International Conference on “Reforming the Financial System: Proposals, Constraints and New Directions” Muttukadu, Chennai, India, January 25-27, 2010.

Click for the Conference Report

Responses to the financial crisis were from the very beginning expected to take three directions:

(i) preventing systemic failure in the financial sector by rescuing fragile institutions, especially when they are large and interconnected;

(ii) stalling the real economy downturn and ensuring a recovery; and

(iii) reforming the financial system to prevent the future occurrence of similar or related crisis.

Few would disagree that much has been done on the first two fronts, even though there could be differences on the adequacy and appropriateness of the measures adopted in different contexts. As far as the third of these areas is concerned, while there has been a spate of proposals advocating reform in different areas at the national and global levels, agreement on the appropriate mix of policies has been limited and progress with implementation has been tardy to say the least. Moreover, despite a renewed interest in the work of Minsky and others when it comes to “explaining” the crisis, there is little effort to turn to the regulatory solutions implicitly or explicitly advanced by them.

The proposed conference would attempt to delineate the proposals that have been made in different quarters (Turner Review, Geithner Plan, the Stiglitz Commission Report, etc), assess their adequacy, examine the constraints that could be faced when attempting to implement them, and advocate additional or alternative measures that may be needed. It would also analyse what actually has been done in the name of reforming the financial sector and improving the regulatory framework in particular countries and what the real economy implications of those actions are. When doing so the emphasis would be on providing a developing country perspective, since internal financial liberalisation in most emerging markets (as opposed to liberalisation of the capital account, for example) has transformed their financial structures so that they resemble those typical of the Anglo-Saxon financial framework as it evolved since the 1980s. However, given the development context and the regulatory framework in these countries, their requirements could be very different, necessitating post-crisis reform that could be substantially different from what is required or feasible in the developed countries. The discussion would examine the kind of financial reform and regulatory structure that would be appropriate for these countries and identify ways through which these proposals can be channelled into the policy process.

The conference will follow the conventional framework of paper presentations and panel discussions. While the intent is not to tie down presenters, panellists and discussants, it is proposed that the discussions should, inter alia, cover the following broad themes:

(i) The Nature and Scope of Banking Reform:
Questions that would be taken up could include: Should we restore (and if so, to what degree) elements of earlier framework of structural regulation (such as were implicit in the Glass-Steagall Act in the US) rather than the broadly self-regulatory framework that took its place, involving capital adequacy requirements, disclosure norms, accounting standards and behavioural guidelines? If so, what form should such regulation take? Is interest rate regulation needed? Must banks be restricted in terms of the nature of their business, sectors of activity, and levels of exposure? Is it necessary to limit the size and interconnectedness of banking institutions? How can this be done effectively? How can the procyclical aspects of prudential regulation be reduced, and how can such prudential regulation be made more relevant to the specific circumstances of developing countries?

(ii) Regulating the Non-Bank Financial Sector:
Must we and if so how do we regulate and limit the size of the so-called “shadow banking” system? Should non-deposit taking institutions such as hedge funds and private equity firms be regulated at all or only lightly regulated? Should there be adequacy requirements and ceilings on leverage that should apply to these institutions? Should there be disclosure requirements with penalties for violation? Should there be restrictions on cross-sector operations such as financial firms investing in stock, real estate, derivatives and commodity markets? Is there need for specific regulation of commodity futures markets?

(iii) Stock Markets:
What guidelines must apply with regard to reporting requirements for listed companies and disclosure requirements for investors and brokers? Should there be measures such as transaction taxes that limit short-term speculative trading? Should there be controls on foreign investment in equity markets?

(iv) Financial Instruments:
Should there be controls on the kinds of financial instruments that different kinds of financial institutions can create? Once permitted, can securitisation be regulated and if so how? Is it possible (and if so how is it possible) to ensure that financial instruments are simple, transparent and safe? Do we need a system of rating instruments and if so what should be the institutional structure of such a system?

(iv) Global Governance:
Do we need global guidelines given the differential structures and levels of development of markets and countries? How do we discourage regulatory arbitrage? What institutions are appropriate locations to decide on global guidelines and what should the decision-making process in those institutions be?

(v) The Macro-Prudential Framework:

What kinds of guidelines, if any, can be formulated to prevent monetary and fiscal policy from encouraging speculative financial activity? Should/can there be consensus on the responses of governments and central banks to asset price bubbles in stock and real estate markets? Do developing countries need to regulate capital flows to ensure environments that permit appropriate financial regulation? What are the different capital management techniques that are possible?

These and other questions would be discussed over 8 sessions.

Background papers are available in the section Re-Regulating Finance.

25 January 

Session 1: 9-11 am

Is it Possible to Regulate Finance Now?

– Inherent instabilities and cycles in financial markets
– Path dependence and limits to reversal of financial structures
– Political economy issues

Introduction and Chair: C.P. Chandrasekhar

Lead Speakers: Jan Kregel (Note) , Abhijit Sen, Seeraj Mohammad (Presentation), Leonardo Burlamaqui (Presentation)

Session 2: 11.30 am to 1.00 pm 

Banking Regulation: Glass-Steagall vs. Basel norms

– Limiting bank competition
– Wall between banking and non-bank activities
– Exposure limits
– Size and the prevention of systemic risk

Chair: Venkatesh Athreya

Lead Speakers: Y. V. Reddy, Arturo O’Connell (Note), C.P. Chandrasekhar (Note)

Sesssion 3: 4.00 – 6.30 pm 

Finance and the Real Economy – 1

– Implications of easy credit and low interest rates as strategy for inducing    growth
– Macro prudential regulation
– Can global surveillance work?

Chair: Carlo Panico (Note)

Lead Speakers: Prabhat Patnaik (Note), Saul Keifman (Presentation) (Note), Rainer Kattel (Note) (Presentation), Gabriel Palma

26 January 

Session 1: 9-11 am 

Finance and the Real Economy – 2

– Inflation potential of future growth
– Crisis and financial speculation in energy and commodity markets
– Trade-finance linkages
– Implications for developing countries

Chair: Sushil Khanna

Lead Speakers: Terry McKinley (Presentation), Rizal Ramli, Anisuzzaman Chowdhury (Presentation) (Note), Jayati Ghosh (Presentation)

Session 2: 11.30 am to 1.00 pm

The Proliferation of Finance

– Stock and other asset markets
– Controlling ”innovation”
– Does shadow banking have a role
– Regulating institutions like hedge funds, private equity firms, insurance    companies
– Dealing with ”unsafe” instruments like derivatives, CDOs, etc.

Chair: S.K. Rao

Lead Speakers: Gerald Epstein (Presentation), Mario Tonveronachi (Note), D. M Nachane (Presentation)

Sesssion 3: 4.00 – 6.30 pm 

Global Imbalances

– Are these the result of mercantilist strategies or flow of finance to emerging    markets?
– The role of exchange rates

Chair: Rammanohar Reddy

Lead Speakers: Dmitri Papadimitriou (Presentation), Andrew Fischer (Presentation), Rohit (Note), K. S. Jomo (Presentation) 

27 January 

Session 1: 9-11 am 

Restructuring Finance for Development

– Internal financial regulations
– Capital controls
– Public banking

Chair: Rolph van der Hoeven

Lead Speakers: Ilene Grabel (Note), Filomeno Sta Anna (Presentation), Sudip Chaudhuri (Presentation),

Session 2: 11.30 am to 1.30 pm

Freedom from Finance: Rethinking development strategy 

Chair: Nirmal Chandra

Lead Speakers: Luis Bresser Pereira, Amiya Bagchi (Note), Chang Kyung-Sup (Presentation), Surajit Mazumdar