Europe - U.S. Symposium on Building the Financial System of the 21 st Century

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1 2017 Europe - U.S. Symposium on Building the Financial System of the 21 st Century

2 Session 1: The New U.S. Presidency & Brexit s Impact on Trans-Atlantic Financial Markets

3 Brexit & Trump in Global Perspective Global rise in populism Brexit, Trump more coming? Common drivers: weak growth, immigration concerns US may also reflect weak social safety net Declining legitimacy of global openness, cooperation Have we reached peak regulation? G20 agenda mostly complete (from policy making to implementation) Primary goal in US & Europe shifting from stability to growth Erosion of trust in political and administrative institutions Or is this just the pendulum starting to swing back?

4 Trump Effects Are we in for major change in US financial regulatory policy? Prospects weak for new legislation Dodd-Frank Title II as possible exception Major shifts most likely in enforcement personnel as policy Financial institutions don t want D-Frepeal; prefer selective reform Leverage ratio, living wills seen as particularly costly Principles for Trump-era financial regulation Tension between deregulatory impulse & anti-wall Street resentment Suspicion of global institutions (FSB, BCBS, etc.) Focus on growth, competitiveness Could America First mean end to Basel gold-plating in US?

5 Brexit & Financial Regulation What does UK want? Full access to EU markets Autonomy to shape own financial regulatory policies going forward Institutional arrangements: prior consultation & binding obligations w/arbitration by new body Prospects for success Assessments vary What are UK s trade-offs and bargaining leverage What would #10 give up to save the City? EU reliance on London financial markets & liquidity (bonds, derivatives) may give leverage Widespread use of English law for financial contracts; English judges control resolutions Key question: how will EU see its own self-interest What will UK lose from Brexit? Voice in EU legislation and rulemaking May need to accept EU supervision over euro clearing, bonds Effects on EU-27 Fuel further centrifugal tendencies Fate of CMU Impact on bank resolution

6 Global Effects of Trump & Brexit Effects on multilateral cooperation Legitimacy of global elite -led project in question Trump administration preference for bilaterals But reassuring statements by Mnuchin suggest space for technical cooperation Will EU unity hold up? Brexit effects on multilateral cooperation unclear UK may push harder for binding cooperation after losing voice in EU UK unlikely to lead regulatory race to the bottom (but will this hurt its competitiveness?) Trump effects on trans-atlantic finance Is shift to bilateralism a deal-breaker for EU or less cumbersome alternative to G20? Will US pursue resumption of special relationship with UK? International effects of Brexit Consequences for EU-27 and CMU Over time, will US & UK partnership reemerge as lynchpin of global financial cooperation?

7 Session 2: Regulatory Developments in Capital, Liquidity & Derivatives Impacting Europe and the US

8 Financial Markets in the G20 Era Economic trends Weak growth, low returns Low (or negative) interest rates, quantitative easing Regulatory environment Capital, liquidity, leverage, risk-weighting Capital goldplating is challenge, but leverage ratio much worse Resolution regimes Important in principle, but plagued by complexity, expense, uncertainty Stress tests For US SIFIs, these have become binding constraint CCAR criticized as non-transparent & arbitrary Technological change Emergence of new market participants & strategies Effects on confirmation/settlement, but doesn t solve inventory problem Emerging challenges Risks: cyberattacks, possible effects of HFT & autonomous AI Policy challenges: privacy, data localization Are we missing the most important risks?

9 Effects on Credit & Growth Are capital & liquidity rules hurting credit provision? Evidence still not decisive Bank lending is weak, but why? High costs of compliance contribute to low profitability Or is the problem lack of demand? Reliance on banks means Europe may be particularly affected SME lending Risk-weighting for bank capital disadvantages SME lending May account for low growth & job creation Can non-bank FIs take up the slack?

10 Effects on Market Liquidity Is market liquidity in decline? Trading volumes up, bid-ask spreads down But trading& liquidity are fragmented Phantom demand? CCP capacity may limit growth of derivatives trading Changing composition of market Retreat of banks as liquidity providers But new market players have entered, including asset managers, HFT How will capital markets manage a crisis? Banks role as market makers in decline Doubts that new participants will contribute liquidity in crisis Will central banks have to be market-makers of last resort to prevent contagion? Opportunities for moral hazard CB balance sheets already overburdened Could fintech offer alternative market-making model?

11 Regulatory complexity Emerging Policy Priorities Sheer volume 24,000+ pages of D-F rulemakings Complexity & extent of rules hampers both compliance & supervision Preference for shorter, clearer, principles-based rules but how realistic? Inconsistent data reporting standards Unnecessary expense for financial institutions Lack of comparability reduces usefulness for regulators, markets Urgent need for standardization, elimination of duplicative reporting! Cost-benefit assessment Essential to good policymaking regulators must develop capabilities Especially urgent need to analyze cumulative impacts International coordination Technocratic cooperation: is it the victim of political conflict or a possible solution? Some issues may be seen as outside politics e.g. data standards What is role of multilateral regulatory dialogues in the Trump era? Imperial Basel may be over, but consultative Basel will remain Can binding rules and arbitration reanimate bilateral cooperation?

12 UPCOMING EVENTS China U.S. Symposium May Armonk, NY India-U.S. Symposium September New Delhi, India Japan U.S. Symposium October Odawara, Japan Latin America U.S. Symposium December 8-10 Cambridge, MA To receive an invitation to other PIFS Symposia, or to recommend your colleagues for participation, please contact: James Shipton