AUGUR stakeholder’s workshop, 17-18 November 2011
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 stakeholder’s, 17-18 November 2011
Jean-Baptiste GOSSÉ*
Dominique PLIHON **
*CFAP,
**
University of Cambridge
CEPN, Université Paris-Nord
DG Research and Innovation, CDMA building, 21 rue Champ de Mars, Brussels
AUGUR
AUGUR stakeholder’s workshop, 17-18 November 2011
Outline of the paper
• Aims of the study
• Future developments in financial markets
• Challenges of financial regulation
• 5 scenarios
• Conclusions
DG Research and Innovation, CDMA building, 21 rue Champ de Mars, Brussels
AUGUR
AUGUR stakeholder’s workshop, 17-18 November 2011
The aims of this study
1) To provide a base for strategic thinking
2) To define the best strategy for Europe
DG Research and Innovation, CDMA building, 21 rue Champ de Mars, Brussels
AUGUR
AUGUR stakeholder’s workshop, 17-18 November 2011
Future developments in financial markets
DG Research and Innovation, CDMA building, 21 rue Champ de Mars, Brussels
AUGUR
AUGUR stakeholder’s workshop, 17-18 November 2011
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 selfregulation 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
DG Research and Innovation, CDMA building, 21 rue Champ de Mars, Brussels
AUGUR
AUGUR stakeholder’s workshop, 17-18 November 2011
Future developments in financial markets (Cont’d)
• 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
DG Research and Innovation, CDMA building, 21 rue Champ de Mars, Brussels
AUGUR
AUGUR stakeholder’s workshop, 17-18 November 2011
3 dimensions of financial regulation
DG Research and Innovation, CDMA building, 21 rue Champ de Mars, Brussels
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AUGUR stakeholder’s workshop, 17-18 November 2011
DG Research and Innovation, CDMA building, 21 rue Champ de Mars, Brussels
AUGUR
AUGUR stakeholder’s workshop, 17-18 November 2011
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
DG Research and Innovation, CDMA building, 21 rue Champ de Mars, Brussels
AUGUR
AUGUR stakeholder’s workshop, 17-18 November 2011
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
DG Research and Innovation, CDMA building, 21 rue Champ de Mars, Brussels
AUGUR
AUGUR stakeholder’s workshop, 17-18 November 2011
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
DG Research and Innovation, CDMA building, 21 rue Champ de Mars, Brussels
AUGUR
AUGUR stakeholder’s workshop, 17-18 November 2011
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
DG Research and Innovation, CDMA building, 21 rue Champ de Mars, Brussels
AUGUR
AUGUR stakeholder’s workshop, 17-18 November 2011
Incompatibility triangle of financial objectives
DG Research and Innovation, CDMA building, 21 rue Champ de Mars, Brussels
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AUGUR stakeholder’s workshop, 17-18 November 2011
5 scenarios
DG Research and Innovation, CDMA building, 21 rue Champ de Mars, Brussels
AUGUR
AUGUR stakeholder’s workshop, 17-18 November 2011
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
DG Research and Innovation, CDMA building, 21 rue Champ de Mars, Brussels
AUGUR
AUGUR stakeholder’s workshop, 17-18 November 2011
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
DG Research and Innovation, CDMA building, 21 rue Champ de Mars, Brussels
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AUGUR stakeholder’s workshop, 17-18 November 2011
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 => 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
DG Research and Innovation, CDMA building, 21 rue Champ de Mars, Brussels
AUGUR
AUGUR stakeholder’s workshop, 17-18 November 2011
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.

DG Research and Innovation, CDMA building, 21 rue Champ de Mars, Brussels
AUGUR
AUGUR stakeholder’s workshop, 17-18 November 2011
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
DG Research and Innovation, CDMA building, 21 rue Champ de Mars, Brussels
AUGUR
AUGUR stakeholder’s workshop, 17-18 November 2011
Conclusions
Only 3 stable scenarios
Financial stability
Financial integration
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
+
+
+
+
−
−
DG Research and Innovation, CDMA building, 21 rue Champ de Mars, Brussels
AUGUR
AUGUR stakeholder’s workshop, 17-18 November 2011
Conclusions (Cont’d)
• What could be the financial strategy of Europe
• Current situation
- Europe
- World (USA, UK, Australia, Japan)
DG Research and Innovation, CDMA building, 21 rue Champ de Mars, Brussels
AUGUR
AUGUR stakeholder’s workshop, 17-18 November 2011
Thank you
DG Research and Innovation, CDMA building, 21 rue Champ de Mars, Brussels
AUGUR