LAWRENCE — Even as the economic aftershocks from the global financial crisis are still being felt, economists and regulators around the world have been hard at work trying to better understand it. In July 2012, the KU School of Business—in partnership with the Dutch Central Bank, the European Banking Center, and the Journal of Money, Credit and Banking—brought together experts from Europe, Asia and North America to share their views on "Post-Crisis Banking."
Held at the Dutch Central Bank in Amsterdam, the conference featured new research and informed opinion on the genesis of the financial crisis, its impact on the supply of financial services and economic activity, and policy changes that might reduce the chances of similar crises occurring in the future.
Eric Rosengren, President of the Federal Reserve Bank of Boston, delivered the conference keynote address. Mr. Rosengren argued that some of the most crucial pieces of our financial infrastructure are fragile and crisis-prone, because they currently hold no equity capital buffers against losses. US money market funds, which proved to be a weak link during the financial crisis, are one prominent example: in order to prevent investor runs and further supply disruptions in short-term credit markets, regulators had to prop up money market funds with taxpayer guarantees. As proposed by Rosengren, requiring these funds to hold even small capital reserves would go a long way to stabilizing the short-term credit sector during future economic downturns. Moreover, removing the implicit bailout subsidy would also help stabilize commercial banks by channeling short-term funds back into bank deposits.
The conference policy panel featured three luminaries in bank research and regulation: Arnoud Boot from the University of Amsterdam, Stephen Cecchetti from the Bank for International Settlements in Basel, Switzerland, and Mark Flannery from the University of Florida. While each of the panelists had their own focus, all three once again stressed the necessity of requiring and maintaining high levels of equity capital at banks and other financial institutions. A lively discussion among the panelists and other conference attendees followed, touching on a number of contentious financial regulatory issues.
But the core of the conference was the new research presented and formally evaluated by economists from universities and government around the world. The agenda included eleven new studies attempting to understand the financial crisis and, by doing so, help chart a better regulatory course for the future: Should we have bailed out banks that took large losses by investing in bad sovereign debt? Should loan securitizations be redesigned to reduce banks' exposures to default risk? Is there any economic justification for the large size of the world's leading banking companies? Has the expansion of cross-border lending reduced the stability of business credit during financial downturns? Did incentive-laden contracts for bank executives lead banks to take increased risk? Can bank regulators use bank capital rules to prevent excess credit expansion during booms and hence smooth the business cycle? By focusing our attention so strongly on bank capital, are we paying too little attention to bank liquidity, which was the immediate cause of most large bank failures during the crisis? Together, these studies touched on a large portion of the lessons we need to learn in order to limit the damage caused by future financial downturns.
The papers and speeches presented at the conference will be published in a future issue of the Journal of Money, Credit and Banking, to be edited by the three conference co-chairs: Thorsten Beck of the EBC, Jakob de Haan of the Dutch Central Bank, and Robert DeYoung of the University of Kansas.