Lecture Abstract

The financial crisis of 2008 demonstrated weakness in the finance sectors of America, the UK and Europe. This set in train a reform process, coordinated at the global level by the Financial Stability Board (reporting to G20). The main achievements of the reform process have been to require banks to hold more capital. This will be a helpful buffer against losses, but it leaves the structural weakness of the sector largely unaddressed. The distinction between a protected banking sector and an unguaranteed shadow banking sector has been fuzzed, leaving ambiguities in the ‘buyer beware’ framework which is needed to set the correct incentives and define risk clearly in the non-bank sector. At the same time, the disruptive characteristics of the financial markets — pro-cyclicality and episodic dynamic instability — have been left largely unaddressed.

The lecture explores what more might be done. In particular, it suggests that a sharp distinction between the safe banking sector and the unprotected shadow banking sector should be instituted and the two sectors be quarantined effectively from each other, restoring the ‘buyer beware’ characteristic to the non-bank sector. More could be done too, to reduce the pro-cyclicality and dynamic instability of the sector, building on the macro-prudential measures which are currently under active discussion in FSB and domestically.

About the Speaker

Dr Grenville is a Nonresident 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 which arise from the volatile nature of these flows on economies which 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.