 Mae'r ddweud o'r cyfnodd o'r gyfnodd yn ymddangos gyda'i'r profiad honno yma. Felly hefyd, efallai'r profiad honno i fyny yn ei wneud i'r cyfeidliadau, a'r profiad yn ei wneud i fyny yn ei wneud i fyny'r cyfeidliadau. Efallai'r cyfnodd yn gwyloedd ffianaf o'r cyfnodd a'r ddweudol, oed o'r cyfnodd o'r cyfnodd a'r ddweudol i'r cyflwynydol. Government of Global Financial Markets of the Religion of Economic Politics published with CUP in 2012 and also the Mechanics and Regulation of Market Abuse a Legal and Economic Analysis published with OUP in 2005. He also co-authors with Sir Ross Crandston the next edition of Principles of Banking Law. Emilia Aswell as being that esteemed academic is also a qualified practising lawyer with many years experience in the field of global markets. Fy gorffoddur i gyda'i gwybod i ddau i wahanol yw'r allwchur rhywbeth yr wytafion yn cyflaen? Er bod yn meddwl i'r dyfodol o'r lliwyddin yn y Gwynedd Arhan yng Nghymru, byddwn i'r gwahodd ar y ffermwysigol yw'r gwybod yng Nghymru, a amswn i'r gweld gwiaith mewn gwahod organflyneddol. Ie肯r ym Ymddangod i ym hyffordd y dda os ydych chi'n gwneud a'r gyfliadau yng Nghymru yn gwaith ymgyrch. ..is Jimmie Stewart dead. Professor Ferran i'ch felly ddiwg ddegwyd ar gael.. ..anan eich cyfle a blwyddyn ni'n masfydlu sy'n gyfaint o'r peth yn ymddangos.. ..on yng ngharfffawr yng Ngharfffawr. Mae'n gwelwch ddweud o uwch o'r cyfle sy'n ei ffainfodd o'r ddweud o'r informaill.. ..o wyddo i ni'n gwybod eu gwadd freedomau a'u gwybod yw mynd.. .. Mae'r llyfan yn wneud yng ngharfffawr.. ..alen amddangos eich gynnwlad o'r cyffin. Ardedigol yn ddweud o'r unigol. Mae gwaith i chi'n gweithio. Mae gweithio am ystod o Ffair a'r ddau i'r ddod i'w ceisio arnynnu. Felly mae'r ffeithio i bwysigwedd ar gweithio'r ffair yw'r amser yn 2010 feithio'r polemicol yma, ac mae'r cwrwm er mwyn i gydus o'r ystod, y cyfnodiad yw un oedd oeddech chi'n gynnig o'r profesi Gwithgad o'i ddweud i'r ddweud i'r ddweud o'r ddweud i'r proses a'r llwyddo o'r ddechrau. Argymau yn bwysig, mae'n mewn cyfnwysig o'r ffordd oedd eich bod yn bwysig o'r ddechrau a bod ydych chi'n gweithio fel gyfraeg yn cyfrannu ymwdeithasol. A hynny roedd y cywyddrio y cyfrannu sefydliadwyd y bydd cyhoedd y ffordd o fynd i gweithio rwyfiau cyfrannu panf없이n â'r tynnu cyfrannu cyfrannu cancelled i'r bwysig yma, ac yn ei roedd yn cyfrannu cyfrannu cyfrannu ac yn ymdill amddindol hiad yn cerddurol rwyf yn ystod o'r meddwl o rwyf wedi'u hynny i beth o'r cyfrannu cyfrannu cyfrannu ymddindol i'r gan unigfawr am y dyfodol, a lefudaeth mega, gyda'r ddiogel am gyfrannu Llanwyd Llywodraeth, ydych chi'n gwahanol i'r Llywodraethau Gweithlwn i'r ddodol. Mae'r regeslawn lleol ar gyfer y dyfodol i'r ysgrifennu a'r ysgrifennu, y dyfodol y dyfodol. A dyfodol yn cynnig yn eu cyfnodol, ydych chi'n gweithio'r dyfodol y dyfodol, dyfodol y dyfodol i unigfawr am dyfodol, gyda'r cygonon Llywodraeth, ac yn gyfarifio'r ffordd shares allan o'r cygonon Llywodraeth yma. Efallai, ond rydym yn y dyfodol yma,hadwch'r cygonon Llywodraeth ei dylr i gygonon Llywodraeth. Ond ydych chi'n gwestiwch leirio'r cygonon Llywodraeth zes, doedd yr argymeth lŵw i'n teimlo'r cyfan o'r cygonon Llywodraeth. dw i'r rhwngion gweithio a gwersol yn ddiddorol, oherwydd atod gael o'r cwmhag am decheg yn anodol, a oedd y bwysig aboutig yw'r bobl yw'r prosiectau tyf yn reoffo'r bwysig. Ond yn ystod yn ffys speedsart ar gyfnod, rydyn ni'n iawn. A wnaeth i ni eisiau bod y banch nesaf â'r resin gweithio sydd y defnyddio Lending Dysun ym Mhwyaf! a gwithio'r context yng Nghymru, bydd y pan hwn yn y Zoedd Ym Gŷ, ar gyfer y Bwyd Fath Cymru, ddim gweithio ei ddiwedd anodol i ni i fyddaeth am gweithio prof overwhelmed er bod yn bwyd pwyllustol iawn. Felly, y dyfodol yma yn ymdodio'r cychwyn. Felly, roi hynny'r cwestiynau sy'n go llawer o'r ffantanol, y ddweud y ffantanol yw'r bans yn yw'r ddweud, ydych chi'n ddweud y cyfaint, yn y dyfodol, y dyfodol yn ymdodio'r ddweud, yn y gallu hynny'r ddweud, ac mae'n rhaid i'ch gael eich ffacffyn gyda sefydlau mewn rhan. Yna yw'r llad yn gweithio'r dod o'r ardal beth. Ond dae'r ales y cerdd, ac mae'n ardal eich ei hunanol ac mae'n gallu gwneud o'r risot ffasiliaid ales gwyddiol. Ych chi'n ddrifwydd fydd yn eithaf y banthau a'i wneud y cerdd juniornawn ar gyfer hynny, byddedd o'r banth yn rhoi bêl yn ffirlig o'r risot, yn hawdd iawn a'u bach gael hynny, yw'r bwysig o'r bwysig o'r newid o'r newid o'r gwladau. Yn ymdeg yw'r ffordd yw'r ffordd yn ffasig o'r bwysig yn bwysig. Mae'r ffordd yn ffasig oherwydd mae'r bwysig yn bwysig creu ei wneud o'r bwysig o'r agensiol. Mae'r bwysig yn cyd-deg, mae'r bwysig yn cyd-deg, mae'r bwysig yn cyd-deg, ac mae'n rhaid i gael rhagfaodraeth ac mae'r bwysig yn ond a i'r bwysig yn dire Host oherwydd a astiol oherwydd mae'r bwysig bwysig os yw dcre、「créd casos", a felly mae'r ferch Based ond fe yna Aranydife axehyd Aelon yng Nghar shamer hefyd wedi'i Thunderfeyllon. phallach, bod y gyfrifau ffachio'r bach i ddechrau gyrswyr IEI yn ddod o gyfrifiadol iawn fyddio'r gå sahbau wedi bod sall o leiaf o bobl a dyma arall yn cyfrifiadol yn fwynt iawn. Rydw i ddechrau'r bach i ddifrwynt iawn. Rydym yn holl gweld y byddolol yn fwynt iawn. gyffin datblygu sut yn gyffin iawn, o grannu a llwystwg. Urgrwydd yn ei wneud, ac y cyffin iawn y maen nhw er mwyn hwnnw, ac mae'r ysgolwch i ysbain i'r gael, mae'n ddiddordeith llwystwg, yr y acredfyrng llwystwg worlwydd. Mae'n gwneud y arwaith yn y mein ystafell a'r ymdegon o robyn ei lwystwy yma'r gael. Mae'n 그게b gwelwydu'n gwyllalu, mae ddynnu fydd yn dda ni, mae rhoi, dwi'n credu'n meddwl mewn llythbeth Mae'r bwysig yn y gallu cyfnod, mae'r fawr eich bwysig yng Nghaerdaeth a'r Gwyddon Bwysig, ac mae'n fawr i'r argyflwch ar gyflwch gyda'r Gwyddon Bwysig, bobl oherwydd, mae'n bwysig o'r Llywodraeth o Gwyddon Bwysig, ac mae'n gweithio i'r Llywodraeth o Gwyddon Bwysig yn ei gael. Ffaxon reserve banking is a business model that has been with us for quite a long time, and this country is very familiar with it. However, there are problems we leverage that is when owners, shareholders, equity is insufficient because the more money you lend, the more bad decisions you make, and obviously you will pay the price for those bad decisions if you are inadequately capitalised when the economic cycle turns the other way. What makes banks accumulating excessive leverage? Well, the more money you have, the more money you lend, the more profit you make. Bank profit in principle comes from the fact that the arbitrage between the interest rates, they are charged to borrow money from depositors or other wholesale lenders to them, and the money they charge were in order to lend out money, long term preferably. Then managers like that because all sort of like that, because obviously the more money the bank makes, the higher is going to be the remuneration, especially the floating remuneration bonuses. And if you have the ability to lower your capital reserves and capital is a cost to the bank, because regulation allows you, of course you will do that and you will substitute unsafe assets to securitisation or other forms of asset substitution with safe assets to keep us a little capital as possible and lend out as much money as possible in order to maximise profit. Now, there are a number of remedies that have been suggested apart from structural form because, as I said, I'm not going to deal really with structural form until the very end of the paper. I will return to structural form at the very end of the paper because perhaps there is no other solution than smarter than what they have, structural form. But the other alternatives apart from separating investment from commercial banking to have a full reserve banking system, what is called the narrow banking system, whatever the bank borrows from one side lends to the other side. The bank keeps, obviously if they do that, they have to do that into liquid assets because that's what full reserve means, that you can draw down in the reserve to repay your liabilities immediately. Or we can find better capital ratios and insert more equity into the system by keeping the risk-weighted capital ratios. I have to tell you at this point that risk-weighted ratios were not with us before the 70s. They are something that came about in the UK. They were first used by the Bank of England in the late 70s and then gradually adopted by Basel. Leverage ratios on the other hand means that you keep your own funds compared to your assets without weighting the riskiness of your assets at a certain ratio and obviously the higher the ratio the more equity you need to have in the bank. Structural form, the main model I've already explained is separating through various structures interesting banking from commercial banking or infencing as is the weakest suggestion that has been implemented. And the final remedy is to have effective resolution, eliminate moral hazard and eliminate fiscal backslops mainly through bailing of bank characters. Now, the first question that we need to ask at this point because after all, this is a presentation about the future of fractional reserve banking needs. Can we replace them? Can we get rid of them altogether? Can we imagine a world with no fractional reserve banks? After all, they are susceptible to risk all the time. They are like a nuclear reactor which has its uses but it's very volatile and it doesn't go off all the time but when it goes off, boom, Fukushima. So can we make do without them? These graphs show you the level of loans outstanding in each of the countries selected in the United States, Japan and Europe. As you can see, especially Europe is overbent because in the United States the level of bank lending to GDP is much lower. It's around 50% whereas in Europe it's slightly over 100% and as you can see in Japan it fluctuates wildly because of the fortunes of the Japanese economy fluctuating wildly The past few years but Japan is also quite dependent on bank lending and as a matter of fact that's the case to Aotecia. If we had replaced in this graph Southeast Asia in general instead of Japan we would see that growth capital in most of Southeast Asia is coming from bank lending and Asian banks, the big banks, are having assets that equal 100% of GDP or over in most of the large Asian economies. Emilius, the reason the US is so low compared to Europe is that... Capital market development. Capital market development. Economic alliance rather than... Capital audit. So the capital markets. So that's my next slide obviously. Share of bank versus capital markets lending especially in the eurozone because these are the figures I could find. As you can see the figures are extremely current. I pulled them from the ECB side that shows you the entire balance sheet of the eurozone on the 25th of April. So loans outstanding to non-sovereins, 12.6 trillion. If you compare that to global bonds outstanding to non-financels, 1.4 trillion 2012, 1.8 trillion 2007. That means that bank lending just in the eurozone to non-sovereins dwarfs global. Issues of corporate debt outstanding. And there is a massive, massive funding gap in Europe. According to the European Investment Bank Europe needs to invest almost half a trillion a year in economic infrastructure and the bond markets are not really playing that role. Of course there is a plan for a capital markets union. But that's far off into the future and also you need to take into account cultural preferences and path dependence. There is a reason why Europe is so overbanked and why reliance on capital markets debt or equity is so low. And I think this slide helps even more to make a better job to show you Europe's reliance on bank lending for corporate capital. Okay, so the reliance on fractional reserve bonds for corporate lending is massive. Not to waste about it. Why Mark's question was very opposite because capital markets in Europe are not especially risk capital markets, venture capital markets. Private equity markets are not as developed as in the United States. It's not just an issue of the size of the stock market. It's even more an issue of what is the size of the risk capital market and the size of the risk capital market in the United States dwarfs. The junk bonds market for instance, which is risk capital market funding, risk capital market finance dwarfs that in Europe and the Eurozone. The UK is doing slightly better than the rest of Europe. Well, substantially better than the rest of Europe but still the UK is also very reliant on fractional reserve bonds for corporate borrowing. So, let's make fractional reserve bonds safer then. And one of the ways to make them safer is strict leverage ratios. Before we discuss where we should put the leverage ratio, we should consider if they are a good thing. There is an article by the Angelo and Sturge, both respected economies in 2013, who said that banks should carry a high leverage. And leverage ratios are not a good thing because the main role of the bank is to create stable debt claims and the so-called liquidity glow to produce liquid debt claims. And if banks use their own money, which is equity, they will not be able to do the same function. Obviously there are lots of objections to the Angelo and Sturge thesis, but in principle that's the job of fractional reserve banking to create liquid debt claims, liquidity on demand. The next question is whether you need debt to do that or you can also use your equity to do that and my view is more on the side of the higher equity reserves. But leverage ratios per se, apart from being a micro-credential measure, can also be a strong micro-credential measure because they reduce the level of overall lending, overall borrowing in the economy, in the financial system as well as the real economy. And of course, because they are unweighted, they reduce reliance on many risk models or credit ratings, which are all very prosyclic. So they are indeed a stabilizing mechanism for both the financial system and the real economy. As a matter of fact, UK banks adjusted their capital to the risks they were taking in the 19th century. Of course, there is a question here whether what UK banks were doing in the 19th century is really relevant because we don't have really the share of capital markets funding in the 19th century. It doesn't matter what, the 19th century is an appalling time for British banks. They were falling down like pigeons and we had some massive runs. However, indeed, Cappie and Wood have produced a very interesting study that shows that if bankers were willing to take higher risks, they were adjusting their capital reserves to those higher risks. And there is another seminar studied by Miles et al, David Miles is in the Monetary Policy Committee, which showed that bank leverage really took off in the 20th century, especially in the post-war years, but it didn't really make an appreciable difference in economic growth rates. The drivers of economic growth were different factors rather than higher leverage. Now, does that matter? Does the debate between unweighted leverage ratios and weighted leverage ratios matters? According to the Provincial Regulation Authority, in the 2013 stress test, certain UK banks, power bonds of the UK's financial system, had a much higher tier one capital if measured against risk-weighted assets rather than if the equity capital was measured against unweighted assets. And that's very important because if your exploits are lying, you are severely under-capitalised. Now, there are good reasons to argue against leverage ratios. One is that if I can't claim as much as I like, I might choose riskier assets because this will produce higher returns, because shareholders' pressure for returns will not disappear because of the introduction and imposition of leverage ratios. And leverage ratios can constrict economic growth unless they are cycle-adjusted, and as a matter of fact the Bank of England's new leverage ratio for the UK's banking system is cycle-adjusted. It is a modification of the counter-cycle buffer of buzzle and in a rather clever way, me things. I should say at this point that one of the major mistakes that the macroprudential debate makes is probably emanating from the fact that Minsky did not have enough time to broaden his theories that they only think about the financial system. Obviously, there is a wider world out there that generates supply and demand for the financial system, generates supply for financial claims, but there is a wider world out there that needs that funding. So, unless you link up the leverage ratios and all the other macroprudential indicators and measures with the way the macroeconomy performs, obviously macroprudential regulation will have the same fate as other regulatory approaches in the past, which eventually hit a blind alley. It's very important that you link up what you do as a financial regulator with the way the economy performs rather than just focusing on how the financial system behaves. Now, if we are going back from leverage ratios and unweighted assets, if we stick with the buzzle approach to equate capital, how much capital? That means equity capital, not buzzle addition in tier one or tier two capital, shareholder's equity. Buzzle is asking for four and a half, that's buzzle three, but obviously there is a conservation buffer of up to two and a half, and there is a counter cyclical buffer of another up to two and a half, and there is a share charge on the globally systemically important highly interconnected bus. That is not as a matter of fact out of line with total capital requirements, equity requirements, than the historical average. There are studies that have shown that historical average is above 15% of equity, but under 20%. This is however lower than the 25% tier one that has been suggested by heroin, that Matthew and Miles at all as a way to make a factual reserve banking more stable. Now, if you go for 25% equity, obviously you need to find somebody to buy bank shares, to buy bank equity, and in order to find somebody to do that, you need to look at the profitability of the bank. Shareholders are still interested in dividends and capital appreciation, market price appreciation. The problem is that the profitability especially of European banks is very low, the profitability of the US banks is much higher, and higher net equity capital reserves might not really have an appreciable impact on the cost of funding, on the cost of bank lending. Miles at all thinks that will not exceed half percent, probably will be less, Basel agrees, but where are you going to find the money if the banks make no profit? Who is going to invest in European banks if they are not profitable investors? Well, there is another way to bring capital ratios up by saving assets, but that means that you are saving out to the totally unregulated shadow banks, and obviously you are not lending in an economy that as we said is starved for new finance. Another alternative is full reserve banking, whatever I receive from depositors, I invest in safe assets, and the first model is a joint case asset, a joint case model, banks take their deposits and they are investing them in sovereign bonds. They do limited lending, so a perfect way to balance your, in terms of maturities or riskiness, your liabilities with your asset side and to have the perfect model of full reserve banking. But, of course, all previous forms of lending would be outside the perimeter of prudence regulations, so all wholesale banking will go to the shadow banks and sovereign bonds, and they come from Greece, are not really a safe investment for anybody, as a matter of fact. Then there is the much discussed model of narrow banking by Professor Kotikov, to whom obviously the title slide refers, because he had a famous book that Jimmy Stewart is dead, obviously that's a reference to a great movie with a wonderful life. It's a mid-30s movie, which we're watching every year as young kids on Christmas Eve, that shows a thrift, a mid-western thrift in the United States, going back out because it was not a full reserve bank, but it was a fractional reserve bank and the reserves were not enough to repay depositors. Having said that, I thought that we had resolved that with sufficient deposit insurance and the lender of last resort facility. I thought that budget with his book on Robert Street in the late 19th century and the Duke Vig and Diamond article, which obviously opened the process for deposit insurance across the board, had resolved that, but apparently not, because of Northern Rock. Northern Rock was not exactly around on the bank's deposits. Northern Rock was obviously an issue of the Bank of England taking the oil hazard risk too seriously and not providing Northern Rock with additional liquidity in a timely manner, and also the fact that Northern Rock was not really properly supervised when it came to systems and controls as well as its capital base and everything else. The website went down and didn't go back, so people who were holding electronic deposits thought that they lost all their money and they lined up the streets. The Northern Rock incident is not necessarily a failure of the fractional reserve system. It's more a failure to supervise the bank properly and oblige the bank to upgrade its technical systems, because obviously when your bank is in trouble and all you see is a blank screen, you will panic. That's what happened with Northern Rock. According to Kotlikov, however, we need to make all banks, all financial institutions, full reserve institutions, more or less like mutual funds, and you get what is the net asset value divided by your share in the units of the mutual fund. That means however that the mutual fund cannot really invest in long term assets because I cannot see how the liquidity issue will be resolved. You will still need a central bank if you face a liquidity shock on the liability side. It's not discussed really in the Kotlikov paper. Obviously the other thing that you need to take into account here is that if it's all financial institutions, that means no regulatory arbitrage and you need a global treaty. Or you need capital controls, otherwise somebody else will come and start competing with you on interest rates taking over your customers. A full reserve banking probably will not need the fiscal backstop because there is no leverage. I'm not sure that will not need lender of last resort provision, which was the whole point. As I said, it requires perfectly rational bank managers, perfect coordination between the assets and the liabilities side, otherwise you will face a liquidity run, perfect rationality across the system, no asset bubbles, and of course either global treaty or capital controls because if anybody else comes and offers higher interest rates, your customers will disappear immediately. Assuming that the money of your depositors, of your unit holders have gone to liquid assets which normally do not offer high interest rates. They are lower risk, lower than assets. And of course, since liability will be unlimited, it's interesting to see who's going to be a shareholder in such an institution. Now, on the other hand, more modern thinking and given what happened with the bailouts which allegedly cost lots of taxpayer money, regulatory thinking has moved away from bailouts and moral hazard and the two big to failure subsidy into bailing in our centre set apart from the bank shareholders, centre certain bank creditors bailing in liabilities in order to absorb bank losses and not to have to resort to public money. And that's a good thing because bailouts create moral hazard. You behave irresponsibly, recklessly if you know that you're going to be bailed out as a bank manager. It can be expensive and of course some sovereigns are overindated and they cannot really bail out their banks, their financial institutions. The reason that Ireland's debt quadruped, multiplied by four, was because of bank bailouts. Ireland was one of the least indebted countries in the world until the bank bailouts and of course Spain's debt went up and so on. Now, of course, that's a sore story for the UK because of what happened with the Royal Bank of Scotland bailout, but other countries have not really lost money. The US Treasury and the US Treasury did not lose money through the troubled assets relief programme or direct equity injections to troubled financial institutions through the US Treasury. The Swedish Treasury made money when they bailed out their banks through a bad bank in the early 90s and of course if you know that the sovereign is there, standing ready to absorb losses, the scope for contagion is substantially narrowed down. On the other hand, as I explained, a bail-in regime can eliminate more hazard than having a cause to public money, incentivise creditors to become better corporate monitors. To be to fail subsidy was anti-competitive in any case because a very small number of big banks enjoyed that. It's easier to plan for a solution as supposedly it leads to faster capitalisation. Now, the first question that arises within a bail-in regime is who should carry the burden. The taxpayers have not chosen to undertake the risk of an investment in a financial institution, a bank and allegedly it's unfair to oblige the taxpayers who cannot flee to cover the losses and obviously they play no monitoring role whatsoever even though one would suggest that that's why you have financial regulators acting as agents and undertaking the monitoring role on behalf of taxpayers as much as society at large. But in any case creditors are better monitors, it is assumed. However, why, who are going to be these creditors to be bailed in? Obviously pension funds, as it happened Cyprus, the invested Cyprus, charities. Perhaps in the end we'll end up with money going from one pocket ending up in the other and vice versa. And it's of course not clear whether the university of Cyprus was a better monitor than the central bank of Cyprus which of course was not a very effective bank supervisor. Now, unlike bail-outs where you have the certainty that the state stands there to absorb bank losses and of course the tax cannot easily flee, unfortunately. In the case of bail-in you have lots of class secretors, some of whom can be highly mobile, especially depositors. Of course the modern bail-in regimes, especially the European regime, make it implicit that probably even uninsured depositors will not be touched if isolation authorities are faced with the prospect of a generalized crisis or they are faced with the prospect of creating contagion and a systemic, a system-wide shock in the event that they bail in big depositors. That means that the burden will fall more or less on bondholders. But this can flee as well. Equity holders can sell their equity short and bondholders can sell their assets and move to other markets altogether in some cases. So, in summary, in spite of its important advantages and merits, the bail-in process also has some potentially important disadvantages. It might prove to be more contagious and prosyclic. Obviously it will happen when the economy is not doing very well. Whether it will lead to speedier capitalization of the bank or not is to be seen because obviously it will entail much more litigation. It's unclear whether the subsequent equity injections will come from. If, in the conversion, you get lots of voucher funds becoming the shareholders, you end up in a substantially worse situation when it comes to governors. And the best example is not the Russian plutocrats in Cyprus. The best example is the Corp Bank in the United Kingdom, which has a substantial part of its shareholder in-body ease voucher funds and hedge funds. Pressing for governance reform. That's a case for governor's reform to restrict what they're voting. No, but I mean a lot of the pressure on the cooperative bank has come from those sort of aggressive shareholders seeking to have their governance improvements. So I don't think the cooperative governance has got worse by means of having those investors, has it? That's true, but you really end up with very aggressive investors. Yeah, but that might be a good thing. I don't see how the Corp Bank can be held out as an example of the disadvantages of the drawbacks. Exposed will be very difficult to take any long-term decision in the face of having lots of vouchers and hedge funds asking for returns. Maybe, but as an example of demonstrating already the problem I don't think it's... Do you mean given the cooperative bank's governance was in such a state before the vouchers came in? I fully agree that the cooperative bank is not really a model of good governance. On the contrary, the big question is that exposed when you need to take major structuring and reinvestment decisions, whether it's best to be faced with lots of pension funds as you were before structuring or with lots of hedge funds that will last you for returns. Obviously, the exposed outcomes can be worse for the rest of the industry as well because it's not just that the cost of funding for the building bank will go up, but for everybody else in the industry the cost of funding will go up because obviously the market will not think entirely rationally and they will think that, the bail-in risk is a real risk and might happen to anybody at any moment. I need to factor that into the interest rate I charge for any money that I lend to the financial sector and especially to big banks. Having said that, obviously the purpose of the bail-in is to make bank funding more expensive ex-ante in order to eliminate the too big to fail subsidy. Here I'm talking about making outcomes for the sector worse ex-post. Can I just clarify something and understand? It's my misunderstanding that it's crocled, but why is the bail-in process more reciprocal than the bail-out process? Well, the bail-out process is not really prosyclic because there is no panic. The banks are bailed out, this is it. You stop the panic, there is a backstop, there is a discontinuity, the state has moved in and takes over. The state also moves in and takes over. If you're in resolution, which is where you have to be before you do bail-in, you're being run by resolution authority, with a view to sound bail-in. This is the bail-in. It's not as to who takes over the resolution process. Of course, management will be replaced. As a matter of fact, management will be replaced. It can be replaced even at the print solvency stage on the basis of the new powers that the resolution authority and supervisory authority have. This is about who is going to pick up the cost, who is going to pick up the losses. If you have a big daddy with a big purse, you know that the buck stops there. Whereas if you do not, obviously the shocks keep being amplified into the entire financial system. Except that you do have a resolution fund. Once you've done bail-in, you then can tap the resolution fund. Correct. Then you go to the big daddy, which is if that's not enough. The United States is slightly different. You go to the resolution fund and if that's not enough, then you go to the industry and you charge assessments, which can potentially lead to mutualisation of bank debt. In any case, it's much clearer as to who is going to pay with a bail-out. That's the point. Sorry, just for my lack of knowledge. For bail-in, you go to the resolution fund first, then the primary fund. If you do a bail-in of the credit, then you go to the resolution fund. Now, in conclusion, we all want safe banks. Does that mean the preservation of factual reserve banking as far as I'm concerned? Yes. But if you want to have factual reserve banking on a cross-border basis, you do need on the basis of the preceding analysis to have some kind of fiscal burden sharing across the borders. If you have such a fiscal backstop across the borders, obviously as a last resort, not frontstop, but as it was before 2008, any kind of fiscal backstop is a social subsidy. That means that as a society we need to realise that funding that comes from factual reserve banks cannot be replaced by capital markets, at least in Europe, and at least for the foreseeable future. As a result, we suffer, we are imposed a social subsidy in order to shore up fractional reserve banks and keep performing, to the extent that they have been doing that, their role in fostering economic growth. If that becomes unacceptable, and I think it should be acceptable, but if that becomes unacceptable, then we need to rethink the model of structural reform that we have adopted, because what is at stake here is what happens with wholesale funding. If bailing is not going to work to create safe cross-border banking, safe international banking, as some people believe, including myself, then something has to be done about wholesale banking. In that case, either wholesale banks will have to become fully reserved, but then you will lose the equity gains, the equity blow that factual reserve banks enjoy because of leverage if they become fully reserved, and 100% capital reserve for every penny they lend out. Or they will become highly reserved mutual funds with investing banks turning into partnerships. All money coming to them will be in the form of short-term claims from deposit-taking institutions, obviously on the basis of contractual arrangements. It sounds to me terribly complicated and possibly unfeasible, but aside from state ownership, which God forbid, I'm not one of those who argue for full nationalisation of the financial system, on the contrary, but aside from state ownership of the banking sector, I cannot see an alternative between fiscal backstops for factual reserve banks, even though cross-border factual reserve banks, even though that's a social subsidy, or rethinking the model of wholesale banking, taking it all together from the current model of bank regulation and structural reform, and perhaps turning wholesale banks into leveraged mutual funds that will enjoy liquidity through borrowing from deposit-taking institutions and will be supervised separately than the rest of the banking system, which may be both inefficient and unfeasible. So I think the only solution for the foreseeable future is fiscal backstops. That's a good question. You said that both holders can run and free from the day new. What happened is happening, I mean, even if they sell off their boards in the secondary markets, for me it would be disseminated into the secondary markets and the price will reflect this. How exactly, how can the fear don't seem to come out again, please? Well, the claim will not disappear, but you will face a different kind of bull holder. In case of pension funds you're going to have lots of voucher funds in their place waiting to be bailed in, and obviously across the board this will reverberate, and banks will find fewer institutions willing to buy their bonds, means the cost of funding will go up. I didn't say, I said the bond holders will free, I didn't say the claims will be cancelled. The claims will be transferred to different kinds of institutions. The institutions that look for bargains into the global bond markets and these are specific institutions, mostly in the voucher funds. The Greek bonds didn't stay in the hands of the Greek bonds were not exactly bailed in, but there was a massive haircut, which is the same as a bail-in. The Greek bonds on the grief of restructuring and the steep haircut didn't stay in the hands of the big banks that were holding them initially in 2010. These were sold off to a different kind of institution, massive discounts. So, comes back to the same point again. Your point seems to be that these claims that are bailed in are then going to be left with a kind of shareholder base because they will be... Who will be short term? We don't like and we don't think we'll be a good influence for them there. Exposed, whereas the same shareholder ex-antee may be a good thing as you pointed out. I have a question. I was trying to just introduce the deposit insurance system. I have a question. In other countries, how does the individual server get any money or remedies when the bank is robbed? In most countries of the developed world, there is a deposit insurance system. What is worrying is that in Asia, especially the resolution regimes are not really as developed as they are in the West. The West has learned from their mistakes. Admittedly, the banking systems in Asia, we don't know until the cycle turns. On the face of it, they are more stable because after the 1997-98 crisis, a number of US Dictions implemented the macro-credential measures indicated to them or dictated to them by the IMF and the other international lenders. As a result, at least on the face of it, their financial institutions are better capitalized than their financial systems, less leveraged. Obviously, there is an addition of equity financing in Asia. Whether that's the case in light of this post-2000 boom or not, only the next crisis will say. But indeed, most developed US Dictions have highly developed and sensitive deposit insurance schemes. The problem is with bank leverage. Are their banks really as well capitalized as the regulatory system they are? Only the next crisis will show. I think it's a good time to... A few words, yeah. Okay, well, thank you. Before you begin, I should... Well, even though there's only six of us in the room, we're going to be watched literally by thousands of people on iTunes. And our iTunes hits for 3CL are large. Daniel will select it when cut. So this part of the conversation probably won't be in it. But it's up to you, Alex. If you want to be in iTunes, you can spot places. I can't do that. Okay. That's very glad. Just a few words, really. Well, I think that was... Particularly, I think, for people who are not perhaps spending their days looking at these issues, you don't perhaps appreciate just how much there was in that presentation and how much you managed to move across in a very, very wide-ranging survey of where we are and where we've got to and what remains. So I would have to really congratulate you on that, and thank you for that. If I understood what you're saying correctly, you seem to be saying, well, we have to face up to the realities here, look through the rhetoric. So if we look at the financial stability board, it tells us in its last kind of well, we think that the work of agreeing the measures that we need to fix the fault lines is substantially complete, and now we just need to do implementations. So I think you very rightly are taking the role of the detached academic scholarly query and saying, well, actually we've reached a point where we have a choice that we might not like we have to face up to. Either we stay with our existing financial system and recognise that it has certain strengths, but it brings with it certain weaknesses and risks to society. Society ultimately has to be the backstop in respect of those risks, or we have to change our financial system or banking system very radically in ways that will bring with them their own difficulties and risks to society as well. So I think that you're absolutely right to put that very clear choice on the table. But I just slightly want to press you a bit, because I think that that detached scholarly critical reflection is a very good thing that we do, but perhaps sometimes it can become slightly, all the academics ever do is to find the problems. We've problematised everything, we're much better than that than we are at saying, right, this is what we need to do. This is the thing that won't make it all perfect, but might sort of make a difference. And so maybe push you a little bit in that direction of saying, are there things we can do that perhaps accept the problems, not time to solve the big problems at the margins, perhaps there is something we can improve. And there's one area, and I know you covered so much, and it would be totally sort of unfair to say, oh, but you didn't mention this, but nevertheless there is one this that I will mention, and perhaps this is an area because I know you have written about the development of an even nationality fund governance in respect of this area. So the one, to me, slightly surprising gap in what you've covered was with respect to the role of supervisors and supervisory stress tests. So Daniel Turullo, for example, has described stress tests as the cornerstone of the new approach to regulatory supervision, the dynamic, the data driven, both micro and macro potential. So we can see a world of stress tests done regularly by supervisors, feeding into the supervisory review, feeding into their pillar two assessments, and a dynamic adjustment of capital requirements to reflect both issue specific and systemic sort of conditions on a sort of rolling basis. So really that's, I suppose, my sense, I agree with you, that we cannot solve problems that are ultimately impracticable. We have to just do the best in what we've got. But is there more by way of the kind of contribution to that task that you can contribute? And in that regard, did you leave out stress tests because you counter everything or did you leave the light and the supervisor review associated with it because that reflects your assessment that actually they're not so important? As for example, Turullo suggests it. Thanks very much, I guess. That's a very critical and important comment. Possibly a gap in the paper as well, the role of supervisors. I'm not skeptical of the role of supervisors and supervisors stress tests. What I'm skeptical of is whether, because obviously the regulatory framework has been improved and augmented. So here we talk about extreme risks that might happen. And I don't think that there are stress tests and their models can capture those risks so that they can model everything. And even if they do, I'm not sure what kind of remedy they suggest that they will use. Are they going to use risk-weighted asset ratios to capture those risks? With no assurance whatsoever that there is great right risk rates or they will vary leverage ratios. If the latter have written a paper that says that leverage ratios are indeed the best way to bring stability into the system. So indeed the paper was very wide, so I didn't reach the point of referring to a supervisor reaction, probably should. At the same time, apart from varying leverage ratios and increasing ex-ante leverage restrictions I cannot see what else they can do to provide really failed proof remedies against failure. Water proof remedies against failure. And that's a rather blunt instrument and has nothing to do with their very sophisticated and dynamic stress tests. I've got a couple of things I want to follow up on, but I'd rather be democratic. Just by way of clarification in your final slide, in fact I think it's the one you've got up when you present this dilemma of do we pay the social subsidy for fractional reserve banking or do we go down the structural reform route and perhaps change banks into very different animals? Within the first category of the social subsidy are you just talking about bailouts or would bail ins fall into the social subsidy category too? No, bailing is privatisation of social risk. So that would be a third option? I mean I'm talking about fiscal burden sharing arrangements which of course are a fiscal subsidy at the end of the day and that means that the Treasury picks up part of the bill of bank failure and that's a social subsidy. Bailings are elimination of the social subsidy and obviously I talk about extreme cases as I've said the regulatory framework has substantially improved since 2008 and so have supervisors and supervisory ability skills, the toolbox and so on. But still extreme risks will happen and will happen because the very idea of fractional reserve banking is a lever provision of liquidity to society and if that happens it's a case of whether you can entirely privatise the risk or the society in the guise of the Treasury obviously of public funding can pick up some of the cost. Obviously all risks in the world, all substantial risks are insured but if the insurer goes bankrupt we have a reinsurance structure. So basically what the paper says is that it's inevitable if we want to keep the current model of fractional reserve banking that from time to time states especially for international banks act as reinsurance. Obviously that's going to be the case in extreme scenarios and for extreme risks. Otherwise perhaps we need to face up to the possibility that we need to change. We need to change the way we extend credit to society and the way fractional reserve banks are structured has to be radically thought. To be honest with you I'm not entirely clear for instance what an internet credit provider in China which is something between a deposit taking institution and electronic portfolio and the lender is a shadow bank, a fractional reserve bank, an investment institution or just a mobile or internet payments provider. So I think we move, because of financial innovation as well, fractional reserve banking is moving into greyier and greyier and greyier areas and perhaps there is room to rethink what fractional reserve banks should be all about and how they should be regulated. However if we want to keep them as the principal suppliers of liquidity to society as they are today perhaps they are inevitable social cost. I just wondered whether your point is touching on, because at some points you're saying well you'll end up with sort of the creditors who are bailed in will be these incredibly aggressive culture funds and the like and you're concerned with that. But in another place you're saying well the creditors who will be bailed in will actually be people who we would be concerned from a societal perspective with having to absorb this cost. They're charities, they're small, medium sized pension funds, they're individual savers and the like so in a sense that there is a kind of social. That's not a mistake. That's not the state but it's society in that. Yeah it's socialisation in that sense. If you bail in pension funds you end up in the same place that you have started with bailouts. Again you have socialisation of risk. So indeed while bailing has been thought of and that's a very good point and thank you for the clarification I wish because I didn't understand the question initially. Indeed bailing has been thought of and conceived as a way to privatise risk but the whole point of my paper will good have as well is that if you bail in pension funds basically you have socialised the risk again. And that's the whole point of the, or one of the main points of the paper with Professor Woodhead. The series of papers. You're absolutely right that you have not really resolved the problem by pushing it back to society. I didn't understand the question. I wasn't very clear but I suppose the way in my head the way I was looking at it was rather than see bailouts as public and bailouts as private. I suppose I was thinking more in terms of the broadness of the group of the public who were covered. So a bailout is everybody but at least everybody who pays tax. A bailout is kind of the middle class people who get some sort of stake. Which brings us to these couple of slides which discuss who should carry the burden. Is it really better than the pensioners instead of the savers instead of the taxpayers should carry the burden? Yeah, I thought I had touched on this. Yeah, you did. Just because there's one other thing which kind of, the way you explained that kind of threw up are really confusing issue. Not confusing in your paper but confusing in the concept itself when you were discussing leverage ratios as a means of controlling risk. It seemed to me there's an inherent circularity at play because as you explained really well and I've never heard this explained before that if you're trying to ensure a high, safe, theoretically safe, high equity to debt ratio who do you turn to? Well naturally you turn to prospective shareholders to pump more equity into the bank. Who would want to earn something on that equity? Presumably as you've also explained in your paper shareholders very often want a higher return on equity which surely means a high debt to equity ratio. So the people you're turning to pump up your equity to debt ratio are the very people that want the opposite surely. So is that just an inherent circularity? Of course there is but if you just stick with that way to leverage ratios the advantage is that once bank hit the ratio of the ceiling they stop lending and that could be a bad thing but also in a booming economy that could be a good thing. To give you an example I don't think that UK banks need to lend out more money to the UK's housing market and if they do not probably the housing market will cool off. So when you cannot use the monetary instrument you cannot raise interest rates perhaps leverage ratios are a good way. Equity is a good way to absorb losses exposed but leverage ratios are a good way to restrict lending ex ante so that you lower the possibility that you will be faced with major bubbles bursting exposed. To be honest with you I'm more in favour of leverage ratios even though they are terribly blunt instruments rather than adopting maximalist views of what should be the bank's equity cushion. Why? Because sometimes you need to restrict lending ex ante rather than absorb losses exposed and you cannot do that through interest rates. Now truth of the matter is it didn't seem to work in Spain. Spain had adopted this very wise dynamic provisioning regime under which banks were charged ex ante a higher capital charge for its loan that they were making. Why? Because Spanish interest rates were much lower than they should be because the ECB is arranging one interest rate for everybody for all the 18 back then 19 Member States now. So leverage ratios could also help you in situations where you cannot really use interest rates at all in order to cool off the lending market. Having said that it did not work in Spain so the argument is theoretical. I have a paper on that that I have not published yet exactly because I have not found in very good evidence yet. Another curiosity of banks because I am a corporate lawyer I am tending my default mindset is to look at banks and finance as an industry but a subset of all firms that need government. A curiosity was early in your presentation you mentioned that, I think you mentioned this in the paper I read as well on fractional reserve banking that where you've got lower, the way we look at things in corporate governance or might be one actually to say corporate finance is where you've got high equity to debt ratio in an industrial firm. So you've got a lot of equity, perhaps a lot free cash flow, you don't know how to spend it. There's more propensity to impose agency costs and shareholders because you've got a lot of money that you can invest in unprofitable non-value adding projects and then you get conglomerates in the light. Whereas with the understanding what you were saying about banks is in banks where you've got high equity to debt you've got the opposite scenario. I think it's more because the leverage ratio is so extreme. You don't have any corporate that's 1 to 33 shareholders money. The leverage ratio that Basel has imposed is 3%. That's 1 to 33 shareholders money. That's insane. You have lots of corporations that it's 1 to 3, 30% equity over all company assets. Now if it's under that probably the shareholders are taking the creditors for a ride and there is a major agency problem. Here we talk really about dramatically low leverage ratios and there is an argument by D'Angelo and Sturge who say and properly so because the main job of banks is to create safe liquidity claims, the so-called liquidity glow. The job of banks is to produce safe liquid debt assets and not products and as a result leverage is a good thing because it allows them to produce more liquidity. It's in the same way that it's a good thing that a corporation produces more cars. They use liquidity in their model like any other good. Also they suggest that the Modigliani Miller is irrelevant to banks. The capital structure irrelevant model is inapplicable to banks because the job of the banks is to provide liquid debt claims, safe debt claims that is. But the counter argument is that the banks blatantly failed to manage their asset side and they produce lots of unsafe debt claims. They are loans to the real estate sector in Spain or Ireland or in the United States. They were catastrophic. Not everything was highly complex, opaque, innovative. Some of that was just blatantly and plainly stupid lending. Buying lots of great bonds. So the answer to that is in an ideal world they would be where everybody is rational and everybody has full information, they have no information as inventories, they would be absolutely right. But in the real world they are wrong because bankers are bound to make wrong decisions when it comes to capital allocation, when it comes to lending approvals, to loan approvals. And they will face inevitably, when the cycle turns, they will face a shortfall of the value of assets over liabilities. There are going to be problems with the balance sheet. And if there is not enough shareholder's equity there to absorb the losses, the bank is lost. So just to underscore the discussion, Eilish mentioned that academics are very good at noting problems, not so good at finding solutions. If we are looking for a solution, as I understand it, you would press by the structural reform route then? I would press for fiscal burden sharing because I think the structural reform route is a few decades off, it will come inevitably, white will come inevitably because the more we are going to, the more we regulate the former sector, the more funding will go outside the regulatory perimeter to the shadow banking sector. And obviously innovation will take over and as far as I'm concerned, apart from licensing regulations, and obviously safety concerns will go hand in hand with licensing regulations, that's why we license an operation not to minimize risks. I'm not clear why Amazon cannot do exactly the same job as Barclays in terms of retail savings, not in terms of copper loans, not in terms of wholesale lending, and another key thesis of my paper is that wholesale lending is an entirely different animal and perhaps it should be looked as such. Any final questions or comments before we draw this session to a close?