GLOBAL ECONOMICS
Patrick Grady
November 16, 2011
This book, which contains the edited papers presented to the 2010 Banking Law Symposium on Managing Systemic Risk held at Warwick University on April 7-9, 2010, couldn’t be a more timely contribution to the ongoing debate on the continually evolving global financial crisis, which, incidentally, has moved to a new phase with developments in Greece and Italy now threatening to torpedo the Eurozone.
This volume follows up on the 2009 Warwick symposium that resulted in the publication last year of Financial Crisis, Management and Bank Resolution (London: Informa Law, 2010). And yet to come is a volume on the 2011 banking law symposium also on the financial crisis held in October at the OECD.
Its papers are multi-disciplinary and focus on the financial crisis from the economic, financial, banking, and legal perspectives of a very distinguished roster of contributors spanning the required disciplines. The volume includes a foreword by Charles Enoch, Deputy Director of the IMF, and a preface by the three editors that provide excellent overviews of the individual papers and introductions to the most important topics raised.
There is obviously not sufficient space to comment on all 25 chapters. Suffice it to say that they cover a wide range of issues including systemic risk, sovereign debt, the problem of “Too-Big-To-Fail,” cross border issues, prudential regulation, and country case studies.
The only major institutions playing a key role in the crisis that do not have a dedicated chapter in the volume are credit rating agencies. Other analysts have argued that their failure to properly assess the risk of mortgage-backed securities was an important cause of the crisis, which can’t be ignored.
There is also no chapter devoted to derivatives such as Credit Default Swaps, which were created to help manage risk, but ended up becoming such a large systemic risk in their own right that they would have blown up the system if the U.S. Government hadn’t bailed out AIG.
There were many chapters in the volume, which I found to be particularly noteworthy. The first two were those by Richard J. Rosen on investor behaviour before the crisis and by Jack Selody on the nature of systemic risk. Both are very clearly written and dealt with fundamental issues of how the participants in financial markets behave and deal with risk. It is necessary to understand this before tackling the role of financial institutions and the legal and regulatory framework.
As a Canadian, I also must mention the two articles (one by Jean Roy, Rima Turk-Ariss and Yenni Redjah and the other by John Raymond LaBrosse and James F. McCollum) that provide very good explanations of why the Canadian financial system was able to weather the financial storm so well compared to other countries. In short, the Canadian mortgage market was based on government insurance and did not embrace sub-prime mortgages. The Canadian banking system, which was very well regulated including limits on leverage, remained strong right through the crisis. LaBrosse and McCollum also offer some suggestions for improvement, most notably a national securities regulator, and a Canadian Financial Stability Board bringing the housing agency and provincial securities regulators formally into the oversight function.
Other chapters worthy of special note are: John Snape’s critical review of the U.K.’s proposal for a bank levy; and Arnor Sighvatsson and Gunnar Gunnarson’s clinical dissection of the financial disaster in Iceland. With the benefit of hindsight, it is hard to understand how a country as economically successful as Iceland could allow its three major banks to grow to ten times the size of its GDP exposing it so recklessly to external shocks.
Appropriately, given the key role of the United States in precipitating and responding to the crisis, the volume also has two very good papers dealing with American issues. The first by Gillian G.H Garcia offers a critical assessment of the controversial TARP program, and the second by Dalvinder Singh on the structure of bank regulation and the Dodd-Frank Act, which does not come across as a very satisfactory response to the problems revealed by the crisis.
And there are two very informative papers considering the framework for capital and liquidity regulation provided by the Basel Committee on Banking Supervision by George A. Walker and Imad Moosa. Readers will not take much comfort from the many weakness and gaps identified in the pre-crisis structure of regulation by the authors and even less from the inadequacy of the Basel III rules which, according to Moosa, have been watered down in the face of resistance from banks and are only being phased in over the 2013 to 2019 period. And this is before the recent Eurozone crisis beginning in Greece which will no doubt further set back efforts to strengthen the capital base of European banks.
This brings us to the paper on the Greek Crisis by Ioannis Kokkoris, Rodrigo Olivares-Caminal and Kiriakos Papadakis, which provides useful background reading for those trying to make sense of efforts to bail out Greece and to keep it in the Eurozone. The question they raise as to whether it a Greek tragedy or a drama is still to be answered.
This book is essential reading for those seeking a better understanding of the institutions, policies, legal framework and economic forces shaping the financial crisis, which unfortunately is still far from having completely run its course and which makes the book all the more relevant.