Diapositive 1

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WP2 Financial markets and international
regulation
The Future of Financial Markets and Regulation
What Strategy for Europe?
Challenges for Europe in the world in
2030 Brussels stakeholders, 17-18 November
2011 Jean-Baptiste GOSSÉ Dominique PLIHON
CFAP, University of Cambridge CEPN,
Université Paris-Nord
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• Outline of the paper
• Aims of the study
• Future developments in financial markets
• Challenges of financial regulation
• 5 scenarios
• Conclusions

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• The aims of this study
• To provide a base for strategic thinking
• To define the best strategy for Europe

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Future developments in financial markets
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• Future developments in financial markets
• Strategies of financial operators
• Increase the size of financial institutions to
  face the growing international competition
• Concerns about new regulatory constraints which
  can jeopardize their competitiveness. They would
  prefer self-regulation rather than close state
  control.
• Extend the use of automation
• Promising markets
• 2 minor tendencies ethical and green finance
• 2 major tendencies derivatives and
  Over-The-Counter markets

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• Future developments in financial markets (Contd)
• Future locations of financial markets
• Region specific financial products
• Strategic role of commodities
• Increasing opening of financial markets in
  emerging economies
• Financial innovation vs. regulation

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3 dimensions of financial regulation
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• 3 dimensions of financial regulation
• Microprudential regulation stability of
  individual entities and protection of clients
• Macroprudential regulation stability of the
  financial system as a whole
• International coordination stability of the
  international financial system

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• Microprudential tools
• Increase the amount and the quality of own funds
  
• Liquidity coverage ratio (LCR)
• Net stable funding ratio (NSFR)
• Central counterparties for OTC markets
  (counterparty risk)
• Leverage ratio
• Etc
• Main limitations evaluation of risks by CRA,
  consideration of the systemic risk

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• Macroprudential tools
• Countercyclal buffer (avoid procyclicality)
• Additional loss absorbency requirements for
  SIFI reinforce certain actors because of the
  risk they pose to financial system as a whole.
• 2 criteria
• Size on financial markets
• Degree of interconnection
• Main limitations
• Identification of SIFI
• Measure of the systemic liquidity risk
• Definition of macroprudential tools to mitigate
  systemic liquidity risk
• Need for better adaptation to financial
  innovations

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International coordination problem At the
international level, the regulator has three main
objectives which are not necessarily compatible
1) Financial stability 2) Independence of
regulatory policy 3) Financial integration
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Incompatibility triangle of financial objectives
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5 scenarios
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• Bipolar
• Decision makers USA China (Chimerica)
• Regulation and supervision Basel III,
  regulation reform in the US and in Europe (new
  architecture and some macroprudential regulation
  measures)
• IMS IMS mostly based on dollar, growing role of
  yuan euro remains a second class currency
• Implications for the eurozone unstability of
  the euro, slow growth, tensions within the
  eurozone

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• Reduced government
• Decision makers large financial players
  transnational corporations
• Regulation and supervision market friendly
  reform (race to the bottom), extensive financial
  deregulation (internal and external)
• Regulation is circumvented by financial
  innovations
• Basel III standards partially applied at
  national level
• IMS Persistent financial monetary
  instability persistent imbalances debt crises
  domination of large banks investors
  accommodation by central banks
• Implications for the eurozone debt crisis in
  Europe, default or break up of the eurozone

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• Fragmentation
• Decision makers Nation States (economic
  nationalism)
• Regulation and supervision country specific
  regulation no coordination strong heterogeneity
• IMS Currency competition financial monetary
  unstability dominant role of dollar emerging
  country currencies growing speculation
  reduction of international trade finance gt
  deglobalization
• Implications for the eurozone reduction of
  intra-EZ trade, vulnerability of smaller
  countries to speculative attacks, strong
  appreciation of DM, rise in the borrowing costs
  of Southern European countries

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• Regionalisation
• Decision makers States regional authorities
• Regulation and supervision regulation is
  coordinated at a regional level, capital openness
  in blocs but capital control between blocs
• IMS regional monetary zone (Mercosur, euro
  area, ASEAN, CIS, Arab league). Regional
  financial integration with differentiation of
  financial systems (e.g. Islamic finance).
  Adjustment of global imbalances through exchange
  rates in order to respect FEER levels.
• Implications for the eurozone extension of the
  EZ (Eastern Europe, maybe North Africa),
  definition of a common economic policy with
  stronger institutions, advantages of financial
  integration at the continental level, financial
  regulation compatible with European systemic risk
  aversion.

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• Multipolar
• Decision makers Growing role of supranational
  authorities (IMF, Basle Committee) and of civil
  society (large NGOs)
• Regulation and supervision agreement on
  financial regulation (e.g. G20 level), strong
  macro-prudential regulation (global systemic risk
  management), close supervision of CRA
• IMS Creation of a global currency (SDR or
  Bancor), euro becomes a regional currency
• Implications for the eurozone growing
  integration of EZ with the world economy,
  reinforcement of the power of global institutions
  instead of European institutions

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Conclusions Only 3 stable scenarios
Decision makers Financial stability Financial stability Financial integration Financial integration Heterogeneity of national regulations Heterogeneity of national regulations
Decision makers Inside the euro area Outside the euro area Inside the euro area Outside the euro area Inside the euro area Outside the euro area
Bipolar USA-China (Europe?) - -
Consolidation Big companies (minimum state) - -
Fragmentation Nation-states (Economic nationalism) - -
Regionalisation Regional unions - -
Multipolar Supranational institutions - -
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• Conclusions (Contd)
• What could be the financial strategy of Europe
• Current situation
• Europe
• World (USA, UK, Australia, Japan)

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Thank you