List of Contributors... Acknowledgement... Foreword... Christian Noyer. Introduction... 1 Morten Balling and Ernest Gnan

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1 I TABLE OF CONTENTS List of Contributors Acknowledgement Foreword Christian Noyer Preface Urs W. Birchler ix xiii xv xvii Introduction Morten Balling and Ernest Gnan 1. Global and European Monetary Arrangements: from Bretton Woods to EMU Niels Thygesen 1.1. Introduction The Demise of Bretton Woods and Early Ambitions for EMU Frustrations The EMS and the Second Plan for EMU Repairing Surveillance to save EMU but no Global Role for Europe Conclusions Global and Euro Imbalances: China and Germany Guonan Ma and Robert N McCauley 2.1. Introduction Chinese and German Surpluses in a Global Perspective Where Did the Surpluses Come From? Reform Restrains Labour Costs, Boosts Profits, Savings and Surpluses The Contribution of Exchange Rate Changes Reinforcement by WTO for China and Euro for Germany Growth Dependence on Net Exports How Are the Foreign Assets Invested? Two International Balance Sheets in a Global Perspective Split between Debt and Equity or Safe Assets and Risky Assets Split between Private and Public Sector

2 II 50 YEARS OF MONEY AND FINANCE: LESSONS AND CHALLENGES Rates of Return on Foreign Assets Policy Setting and Conclusion Annex: German bank foreign assets Is Monetary Policy a Science? The Interaction of Theory and Practice over the Last 50 Years William R White 3.1. Introduction The Choice of an Exchange Rate Regime The Frameworks within which a National Monetary Policy must be Conducted The Analytical Framework for Conducting Monetary Policy The Political Framework for Conducting Monetary Policy The Philosophical Framework for Conducting Monetary Policy Practical Issues in Conducting Monetary Policy Choosing the Objective of Monetary Policy Dealing with Uncertainty about the Monetary Transmission Mechanism Processes to Formulate and Implement Monetary Policy Conclusions References Unconventional Monetary Policy of the ECB during the Financial Crisis: An Assessment and New Evidence Christiaan Pattipeilohy, Jan Willem van den End, Mostafa Tabbae, Jon Frost & Jakob de Haan 4.1. Introduction Conventional Monetary Policy: an Overview Inflation as Primary Objective ECB Instruments Indicators Recent Research on the ECB s Unconventional Policies: a survey ECB Policies Transmission Effectiveness

3 TABLE OF CONTENTS III Liquidity Support SMP New Evidence on the Effectiveness of Unconventional Policies of the ECB Conclusions References The Development of Financial Markets and Financial Theory 50 Years of Interaction Morten Balling and Ernest Gnan 5.1. Introduction Milestones in Financial Theory Portfolio Theory Capital Asset Pricing Theory Interest Rate Structure Theory Capital Structure Theory Agency Theory Efficient Market Theory Option Pricing Theory Milestones in the European Regulation of Financial Markets A Helicopter View of 50 years of Financial Market Developments Lessons and Challenges Concerning Financial Theory and Financial Markets Models are Simplified Approximations Liberalisation, Deregulation, Risk and the Role of Models Substitution between Markets Other Applications of Financial Theory Concluding Remarks References Annex to Chapter 5: Some Useful References to Financial Market Data Integration versus Interdependence and Complexity in Global Trade and Finance in the Post-War Period Adrian Blundell-Wignall, Paul Atkinson and Caroline Roulet 6.1. Introduction Goods and Capital Market Integration Trends Brief Summary of the Post-War Pre-1960s Period The 1960s to the 1980s: OECD Countries Open up. 198

4 IV 50 YEARS OF MONEY AND FINANCE: LESSONS AND CHALLENGES Measuring Integration via Interest Rate Parity The Savings Investment Correlation The Emerging Economies Asia Crisis Foreign Direct Investment Developing Countries and Distortions Caused by Capital Controls The Crisis and OECD Countries The Risk of Rebuff to Global Integration Financial Integration and Interdependence Trends Growth of Cross-Border Banking Growth of Bank Interdependence The Causes of the Ratcheting up of Bank Interdependence Concluding Remarks References From National Towards European/Global Financial Regulation Charles A.E. Goodhart 7.1. Introduction The Early History of International Regulatory Cooperation; the Basel Committee on Banking Supervision and the Basel I Accord Recent International Developments, : Basel II, The Financial Crisis (2008 onwards), Financial Stability Board Crisis and Thereafter Where do we go from Here? References The Evolution of Financial Supervision: the Continuing Search for the Holy Grail Donato Masciandaro and Marc Quintyn 8.1. Introduction Evolution of Financial Supervision a Timeline Emergence as an Autonomous Policy Area Milestones and their Drivers The Architecture of Financial Supervision The Role of the Central Bank in Supervision The Governance of Supervision The Big Supervisory Questions after the Crisis

5 TABLE OF CONTENTS V What have been the Responses? Trends in Supervisory Architecture and the Role of the Central Bank Trends in Supervisory Governance Supervision, Quo Vadis? The Limitations to Supervisory Governance The Way Forward: divide et impera Conclusions References Fifty Years in the Evolution of Bank Business Models David T. Llewellyn 9.1. Introduction The Nature and Evolution of Business Models Bank Business Models Context of Structural Change The Traditional Model Pre-Crisis Banking Models ROE Strategies Risks in New Business Models Incentive Structures Excess Financialisation Diversity of Business Models Post-Crisis Pressures on European Banking ECB Intervention The Debate about Equity Capital Strategic Options for Banks Stock-adjustment Phase The Crisis as Long Term Transformational Size and Cost of the Banking Industry Future Business Models Assessment References Performance in European Banking: Productivity, Profitability and Employment Trends Philip Molyneux Introduction Structural Features and Employment Revenue, Cost & Efficiency

6 VI 50 YEARS OF MONEY AND FINANCE: LESSONS AND CHALLENGES Productivity and Profitability The Crisis Competition, Regulation and Stability Summary References Shadow Banking and New Lending Channels Past and Future Patricia Jackson Introduction Definition of Shadow Banking Shadow Banking before the Crisis Non-bank Banks Money Market Funds Finance Companies Repos Securitization Developments since the Crisis Switch from Securitization to Covered Bonds Growth of New Shadow Lending Factors Driving Growth New Mechanisms Shadow Trading Activity Implications Going Forward Potential Growth Credit Performance Confidence and Opacity Risk Assessment Regulation Conclusions and Financial Stability Implications References The 2007-Financial Crisis a EURO-pean Perspective Juan Ayuso and Roberto Blanco Introduction A Short Overview of Financial Crises over the last 50 Years The Euro Area Financial Markets before the Crisis The Unfolding of the Crisis in the Euro Area The Main Weaknesses of the Euro Area Institutional Framework that fed the Crisis Progress made so far

7 TABLE OF CONTENTS VII The Challenges Ahead Concluding Remarks References The Effects of Derivatives on Underlying Financial Markets: Equity Options, Commodity Futures and Credit Default Swaps William Arrata, Alejandro Bernales and Virginie Coudert Introduction Equity Options and the Effects on Market Quality and Informational Efficiency Commodity Futures The Rise in Commodity Derivatives in the 2000s The Reasons behind the Market Expansion Speculators, Hedgers and the Difference between Spot and forward Price Two Opposite Views on the Consequences of Derivatives Expansion on Commodity Prices The Role of Derivatives in Volatility of Commodities Prices Credit Default Swaps The functioning of the CDS The Rise and Fall of the Market CDS Premia and Bond spreads in a Default-Free Risk Portfolio CDS Premia and Bond Spreads in Empirical Studies CDS Premia and Bond Spreads during Crises Conclusion References Timeline of Money and Finance relevant Events during the last 50 Years 475 List of Currency Codes List of Figures List of Tables List of Abbreviations Index