini, Neri, 14n 24 Angeloni, Chiara, 50n Artus, Patrick, 50n Atkinson, P.E., 9n 3, 31n 7, 77, 86n 1, 86n 8, 188, 190, 191, 192, 193, 196, 199, 200 Attinasi, Maria-Grazia, 12n 22, 32, 34n Austria current account balance, 185 government primary balance, 205 gross debt ratio, 204 housing markets, 28 net international investment position, 203 ten-year government bond spread, 187 unemployment rate, 207 Axilrod, Stephen H., 99, 197, 199, 200 Baer, Gunter D., 163, 181, 183, 184, 187, 206 balance-of-payments crisis, 201, 203, 211A Balassa–Samuelson effect, 73 Bank for International Settlements (BIS) Annual Reports, 28–31 bank managers’ role, 131–2 competitiveness, 29–31 Cross Report, 108–9 external imbalance, 29 fiscal imbalance, 28 housing market imbalance, 28–9 inflation differential, 29–31 investment bank’s structure, 134 misperception, commercial banks, 133–4 remuneration package, senior management, 134–5 static equilibrium advantages, 135–8 supervisor, 6, 188 Barbosa, Luciana, 13n 22, 32, 34n Barrell, R., 135 Bartels, B., 13n 23 Basel Committee of Banking Supervisors (BCBS), 95, 108 Basel framework II, 8, 189 III, 8, 31 on capital controls, 127, 176–7, 192–3 current, 82 Tier ratio, 113–15 Bear Stearns, 34, 90, 114, 192 Belgium current account balance, 185 government primary balance, 205 gross debt ratio, 204 net international investment position, 203 sovereign debt crisis, 145 ten-year government bond spread, 187 unemployment rate, 207 unit labour cost, 184 Benink, H., 13n 22 216 Index Bernoth, Kerstin, 32, 33, 34n 1, 34n Bijsma, Michiel, 51n 11 Blanchard, Dell’Ariccia, 9n 5, 10n 10, 14n 24 Blundell-Wignall, A., 82, 86n 8, 108, 194 Boone, P., 13n 24 Boorman, Jack, 50n 2, 50n 4–5, 50n 7, 51n 14–15, 51n 17 Borio, C., 110, 133 Bretton Woods system, 39, 145 Brunnermeier, M., 13n 24, 113 Bulow, J., 138 Camdessus, Michel, 39, 50n 2–3 Cannes Summit, 40 capital markets credit-rating agencies on, 196 credit risk, 93–4 euroareas banking systems, 95–6 macroprudential policy, 108 systemic risks, reduction, 94–5 Capital Requirements Directives, 8, 175 Carmassi, J., 84, 87n 13 Carmichael, J., 121 Cecchetti, Stephen, 51n 12 central bank Banco de Potugal, 13, 34n Bank of Canada, xv, 162n 2, 215 A2 Bank of England, xiii, 80, 87n 10, 200, 213 A2 Bank of France (Banque de France), xiii, 39, 213 A2 Bank of Japan, xiv, 214 A2 Deutsche Bundesbank, 34n 5, 35n European Central Bank (ECB), 4–5, 7, 20, 30, 49, 79–81, 95, 100–1, 104–6, 145–6, 153, 156–8, 164, 168–9, 177, 184, 188, 196–7, 199–200 Federal Reserve Bank of Atlanta, 14, 85n 217 Federal Reserve Bank of Dallas, 130 Federal Reserve Bank of Kansas City, 14 Federal Reseve Bank of New York, xiv, 214A Riksbank, xiv, 214A Checherita, Cristina, 12n 22, 32, 34n competitivenes, 3, Greece, 22, 25 Ireland, 22, 26 Italy, 22–3, 31 Portugal, 23, 26 Spain, 23–4, 26 conflict of interest, 13, 48, 109–10, 127, 136, 138, 151 Constancio, Vitor, 14n 24, 86n Contingent Convertibles (Co-Co), 138 Cooke Committee, 108 Costa, Sonia, 13n 22, 32, 34n The Country Banker (Rae), 132 Cour-Thimann, Philippine, 51n 13 creditor countries cross-border lending, 147 “debt brake”, 153 deflation, 161 exchange rate, 162 export market, 159 financial stability, 150 fiscal policy adjustment, 178–9, 201, 205–6, 208 private investment in, 155–6 solvency of major banks, 148 credit rating, 13n 23, 133, 153, 174, 176, 188, 195–6 Crockett, A., 13n 24, 50n 2, 109, 133, 198 currency union, 4, 10 n 11, 145–6, 161, 182, 202 Cyprus banking failures, 143 current account balance, 185 general government primary balance, 205 liquidity problem, 153 218 Index Cyprus – continued net international investment position, 203 restructuring of banks, 154, 160 supervisory mechanism, 81 ten-year government bond spread, 187 unemployment rate, 207 debt corporate, government, 3–4, 7–8, 32–3 household, 3, 7, 12n 19, 20 sovereign debt, 3, 8, 24, 27, 31, 43, 48, 145–7, 150, 152, 154, 156–7, 165, 168, 178–9, 184, 189, 201–3, 211A debtor countries austere policies, 149–50 exports in, 159 inflation, 161 need for fiscal deficit reductions, 205–6 non-OECD area, policy response, 152, 178 sovereign debt level, 156 structural reform, 149, 201, 206–8 De Grauwe, Paul, 146 de la Maisonneuve, C., 10n 14 Dell’Ariccia, G., 10n 10, 14n 24 Delors Committee, 163–4 Dodd–Frank Act (DFA), 94, 100, 103, 191 Dötz, Niko, 33, 35n economic and financial policies, 40, 174, 186 Efing, H., 13n 23 Egebo, T., 10n 14 Eickmeier, Sandra, 51n 19 emerging market economies (EMEs) capital controls, 109, 121, 123, 126–8 domestic monetary policies, 144 financial intermediation, 111 IMF’s role, 124–5 special problems, 121 structural reforms, 129 Englander, A.S., 10n 14 Equity Recourse Notes (ERN), 138 Erdogan, Burcu, 33, 34n Erixon, F., 12n 19 Estonia, 41, 203 euro-area crisis competitivness concern, 25–8 ECB policy operations, 100–1 international institutions observations, 15–28 limits of global and regional surveillance, 173–88; see also macroprudential policy; microprudential policy macroeconomic imbalances, national sentiments, 59 role of surveillance, 64–73 sovereign bond yield determinants, 32–4 vs sovereign debt crisis, 201–5 Euro-currency Standing Committee Report, 108 European Central Bank (ECB) capital rules for banks, 95, 145–6 common monetary policy, on housing market conditions, 20 on consumer price changes, 164 on euro area crisis, inflation rate, 5, 30 liquidity influences, 101 macroprudential policies, 197, 199–200 on market behaviour, 168–9, 188 policy making, 7, 49 regulatory role, 100, 104–6, 177, 184, 196 Single Supervisory Mechanism, 157–8 sovereign bond market, supporting, 153 supervisory authority, 79–81 Target2 system, 156 European Council, 41, 95 Index European Financial Stabilisation Mechanism (EFSF), 153 European fiscal stability treaty, 47, 49 European monetary union (EMU) budgetary policies, 163 determinants of sovereign bond yield, 32–3 fiscal policy, macroeconomic surveillance, 57, 59, 69, 71 European Stability Mechanism (ESM), 153, 156 Eurozone crisis “AAA” risk level, 94 alternative scenarios, 160–2 banking risk and sovereign risk, 95 “bank- sovereign nexus.”, 147 central elements, 143–5 collective vision, 149 economic and political challenges, 145–9 effective policy solutions, 149–52 excessive credit expansion, 144–5 external debts, 148 market confidence restoration, 155–60 policy decisions, shortcomings, 152–5 problems of Cyprus, 143 sovereign debt levels, 145–7 special character, 143 exchange rate policies capital controls and, 124–7, 129 consumer price changes and, 164 coordinating policies, 167 in EMEs, 120 Euro-zone crisis, 145–6, 202 financial market, impact on, 78 Germany, 73 Greece, 16 income convergence process, 184 Ireland, 17 Italy, 23 market signals, 163, 168 nominal adjustments, 153 219 Palais Royal Initiative, 39 role in global financial stability, 50 service obligation, creditor countries, 162 structural reforms, 144, 202 surveillance issue, 40, 46, 65, 174, 178 Sweden, 55–6 external imbalance Greece, 20–1 Ireland, 3, 21 Italy, 21 Portugal, 21, 27 Spain, 21–2 Fahlenbrach, R., 133 Federal Deposit Insurance Corporation (FDIC), 191–3 Federal Open Market Committee (FOMC), 103 The Federal Reserve, 54, 91, 100–6, 192–3 Feldstein, Martin, 58 financial markets surveillance policy design, 78 reliance on market processes, 82–5 supervisory arrangements, 79–82 Financial Policy Committee (FPC), 80, 200 financial regulation, 39, 62, 67, 88, 94, 101 Financial Sector Assessment Program reports, 109 Financial Stability Board, 95 Finland consumer price, 164 current account balance, 185 euro-area crisis, characters, 53 fiscal policies, 54 government primary balance, 205 national sentiment, 59 net international investment position, 203 structural deficit rule, 41 220 Index Finland – continued ten-year government bond spread, 187 unemployment rate, 207 fiscal balance France, 15 Germany, 28 Greece, 16, 28, 65 Ireland, 17–18 Italy, 18 Portugal, 18 Spain, 18 Fiscal Stability Treaty, 41, 47 Fisher, Christoph, 34, 35n Fraga, Arminio, 50n France current account balance, 185 fiscal balance, 15 government primary balance, 205 gross debt ratio, 204 house price boom, 29 inflation record, 23 net international investment position, 203 sovereign debt, 3, 146 Stability and Growth Pact (SGP) suspension, 41 structural reforms, 179, 208 surveillance issues, 65 ten-year government bond spread, 187 unemployment rate, 207 unit labour cost, 184 G20, 40, 48–9, 94, 174, 186, 195, 208 G8, 208 Gambacorta, Leonardo, 51n 19 Gasoliba, Carles A., 186 Gerlach, Stefan, 34n Germany burden sharing, 183 common monetary policy, 197 consumer price, 164 creation of euro, impact on, 93 current account balance, 185 “debt brake”, 153 distribution issues, 155 exchange rate policy, 73 external deficit, fiscal imbalance, 28 government primary balance, 205 gross debt ratio, 204 Hartz Reforms, 71, 73 housing market imbalance, 28–9 inflation, 23, 30 monetary independence, 53 national sentiments, 59 net international investment position, 203 political realm, 151–2 public debt, 32 reunification costs, 160 role of structural policies, service obligations, 161 sovereign bond yield, 32–3 Stability and Growth Pact (SGP) suspension, 41, 65 ten-year government bond spread, 187 unemployment rate, 207 unit labour cost, 3, 184 global crisis, 7, 24, 39, 64–5, 109, 120, 133, 124–5, 143, 146, 165, 180–1, 183, 202 gold standard, 6, 80 Goodhart, C.A.E., 13n 24, 84, 86n 7, 87n 12, 114, 131, 197, 198, 199, 200 Gravet, Isabelle, 50n Greece banking failures, 143, 154 convergence criteria, 41 current account balance, 185 debt problems, 31 ECB’s support package, 81–2 exchange rate policy, 16 external imbalance, 20–1 fiscal imbalance, 16, 28, 65 government primary balance, 205 inflation, 22, 25, 164 mismanagement of public finance, 56 Index net international investment position, 203 policy response, 152 rating agencies on, 93–4 SGP limit, 15 sovereign bond spread, 33–4, 187 sovereign debt crisis, 3, 146–7 surveillance failures, 70 unemployment rate, 207 unit labour cost, 27, 184 GSIFIs, 112, 114, 117, 119, 189–91 Guillermo de la Dehesa, 50 Gyohten, Toyoo, 50n Haldane, A., 14n 24, 87n 10 Hans Werner Sinn, 51n 11 Hau, H., 13n 23 Haugh, David, 13n 22, 31n Hellwig, M.F., 135 Hoeller, Giorno, 10n 14 Hoenig, T., 87n 10 housing market imbalance Austria, 28 Germany, 28–9 Ireland, 18–19, 24 Spain, 20, 28–9 United Kingdom, 28 Hu, Xiolan, 50n Huizinga, H., 13n 23 Icard, André, 39, 50n 2, 50n 4–5, 64, 65, 66, 67, 69, 70, 71, 180, 182, 183, 184, 185, 186, 187 imbalance current account, 12n 11, 24, 31n 2, 159, 164, 166 external, 7, 15, 20–2, 29, 45, 165, 182 fiscal, 28, 41–2, 65n 2, 211n France, 23 Germany, 23, 30 Greece, 22, 25, 164 housing market, 15, 19–20, 28 inflation, 10 intraregional, xi, 209–10A Ireland, 22, 25–7 221 Italy, 22–3 macroeconomic imbalance procedure (MIP), 9n 2, 11n 16, 57 Portugal, 22–3, 25 saving/investment imbalance, 211A Spain, 23–5 IMF’s World Economic Outlook (WEO), 4, 20, 22, 24–5 inflation differential, 8, 10 n13, 15, 29–30 Greece, 22, 25, 31n Ireland, 22 Italy, 22–3 Portugal, 23 Spain, 23–4 inflation target, 10n 10, 29, 56, 150 4%, 10n 10 International Monetary and Financial Committee, 49 International Monetary Fund (IMF) articles of agreement, 40, 46 on asset prices, 19 binding norms, 47 competitiveness, 29–31 crisis prevention policies, 44–6 current public debt rule, 41 double surveillance in euro-areas, 46 external imbalance, 20, 28–9 fiscal imbalance, 25, 28 general surveillance, 4–5, global imbalance, analysis, 20 housing market imbalance, 4, 28–9 on inflation differential, 22, 29–31 institutional framework, 48 observation from 2009, 24 observations until late 2008, 15–16 sovereign debt market, 24 surveillance, voting rights, 46 intra-euro-area payment system, 5, 22, 25, 168 222 Index Ireland bank assets, 157 current account balance, 21, 185 debt bubbles, 93–4 Delors Committee, 164 euro-area crisis, character, 53–4 exchange rate policy, 17 external imbalance, 3, 21 fiscal balance, 17–18 government primary balance, 205 gross debt ratio, 204 housing market imbalance, 18–19, 24 inflation, 22, 25–7 net international investment position, 203 policy management, 197 public debt, 42 ten-year government bond spread, 187 unemployment rate, 207 unit labour cost, 3, 6, 184 Italy current account balance, 185 demand pattern, 30 exchange rate policy, 23 external deficit, 27 financial crisis (2011), fiscal deficit, 15, 18, 28 funding problems, 148 government primary balance, 205 gross debt ratio, 204 inflation differential, 22–3 mismanagement of public finance, 56 net international investment position, 203 OECD’s concern, policy response, 152 public debt and GDP ratio, 41 sovereign debt, 145 ten-year government bond spread, 187 trade deficits, 146 unemployment rate, 207 unit labour cost, 25, 184 James, Harold, 159 Ji, Yeumi, 162n Johnson, S., 13n 24 Johnston, Donald J., 185, 195 Kashyap, A.K., 14n 24, 86n Klemperer, P., 138 Koehler, Horts, 50n Koromzay, Val, 64, 182, 183 Krueger, Anne O., 51n 16 Lamfalussy, Alexandre, 39, 50n 2, 108 Large, A., 86n Lax fiscal policy, 165 Lehman Brothers, 32, 83, 89–90, 114, 146, 192 Leigh, D., 9n Lukkenen, Jasper, 51n 11 Luxembourg, 41 Maastricht Treaty, 8, 41–3, 163–4, 166, 174, 181, 184 macroeconomic surveillance, 44, 48, 52, 56–7, 60, 71 macroprudential policies appropriate tools, requirements, 111–13 assignment issues, 113–17 borrowing constraints, 200–1 definition, 109 DTD model, 117–20 ECB’s authority, 199–200 EME capital controls, 120–9 monetary and regulatory aspects, 197–9 national central banks role, 199–200 systemic stability, implications, 110–13 targets and instruments governance, 120 Malta, 203 Marsh, David, 152 Marshall Aid, 78 Merler, Silvia, 50n Index Michalski, Wolfgang, 207 Micossi, S., 84, 87n 13 microprudential policies Basel rules, 113 prevention strategies, financial crisis, 192–5 regulatory failures, 188–92 systemic risk reduction, 88–92 Miles, D., 135 Minsky, H.P., 133 monetary policy, x–xiii, 5–6, 10n 13, n 14, 20, 28–30, 54–6, 60, 95, 99–107, 110, 114, 117–19, 121, 123–9, 163, 165–6, 173–5, 178, 183, 197–8, 200, 209–11A 1, 213 A2 moral hazard, x–xi, 77, 89–90, 151, 176, 192 Murphy’s Law, 149 The Netherlands current account balance, 185 “debt brake” , 153 economic policies, 59 government’s primary balance, 205 gross debt ratio, 204 house price booms, 29 net international investment position, 203 ten-year government bond spread, 187 unemployment rate, 207 unit labour costs, 184 Nickel, Christiane, 12n 22, 32 no bail-out clause, 8, 44–5, 169, 175, 188 OECD’s Economic Outlook (EO) on fiscal and structural policies Greece, 16 Ireland, 17–18 Italy, 18 Portugal, 18–19 Spain, 19 Ollivaud, Patrice, 13n 22, 31n 223 Organisation for Economic Co-operation and Development (OECD) country surveys, 71 distribution of Marshall Aid, 78 financial crisis, global surveillance, 180 macroeconomic surveillance, 71–2 macroprudential policy, 128, 198 microprudential control, 195 observations until 2008, 15–25 panel regression study, 126 on preventive action, 181 probit-regression approach, 124–5 surveillance documents, 5–8 on systemic riskiness of banks, 114–19 on unit labour cost, 25–8 on US current-account deficit, 68 Ortiz, Guillermo, 50n Ostry, J.D., 124 Padoa-Schioppa, Tommaso, 39, 50n 1–2 Pagrotsky, Leif, 52, 64, 66, 67, 69, 70, 71, 181, 182, 183, 186, 187 Palais Royal Initiative, 39, 41–5, 49 Panetta, F., 14n 24 Paulson, Hank, 88 Perotti, Enrico, 87n 12 Persaud, A.D., 13n 24 Pisani-Ferry, Jean, 4, 9n 4, 9n 8, 51n 18 political economy issues, x, 10n 10, 11–12, 174, 181, 207, 209, 211A Portugal current account balance, 21, 185 external imbalance, 21, 29 financial crisis 2011, fiscal policy, 18–19, 54 foreign credit, 146 government’s primary balance, 205 gross debt ratio, 204 inflation, 22–3, 25 224 Index Portugal – continued net international investment position, 203 sovereign debt, 157 ten-year government bond spread, 187 unemployment rate, 207 unit labour cost, 26, 184 Price, Robert W.R., 173, 180 private-sector debt, 8, 43, 146, 167, 185, 195 quantitative benchmarks, 40, 47, 174, 186 Rabanal, P., 63n Rae, G., 132 Ramos, Maria, 50n Raymond, Robert, 203, 205, 208 Reddy, Venugopal, 50n regulatory policies, xi, 17, 67, 99–106, 177, 200 Reinhart, Carmen M., 146 Rogoff, Kenneth S., 146 Roulet, C., 87n 9, 108 Sarkozy, Nicolas, 40 Schmitt-Grohé, S., 9n Schuknecht, Ludger, 32, 33, 34n Schulz, Alexander, 34n Sgherri, Silvia, 33, 34n Shafer, Jeffrey R., 65, 88, 191, 192, 193, 194, 195 Sheet, Nathan, 50n Shigehara, K., 3, 9n 3, 11n 15, 12n 17, 86n 1, 93, 184, 185, 189, 195, 202, 205, 206, 207, 208 single monetary policy, 5, 163, 165, 175 Sirou, Carol, 93, 195 Slovakia, 41, 203, 205 Slovenia current account balance, 185 Eurozone crisis, 146 government’s primary balance, 205 gross debt ratio, 41, 204 net international investment position, 203 ten-year government bond spread, 187 Sockin, Robert, 50n soft surveillance, 70 Soros, George, 161 sovereign bond spreads, 12–13n 22, 24, 33, 35n sovereign bond yield determinants, 32–4 sovereign debt crisis vs balance of payments crisis, 152 cross-border effects, 27 different levels of, 145 euro-area concept, 179, 201–5 vs Eurozone crisis, 146–7, 150 in Greece, 31, 157, 165 macroeconomic conditions, 24, 48 in peripheral countries, 154, 156 public debt rule, 43, 178 zero-risk weight, 8, 168, 184, 189 see also individual countries Spain banking rules, 54 competitiveness, 34 current account balance, 21–2, 185 debt bubbles, 93 Delors Committee, 164 euro-area crisis, characters, 53 export performance, 26 external imbalance, 21–2 fiscal policy, 19, 28, 67 government primary balance, 205 gross debt ratio, 204 housing market imbalance, 20, 28–9 inflation differential, 23–5 macroeconomic surveillance, 56 national sentiments, 59 net international investment position, 203 Index policy response, 152, 197 public debt rule, 42 solvency of major banks, 146–8 sovereign debt, 3, 146 structural reforms, 27 ten-year government bond spread, 187 unemployment rate, 207 unit labour cost, 3, 6, 184 Stability and Growth Pact (SGP), 15–16, 19, 28, 41–2, 47, 164 Standard &Poor’s, xiv, 13n 23, 93–6 Stark, Jorgen, 86n structural reforms Cyprus, 146 debtor countries, 206–8 in EMEs, 129 in Europe, 144 Eurozone area, 159–60 at global level, 144 Greece, 146 Italy, 146 macroeconomic implications, 202 OECD on, 27 Portugal, 18, 21–3, 146 Slovenia, 146 Spain, 23–4 unpopular, 179 structural surveillance, 175, 184–5, 202 Stulz, R.M., 133 surveillance bilateral surveillance, 12n 18, 47 frequency of surveillance, 11n 15 global surveillance, x, 45–6, 180, 209–10A macroeconomic surveillance, 4, 11n 16, 44, 48, 52, 56–60, 71 multilateral surveillance, 11n 15, 12n 17, 40, 64–5, 68 regional surveillance, x, 4, 46, 63n 6, 173, 180–2, 209–10A structural surveillance, 175, 184–5, 202 supervisory policies, xi, 6, 198 225 surveillance failures (euro-area crisis) breaching of rules, 41–2 non-coercive surveillance, 71 political questions, 48–50 public debt rule inadequacies, 42–3 quality aspects, 46–8 regional and global coordination, 45–6 surveillance gaps, 43–5 Sweden, 53–6, 67 Thygesen, Niels C., 204, 206, 208n Trichet, Jean Claude, 45 Troubled Asset Relief Program (TARP) process, 199 Truman, Edwin, 50n Tsomocos, D., 86n Turner, David, 31n Turner, P., 9n 6, 120, 197, 199, 200 United Kingdom central bank liabilities, 117 current account balances, 185 euro-area crisis, 53 Financial Policy Committee (FPC), 80 government’s primary balance, 205 housing market imbalances, 28 net international investment, 203 public debt rule, 42 ten-year government bond spread, 187 unemployment rate, 207 unit labour cost, 184 Uribe, M., 9n USA credit crisis banking/financial regulation, 101–2 federal regulatory agencies, role, 99–101 Federal Reserve’s authority, 102–7 226 Index Van Rompuy, Herman, 95, 158 Vanston, Nicholas J., 180 Vardoulakis, A., 14n 24, 86n Volcker, Paul, 50n von Furstenberg, G.P., 138 von Hagen, Jürgen, 32, 33, 34n Weder di Mauro, B., 13n 23 White, W.R., 110, 133, 143, 162n 2, 201, 202, 203, 205 Wolff, Guntram, 9n 8, 34n zero-risk weight, 8, 189 Zoli, Edda, 33, 34n .. .The Limits of Surveillance and Financial Market Failure This page intentionally left blank The Limits of Surveillance and Financial Market Failure Lessons from the Euro- Area Crisis Edited... at the global level by the IMF and the OECD15 as well as at the regional level (within the frameworks of the euro area and the European Community in the case of the current crisis in Europe)16... Surveillance and Financial Market Failure: Some Fundamental Issues Arising from the Euro- Area Crisis Kumiharu Shigehara Part II Global and Regional Surveillance: Lessons from the Euro- Area Crisis André