America's Voluntary Standards System--A "Best Practice" Model for Innovation Policy?

America's Voluntary Standards System--A "Best Practice" Model for Innovation Policy? By Dieter Ernst
East-West Center, Apr 2012
http://www.eastwestcenter.org/publications/americas-voluntary-standards-system-best-practice-model-innovation-policy

For its proponents, America's voluntary standards system is a "best practice" model for innovation policy. Foreign observers however are concerned about possible drawbacks of a standards system that is largely driven by the private sector. There are doubts, especially in Europe and China, whether the American system can balance public and private interests in times of extraordinary national and global challenges to innovation. To assess the merits of these conflicting perceptions, the paper reviews the historical roots of the American voluntary standards system, examines its current defining characteristics, and highlights its strengths and weaknesses. On the positive side, a tradition of decentralized local self-government, has given voice to diverse stakeholders in innovation, avoiding the pitfalls of top-down government-centered standards systems. However, a lack of effective coordination of multiple stakeholder strategies tends to constrain effective and open standardization processes, especially in the management of essential patents and in the timely provision of interoperability standards. To correct these drawbacks of the American standards system, the government has an important role to play as an enabler, coordinator, and, if necessary, an enforcer of the rules of the game in order to prevent abuse of market power by companies with large accumulated patent portfolios. The paper documents the ups and downs of the Federal Government’s role in standardization, and examines current efforts to establish robust public-private standards development partnerships, focusing on the Smart Grid Interoperability project coordinated by the National Institute of Standards and Technology (NIST). In short, countries that seek to improve their standards systems should study the strengths and weaknesses of the American system. However, persistent differences in economic institutions, levels of development and growth models are bound to limit convergence to a US-Style market-led voluntary standards system.

BCBS: Implementation of stress testing practices by supervisors

Implementation of stress testing practices by supervisors: Basel Committee publishes peer review

BCBS

April 13, 2012

http://www.bis.org/press/p120413.htm

The Basel Committee on Banking Supervision has today published a peer review of the implementation by national supervisory authorities of the Basel Committee's principles for sound stress testing practices and supervision.

Stress testing is an important tool used by banks to identify the potential for unexpected adverse outcomes across a range of risks and scenarios. In 2009, the Committee reviewed the performance of stress testing practices during the financial crisis and published recommendations for banks and supervisors entitled Principles for sound stress testing practices and supervision. The guidance set out a comprehensive set of principles for the sound governance, design and implementation of stress testing programmes at banks, as well as high-level expectations for the role and responsibilities of supervisors.

As part of its mandate to assess the implementation of standards across countries and to foster the promotion of good supervisory practice, the Committee's Standards Implementation Group (SIG) conducted a peer review during 2011 of supervisory authorities' implementation of the principles. The review found that stress testing has become a key component of the supervisory assessment process as well as a tool for contingency planning and communication. Countries are, however, at varying stages of maturity in the implementation of the principles; as a result, more work remains to be done to fully implement the principles in many countries.

Overall, the review found the 2009 stress testing principles to be generally effective. The Committee, however, will continue to monitor implementation of the principles and determine whether, in the future, additional guidance might be necessary.

Conference on macrofinancial linkages and their policy implications

Bank of Korea - Bank for International Settlements - International Monetary Fund: joint conference concludes on macrofinancial linkages and their policy implications

April 12, 2012

http://www.bis.org/press/p120412.pdf
 

The Bank of Korea, the Bank for International Settlements and the International Monetary Fund have today brought to a successful conclusion their joint conference on "Macrofinancial linkages: Implications for monetary and financial stability policies". Held on April 10-11 in Seoul, Korea, the event brought together central bankers, regulators and researchers to discuss a variety of topics related to interactions between the financial system and the real economy. The goal of the conference was to promote a continuing dialogue on the policy implications of recent research findings.

The conference programme included the presentation and discussion of research on the following issues:

• Banks, shadow banks and the macroeconomy;
• Bank liquidity regulation;
• The macroeconomic impact of regulatory measures;
• Macroprudential policies in theory and in practice;
• Monetary policy and financial stability.

Efforts to recast monetary and financial stability policies to reduce the frequency and severity of financial crises have focused attention on the interactions between the financial system and the macroeconomy. The crisis demonstrated that financial system weaknesses can have sudden and long-lasting macroeconomic effects.

The conference concluded with a panel discussion chaired by Stephen Cecchetti (BIS), and including Jun Il Kim (Bank of Korea), Jan Brockmeijer (IMF), Hiroshi Nakaso (Bank of Japan), and David Fernandez (JP Morgan). The panel discussion focused on the lessons or guideposts for the formulation and implementation of macroprudential and monetary policies that can be drawn from the intensive research efforts on macrofinancial issues in recent years, as well as on the empirical evidence on the effectiveness of policy measures. The roundtable also included a discussion of weaknesses in our understanding of macrofinancial linkages and touched on priorities for future research, analysis, and continuing cooperation between central banks, regulatory authorities, international organisations and academics.

Introducing the conference, Choongsoo Kim, Governor of the Bank of Korea, said, "Since major countries' measures to reform financial regulations, including Basel III of the BCBS, focus mostly on the prevention of crisis recurrence, we need to continuously monitor and track how these measures will affect the sustainability of world economic growth in the medium- and long-term. In doing so, we should be careful so that the strengthening of financial regulation does not weaken the benign function of finance, which is to drive the growth of the real economy through seamless financial intermediation. Moreover, in today's more closely interconnected world economy, the strengthening of financial regulation with a primary focus on advanced countries does not equally affect the financial system in emerging market countries with their significantly different financial structure. Hence, in examining the implementation of regulations, an in-depth analysis should be conducted of how these regulations will affect the financial industries of emerging market countries and all other countries other than the advanced economies and their careful monitoring is called for."

Stephen Cecchetti, Economic Adviser and Head of the BIS Monetary and Economic Department, remarked that "It is important that we continue to learn about the mechanisms through which financial regulation helps to stabilize the economic and financial system. We are not only exploring the effectiveness of existing tools, but also working to fashion new ones. Doing this means refining the intellectual framework, including both the theoretical models and empirical analysis, that forms the basis for macroprudential policy and microprudential policy, as well as conventional and unconventional monetary policy. The papers presented and discussed in this conference are part of the foundation of this new and essential stability-oriented policy framework."

Jan Brockmeijer, Deputy Director of the IMF Monetary and Capital Markets Department, added that "All the institutions involved in developing macroprudential policy frameworks are on a learning curve both with regard to monitoring systemic risks and in using tools to limit such risks. In such circumstances, sharing of views and experiences is crucial to identifying best practices and moving up the learning curve quickly. The Fund is eager to help its members in this regard, and the conference co-organised by the Fund is one way to serve this purpose."

IMF Global Financial Stability Report: Risks of stricter prudential regulations

IMF Global Financial Stability Report
Apr 2012
http://www.imf.org/External/Pubs/FT/GFSR/2012/01/index.htm

Chapter 3 of the April 2012 Global Financial Stability Report probes the implications of recent reforms in the financial system for market perception of safe assets. Chapter 4 investigates the growing public and private costs of increased longevity risk from aging populations.

Excerpts from Ch. 3, Safe Assets: Financial System Cornerstone?:

In the future, there will be rising demand for safe assets, but fewer of them will be available, increasing the price for safety in global markets.  In principle, investors evaluate all assets based on their intrinsic characteristics. In the absence of market distortions, asset prices tend to reflect their underlying features, including safety. However, factors external to asset markets—including the required use of specific assets in prudential regulations, collateral practices, and central bank operations—may preclude markets from pricing assets efficiently, distorting the price of safety. Before the onset of the global financial crisis, regulations, macroeconomic policies, and market practices had encouraged the underpricing of safety. Some safety features are more accurately reflected now, but upcoming regulatory and market reforms and central bank crisis management strategies, combined with continued uncertainty and a shrinking supply of assets considered safe, will increase the price of safety beyond what would be the case without such distortions.

The magnitude of the rise in the price of safety is highly uncertain [...]

However, it is clear that market distortions pose increasing challenges to the ability of safe assets to fulfill all their various roles in financial markets. [...] For banks, the common application of zero percent regulatory risk weights on debt issued by their own sovereigns, irrespective of risks, created perceptions of safety detached from underlying economic risks and contributed to the buildup of demand for such securities. [...]

[...] Although regulatory reforms to make institutions safer are clearly needed, insufficient differentiation across eligible assets to satisfy some regulatory requirements could precipitate unintended cliff effects—sudden drops in the prices—when some safe assets become unsafe and no longer satisfy various regulatory criteria. Moreover, the burden of mispriced safety across types of investors may be uneven. For instance, prudential requirements could lead to stronger pressures in the markets for shorter-maturity safe assets, with greater impact on investors with higher potential allocations at shorter maturities, such as banks.

Money and Collaterall, by Manmohan Singh & Peter Stella

Money and Collateral, by Manmohan Singh & Peter Stella
IMF Working Paper No. 12/95
Apr 2012
http://www.imf.org/external/pubs/cat/longres.aspx?sk=25851.0

Summary: Between 1980 and before the recent crisis, the ratio of financial market debt to liquid assets rose exponentially in the U.S. (and in other financial markets), reflecting in part the greater use of securitized assets to collateralize borrowing. The subsequent crisis has reduced the pool of assets considered acceptable as collateral, resulting in a liquidity shortage. When trying to address this, policy makers will need to consider concepts of liquidity besides the traditional metric of excess bank reserves and do more than merely substitute central bank money for collateral that currently remains highly liquid.

Excerpts:

Introduction

In the traditional view of a banking system, credit and money are largely counterparts to each other on different sides of the balance sheet. In the process of maturity transformation, banks are able to create liquid claims on themselves, namely money, which is the counterpart to the less liquid loans or credit.2 Owing to the law of large numbers, banks have—for centuries— been able to safely conduct this business with relatively little liquid reserves, as long as basic confidence in the soundness of the bank portfolio is maintained.

In recent decades, with the advent of securitization and electronic means of trading and settlement, it became possible to greatly expand the scope of assets that could be transformed directly, through their use as collateral, into highly liquid or money-like assets. The expansion in the scope of the assets that could be securitized was in part facilitated by the growth of the shadow financial system, which was largely unregulated, and the ability to borrow from non-deposit sources. This meant deposits no longer equaled credit (Schularick and Taylor, 2008). The justification for light touch or no regulation of this new market was that collateralization was sufficient (and of high quality) and that market forces would ensure appropriate risk taking and dispersion among those educated investors best able to take those risks which were often tailor made to their demands. Where regulation fell short was in failing to recognize the growing interconnectedness of the shadow and regulated sectors, and the growing tail risk that sizable leverage entailed (Gennaioli, Shleifer and Vishny, 2011).

Post-Lehman, there has been a disintermediation process leading to a fall in the money multiplier. This is related to the shortage of collateral (Singh 2011). This is having a real impact—in fact deleveraging is more pronounced due to less collateral. Section II of the paper focuses on money as a legal tender, the money multiplier; then we introduce the adjusted money multiplier. Section III discusses collateral, including tail-risk collateral.  Section IV tries to bridge the money and collateral aspects from a “safe assets” angle. Section V introduces collateral chains and describes the economics behind the private pledged collateral market. Section VI brings the monetary and collateral issues together under an overall financial lubrication framework. In our conclusion (section VII) we offer a useful basis for understanding monetary policy in the current environment.



Conclusion

“Monetary” policy is currently being undertaken in uncharted territory and may change some fundamental assumptions that link monetary and macro-financial policies. Central banks are considering whether and how to augment the apparently ‘failed’ transmission mechanism and in so doing will need to consider the role that collateral plays as financial lubrication (see also Debelle, 2012). Swaps of “good” for “bad” collateral may become part of the standard toolkit.31 If so, the fiscal aspects and risks associated with such policies—which are virtually nil in conventional QE swaps of central bank money for treasuries—are important and cannot be ignored. Furthermore, the issue of institutional accountability and authority to engage in such operations touches at the heart of central bank independence in a democratic society.

These fundamental questions concerning new policy tools and institutional design have arisen at the same time as developed countries have issued massive amounts of new debt.  Although the traditional bogeyman of pure seigniorage financing, that is, massive monetary purchases of government debt may have disappeared from the dark corners of central banks, this does not imply that inflation has been forever arrested. Thus a central bank may “stand firm” yet witness rises in the price level that occur to “align the market value of government debt to the value of its expected real backing.” Hence current concerns as to the potential limitations fiscal policy places on monetary policy are well founded and indeed are novel only to those unfamiliar with similar concerns raised for decades in emerging and developing countries as well as in the “mature” markets before World War II.

IMF Background Material for its Assessment of China under the Financial Sector Assessment Program

IMF Releases Background Material for its Assessment of China under the Financial Sector Assessment Program
Press Release No. 12/123
April 5, 2012

A joint International Monetary Fund (IMF) and The World Bank assessment of China's financial system was undertaken during 2010 under the Financial Sector Assessment Program (FSAP). The Financial System Stability Assessment (FSSA) report, which is the main IMF output of the FSAP process, was discussed by the Executive Board of the IMF at the time of the annual Article IV discussion in July 2011.

The FSSA report was published on Monday, November 14, 2011. As background for the FSSA, comprehensive assessments were undertaken by the FSAP mission of the financial regulatory infrastructure and the Detailed Assessment Reports of China's observance with international financial standards were prepared during the FSAP exercise. At the request of the Chinese authorities, these five reports are being released today.

The documents published are as follows:

Detailed Assessment of Observance Reports

1. Observance of Basel Core Principles for Effective Banking Supervision
2. Observance of IAIS Insurance Core Principles
3. Observance of IOSCO Objectives and Principles of Securities Regulation
4. Observance of CPSS Core Principles for Systemically Important Payment Systems
5. Observance of CPSS-IOSCO Recommendations for Securities Settlement Systems and Central Counterparties

The FSAP is a comprehensive and in-depth analysis of a country’s financial sector. The FSAP findings provide inputs to the IMF’s broader surveillance of its member countries’ economies, known as Article IV consultations. The focus of the FSAP assessments is to gauge the stability of the financial sector and to assess its potential contribution to growth. To assess financial stability, an FSAP examines the soundness of the banks and other financial institutions, conducts stress tests, rates the quality of financial regulation and supervision against accepted international standards, and evaluates the ability of country authorities to intervene effectively in case of a financial crisis. Assessments in developing and emerging market countries are done by the IMF jointly with the World Bank; those in advanced economies are done by the IMF alone.

This is the first time the Chinese financial system has undergone an FSAP assessment.

Since the FSAP was launched in 1999, more than 130 countries have volunteered to undergo these examinations (many countries more than once), with another 35 or so currently underway or in the pipeline. Following the recent global financial crisis, demand for FSAP assessments has been rising, and all G-20 countries have made a commitment to undergo regular assessments.

For additional information on the program, see the Factsheet and FAQs.

Original link: http://www.imf.org/external/np/sec/pr/2012/pr12123.htm

Management Tips from the Wall Street Journal

Management Tips from the Wall Street Journal


Developing a Leadership Style

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        Leadership in a Crisis – How To Be a Leader
        What are the Common Mistakes of New Managers?
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Managing Your People

        How to Motivate Workers in Tough Times
        Motivating Employees
        How to Manage Different Generations
        How to Develop Future Leaders
        How to Reduce Employee Turnover
        Should I Rank My Employees?
        How to Keep Your Most Talented People
        Should I Use Email?
        How to Write Memos

Recruiting, Hiring and Firing

        Conducting Employment Interviews – Hiring How To
        How to Hire New People
        How to Make Layoffs
        What are Alternatives to Layoffs?
        How to Reduce Employee Turnover
        Should I Rank My Employees?
        How to Keep Your Most Talented People

Building a Workplace Culture

        How to Increase Workplace Diversity
        How to Create a Culture of Candor
        How to Change Your Organization’s Culture
        How to Create a Culture of Action in the Workplace

Strategy

        What is Strategy?
        How to Set Goals for Employees
        What Management Strategy Should I Use in an Economic Downturn?
        What is Blue Ocean Strategy?

Execution

        What are the Keys to Good Execution?
        How to Create a Culture of Action in the Workplace

Innovation

        How to Innovate in a Downturn
        How to Change Your Organization’s Culture
        What is Blue Ocean Strategy?

Managing Change

        How to Motivate Workers in Tough Times
        Leadership in a Crisis – How To Be a Leader
        What Management Strategy Should I Use in an Economic Downturn?
        How to Change Your Organization’s Culture

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