29-30 January 2015: Conference on 'Macroprudential Regulation: from theory to implementation' in Amsterdam, The Netherlands

On 29th and 30th January 2015 leading academics and policy makers joined the conference on Macroprudential Regulation ‘From Theory to Implementation’ in Amsterdam. The joint conference organized by the European Banking Center (EBC) in conjunction with the De Nederlandsche Bank (DNB) and the Journal of Financial Stability took place at the venue of the DNB.

conference 29-30 January 2015

Academics and policy makers were welcomed by Job Swank, the Executive Board Member responsible for Financial Stability at De Nederlandsche Bank, and Wolf Wagner, the Chair of the European Banking Center at Tilburg University, who underlined the importance of macroprudential regulation. The program included the presentation of eleven papers with their corresponding discussions and enriching comments from the audience. The aim of the cutting-edge research findings at the conference was to underpin the case for implementing macroprudential elements in regulation of the financial system.

On the first day, with a systemic risk setting in mind, the first speaker Di Gong (Tilburg University) introduced systemic risk-taking as evidence from the pricing of syndicated loans. His research brings new insights about the too-many-to-fail and moral hazard issues. He  suggested policy measures focused on less correlated and small banks, as these are more aggressive in systemic risk-taking.

Maarten van Oordt (DNB) contributed to the systemic risk picture with his talk about systemic risk and bank business models. He drew attention to the fact that policy measures require a careful balance between micro- and macroprudential objectives of regulation as the implementation of a single policy might have different effects in individual and systemic risk.

From the bank risk perspective, Taylor Begley (London Business School) addressed the strategic under-reporting of banks as they have both incentives and ability to reduce their capital requirements. Later, a proper risk measure is critical for the stability of individual financial institutions, since under-reporting has implications for the risk assessment of the entire system.

conference 29-30 January 2015

The systemic risk session ended with Stephanie Chan (University of Amsterdam). Stephanie presented an interesting theoretical model on CoCos (contingent convertible debt), contagion and systemic risk. The paper led to a refreshing discussion by Benjamin Kay (US Department of Treasury) on CoCos and their possible systemic risk implications, and intriguing questions from the audience.

The second session placed the spotlight on macroprudential policies. Stijn Claessens (IMF) showed evidence on the effectiveness of macroprudential tools by analyzing a new database. He concluded that, even though there is a positive effect of the implementation of macroprudential policies, more research is required to calibrate them.

Olivier Loisel (CREST, ENSAE), in a theoretical model, studied optimal monetary and prudential policies from a normative perspective. He found that a clear goal (financial stability) with a clear instrument (capital requirements) can lead to an optimal Ramsey allocation, showing that the integration of the financial sector in macroeconomic modeling is gaining traction.

conference 29-30 January 2015

The second day was opened by a plenary talk delivered by John Geanakoplos (Yale) who analyzed the effect of financial innovation on investment. He provided the participants with a view on collateral, which differs strongly from the traditional Bernanke-Gertler or Kiyotaki-Moore perspectives. John explained how the introduction of collateral requirements may lead to over-investment in a simple Arrow-Debreu economy. The result is driven by the extra incentives to invest that arise if the investment good can be also used as collateral. These insights is also suited for the analysis of CDS, which in turn lead to under-investment as risk averse agents will resort to CDS to hedge their risks.

This thought-provoking speech was followed by a session on financial regulation. First, Frederic Malherbe made an argument in favor of counter-cyclical capital requirements, based on a simple OLG model with banks.

The next paper in this session triggered a discussion on the desired level of complexity in financial regulation. Tobias Neumann presented an interdisciplinary project showing that simple rules may out-perform more complex approaches in the analysis of systems with uncertainty. This analysis received a critical but supportive discussion, and generated quite a stir throughout the audience.

The session ended with an interesting model of shadow banking. Stephan Luck (joint work with Paul Schempp) discussed an intergenerational banking model, in which the size of the shadow banking industry has an impact on financial stability. An unregulated financial sector that is large enough (in comparison to the regulated one) may cause a bank run and even lead to an economy wide banking crisis.

The conference was already the fourth the EBC and the DNB jointly organized, and based on the positive experiences on both sides we might expect future events to follow. Selected papers from the conference will be published in a special issue of the Journal of Financial Stability.