Papers by Avinash Persaud
Social Science Research Network, Feb 29, 2008
We observe that financial regulation is ever-growing, with the latest area to experience increase... more We observe that financial regulation is ever-growing, with the latest area to experience increased supervisory attention being pensions. Yet this has not made the financial world or consumers safer, and for pensions in particular there are unexpected and undesired consequences. We explore the current policy approach to supervision, which is 'bottom up', i.e. assessment and regulation of individual institutions, with the aim ofmaking the financial system safe by making each institution safe. We show that this is both damaging (because it stifles innovation) and does not work (because risk will always be squeezed from the regulated institutions to the less regulated and less seen). Instead, we advocate a 'top-down' approach, which focuses on making the system safe first. We conclude that once you have made systems safe, detailed supervision of individual institutions is less necessary, thus reducing the burden of supervision. We believe that this approach will lead to a more suitable and diverse treatment of different risks that will increase both systemic and consumer safety. 'If you have ten thousand regulations you destroy all respect for the law', Winston Churchill (1931). 'The ultimate result of shielding men from the effects of folly is to fill the world with fools', Herbert Spencer (1891). Copyright 2006, Oxford University Press.
This eBook collects some of the best Vox columns on financial regulations, starting with the fund... more This eBook collects some of the best Vox columns on financial regulations, starting with the fundamentals of financial regulations, moving on to bank capital and the Basel regulations, and finishing with the wider considerations of the regulatory agenda and the political dimension. Collecting columns from over the past six years, this eBook maps the evolution of leading thought on banking regulation.
* What Is Unique About Finance that Requires Separate Regulation? * Why Do We Regulate Financial ... more * What Is Unique About Finance that Requires Separate Regulation? * Why Do We Regulate Financial Firms Differently * Financial Crashes and the Implications for Financial Regulation * The Visible Hand in Financial Regulation: A Cautious Agenda * The Systemic Risk Regulator * Regulating Instruments of Behavior * The Locus of Financial Regulation * Conclusion: Putting It All Together
The international financial system is failing us. At times, financial markets disappear, financia... more The international financial system is failing us. At times, financial markets disappear, financial contagion sweeps away exchange rate arrangements that are fundamentally supported, and currency crises have real, worldwide economic impact. Disturbingly, these episodes appear more frequent and more ferocious than before. The solution is not to curtail portfolio flows, which have the potential to deliver scarce investment to developing countries, or for the International Monetary Fund (IMF) to do more of the same, just more quickly and with more money. We must try to work with the financial markets and not against them. Countries that meet simple, transparent criteria should be eligible to draw support from a superfund of pooled foreign exchange reserves whenever they choose. Currency crashes should be selectively avoided, not ameliorated afterwards. Countries that do not meet the criteria should be offered technical assistance and development support, but not bailouts. The moral hazard associated with bailouts is already acting as an obstacle to reform in a number of economies. UNDER STRAIN: THE INTERNATIONAL FINANCIAL SYSTEM The international financial system is failing its constituents: There are periods of severe dislocation when some financial markets disappear, financial difficulty in one country sweeps contagiously across regions, and the resulting financial turmoil impairs economic growth, worldwide. These features of the international financial system were visible during the Asian currency turmoil, triggered by a collapse of the Thai baht in July 1997. In the midst of the Asian currency crisis, the currency options
SSRN Electronic Journal, 2015
Policy Brief compliance. The EU subsidiary of a non-EU insurance group like MetLife, Canada Life,... more Policy Brief compliance. The EU subsidiary of a non-EU insurance group like MetLife, Canada Life, Travellers, and Tokio Marine will also have to comply with Solvency II as stand-alone entities. 2 US insurers with European subsidiaries or European parents are angry about what they see as an additional, unnecessary, and inconsistent level of regulation. As a result, the EU Commission, the US National Association of Insurance Commissioners (NAIC), and others are engaged in a discussion to ensure equivalency between US and European regulation. Perhaps because the European Union is the single largest insurance jurisdiction, the direction of travel has been for US state regulators and other non-EU jurisdictions to change their regulations to be more in line with Solvency II. This Policy Brief argues that the capital requirements of Solvency II, while not particularly onerous at an aggregate level, will impose an asset allocation on life insurers and pension funds that does not serve the interests of consumers, the financial system, or the economy. Apart from the Solvency II initiative, the Financial Stability Board (FSB)-the international body of finance ministers, central bankers, and other agencies established in 2009 after the global financial crisis-is seeking to set up an international standard for the regulation of what it considers to be systemically important insurance companies. 3 The move was prompted in part by the failure of AIG in September 2008. 2. Early on there were concerns that the entire group of a non-EU insurance company with an EU subsidiary would have to comply. It does not. Non-EU groups will complain that having the EU subsidiary comply with Solvency II as a stand-alone entity, with its own capital adequacy requirement, reduces the scope for its customers to benefit from efficiencies in capital management.
SSRN Electronic Journal, 2014
Policy Brief matic bail-in of creditors of institutions that are still going concerns. 2 This mec... more Policy Brief matic bail-in of creditors of institutions that are still going concerns. 2 This mechanism and its attendant instruments are the focus of this Policy Brief. The Financial Stability Board and national regulatorsincluding the US Federal Reserve Board and the European Central Bank (ECB)-are formalizing rules requiring the 30 globally systemically important banks (GSIBs) to hold an additional layer of capital. Estimates range from 4 to 7 percent of risk-weighted capital or approximately $1.2 trillion globally or $250 billion in the United States and more in Europe. A bank's losses would be met by this additional buffer first before the minimum capital adequacy level is touched. To put the size of this new buffer into context, between 2009 and 2012, the 16 largest US banks raised just $24 billion of new equity capital and the 35 largest banks in Europe raised only $23 billion. 3 But the proposal is that this additional layer of capital need not be in the form of equity or retained earnings. We may be witnessing a political tradeoff where bankers give in to the substantially higher overall capital requirements demanded by politicians if part of this additional capital is in instruments that, compared with issuing more equity, are cheaper 4 and do not dilute the bankers' control and pay in the good times. These bail-in securities, commonly known as cocos, 5 convert into equity once a bank's capital falls below a preannounced level. Even before the ink is dry on these proposals, banks have started to issue cocos and the market has quickly grown to a capitalization of $150 billion. The case for bail-in securities is that bailouts create "moral hazard," i.e., they encourage reckless lending by banks in the secure knowledge of a rescue if desperate times ensued. Bailouts also allow depositors, creditors, and investors to relax their monitoring of banks knowing that taxpayers will foot the bill if things fell apart. Many see both behaviors as critical in perpetu-2. See Basel Committee on Banking Supervision (2011) and Avgouleas, Goodhart, and Schoenmaker (2013). 3. Data are from the Bank for International Settlements.
SSRN Electronic Journal, 2015
Pre-HFT estimates of the intermediary proportion of turnover are around 20%-(see Demirguc-Kunt an... more Pre-HFT estimates of the intermediary proportion of turnover are around 20%-(see Demirguc-Kunt and Ross Levine, 1996) so 20/(100-37) = 32%.
Handbook of Safeguarding Global Financial Stability, 2013
For a long time, financial regulation was based on the premise that we can make the system safe b... more For a long time, financial regulation was based on the premise that we can make the system safe by ensuring that individual banks are safe. This is a fallacy of composition. In trying to make themselves safer, banks and other highly leveraged financial intermediaries can behave in ways that collectively undermine the system. A large element of systemic risks is centered around the economic cycle. However, making the system safe is not just about countercyclical measures – though they are vital – but also about better matching risk-taking to diverse risk-absorptive capacity.
International Affairs, 2010
If the G's are the world economy's steering committee, the step from G7 to G20 broadened the demo... more If the G's are the world economy's steering committee, the step from G7 to G20 broadened the democratic legitimacy of this committee. But it has also been associated with a shift in influence towards a group that share little else than economic power: they have diverse experiences, challenges, cultural perspectives and starting points. This is particularly the case in the field of financial regulation. Reflecting this, the action in financial regulation action across these countries in recent months-despite all the language of global regulation-is increasingly local. The prospect of the new global being quite local has dismayed "internationalists". But it need not. This paper challenges the dichotomy of more global versus more local. It argues that financial internationalism-greater cooperation by nations for the benefit of all-is better served by institutions that help to integrate diverse systems than those which try to enforce one-size-fits-all approach to very different countries. It is often forgotten that it was international banks that persuaded regulators of the benefit of global rules, applied by a single home country regulator, that tried to established a level playing field for banks. But the benefits accrued largely to the banks in the boom, and proved an avenue for contagion during the crash. Local regulation may prove a safer way to regulate financial systems, in particular by allowing regulation to be more responsive to national economic conditions and cycles. It is likely that a shift back to "host" from "home" country regulation will act as a drag on international capital flows. The instinct of economists is that the cost of this is uncertain, suspect and conditional-especially when compared to the attendant cost of financial crises. Host country regulation does not mean no role for international institutions, like the newly minted Financial Stability Board. It suggests a more nuanced role, potentially encompassing the policing of international market infrastructure, financial protectionism, information free-flow between regulators and a convergence of regulatory principles and a consolidation of regulatory instruments. An informed, and collegiate process of integrating different financial systems will be a more resilient system than one that tries to enforce a single rule book across inherently different countries.
SSRN Electronic Journal, 2001
Modern financial regulation has been about the spread of market-sensitive risk-management systems... more Modern financial regulation has been about the spread of market-sensitive risk-management systems for banks, the spill-over of this approach to other financial institutions and the retreat of regulatory ambition. There is evidence that these trends are leading to a more fragile financial system, more prone to concentration and ‘liquidity black holes’. The most glaring effects of these trends are felt in the pro-cyclicality and volatility of capital flows to risky markets. The root of the problem is that the liquidity of financial markets requires diversity, but all these trends are serving to reduce the diversity of behaviour of market participants.
This is the sixth in a series of policy briefs on the crisis—assessing the policy responses, shed... more This is the sixth in a series of policy briefs on the crisis—assessing the policy responses, shedding light on financial reforms currently under debate, and providing insights for emerging-market policy makers. Fixing Fundamental Market (and Regulatory) Failures This is not the first international banking crisis the world has seen. The previous ones occurred without credit default swaps, special investment vehicles, or even credit ratings. If crises keep repeating themselves, it seems reasonable to argue that policy makers need to carefully consider what they are doing and not just “double up ” by
Finanzas Y Desarrollo Publicacion Trimestral Del Fondo Monetario Internacional Y Del Banco Mundial, 2008
The Road to International Financial Stability: Are Key …, 2003
Following crises in Asia, Argentina and more recently the weakness in global equity markets after... more Following crises in Asia, Argentina and more recently the weakness in global equity markets after the US accounting scandals, there would appear to be a stronger case than ever for better standards regarding the disclosure and quality of information. Yet this assumption is based on the notion that these market failures are caused by the lack of information, and that improvement in the quality and dissemination of information will therefore help to avoid future crises. We shall consider a variety of recent crises to deduce the extent that they could have been prevented by better disclosure, or whether the warning signals were simply ignored as asset market bubbles developed. And we discover that, while, in general, stronger data standards will help market efficiency, it is questionable whether they are the panacea that is often assumed. Indeed, there are some forms of disclosure that might even increase financial instability.
In 2006 all ECB publications will feature a motif taken from the €5 banknote. This paper can be d... more In 2006 all ECB publications will feature a motif taken from the €5 banknote. This paper can be downloaded without charge from
In this paper, we assess the impact of the securi ties transaction tax (STT) introduced in France... more In this paper, we assess the impact of the securi ties transaction tax (STT) introduced in France in 2012 on market liquidity and volatilit y. To identify causality, we rely on a distinctive design of the tax, which is imposed on large French firms only, all listed on Euronext. This provides two reliable control groups (smaller French firms and foreign firms listed on Euronext) and allows us to use a differen ce-i -difference approach in order to isolate the impact of the tax from the other economic chang es that have occurred simultaneously. We find that the STT has reduced stock trading, but we find no significant effect on theoretically based measures of liquidity, such as price impact, and no significant effect on volatility. The results are robust whether we rely on different con trol groups (German stocks listed on the Deutsche Börse), different datasets (firm-level or aggregated data), different periods (from one to six months), or different methodologies (pro pensity score m...
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Papers by Avinash Persaud