26 November 2014
WP285 | Fixing Global Finance: Unfinished Business
Abstract
The 2008 financial crisis was hugely damaging. The focus of reform has been on increasing banks’ required capital. Together with the other measures taken, this makes a repetition of 2008 less likely. However, the crisis also taught us that financial markets do not work as well as we thought. Financial innovation has made the markets more volatile, short-term focused and more pro-cyclical. Not much has been done to address this issue. This paper suggests that the government-guaranteed banking sector should be separated much more clearly from the rest of the financial sector, which should be more explicitly identified as a risky sector. This separation would change the way the financial sector is managed (with conservative management returning to the banking sector). Such beneficial changes would reduce the size of the financial sector, which currently attracts too many of our best brains.
About the Author
Dr Stephen Grenville is a Non-resident Fellow at the Lowy Institute for International Policy. He works as a consultant on financial sector issues in East Asia. Between 1982 and 2001 he worked at the Reserve Bank of Australia, for the last five years as Deputy Governor and Board member. Before that, Dr Grenville was with the Organisation for Economic Co-operation and Development in Paris, the International Monetary Fund in Jakarta, the Australian National University and the Department of Foreign Affairs in Canberra. His special interests are in monetary policy and financial development in the Asian emerging economies. He has written extensively on capital flows, recognising the serious policy challenges that arise from the volatile nature of these flows on economies that have not yet developed deep and resilient financial sectors. He has also written on the 2008 financial crisis and the reform efforts since then. His interests include the international economic institutions (particularly the International Monetary Fund and the Asian institutions). He is member of the Lowy Institute’s G20 Studies Centre. More broadly, he blogs weekly on the Lowy Institute’s The Interpreter web-site on a range of current international economic issues and is a regular contributor to the Nikkei Asian Review.
Abstract
The 2008 financial crisis was hugely damaging. The focus of reform has been on increasing banks’ required capital. Together with the other measures taken, this makes a repetition of 2008 less likely. However, the crisis also taught us that financial markets do not work as well as we thought. Financial innovation has made the markets more volatile, short-term focused and more pro-cyclical. Not much has been done to address this issue. This paper suggests that the government-guaranteed banking sector should be separated much more clearly from the rest of the financial sector, which should be more explicitly identified as a risky sector. This separation would change the way the financial sector is managed (with conservative management returning to the banking sector). Such beneficial changes would reduce the size of the financial sector, which currently attracts too many of our best brains.
About the Author
Dr Stephen Grenville is a Non-resident Fellow at the Lowy Institute for International Policy. He works as a consultant on financial sector issues in East Asia. Between 1982 and 2001 he worked at the Reserve Bank of Australia, for the last five years as Deputy Governor and Board member. Before that, Dr Grenville was with the Organisation for Economic Co-operation and Development in Paris, the International Monetary Fund in Jakarta, the Australian National University and the Department of Foreign Affairs in Canberra. His special interests are in monetary policy and financial development in the Asian emerging economies. He has written extensively on capital flows, recognising the serious policy challenges that arise from the volatile nature of these flows on economies that have not yet developed deep and resilient financial sectors. He has also written on the 2008 financial crisis and the reform efforts since then. His interests include the international economic institutions (particularly the International Monetary Fund and the Asian institutions). He is member of the Lowy Institute’s G20 Studies Centre. More broadly, he blogs weekly on the Lowy Institute’s The Interpreter web-site on a range of current international economic issues and is a regular contributor to the Nikkei Asian Review.
